China released its annual GDP figures, along with a slew of other economic data for the final month of 2018, on Monday (Jan. 21). Economists had predicted the results would be considerably worse than in recent years, as Chinese consumers fret over a weaker global economy, and the ongoing US-China trade war puts a dent in the country’s exports.
Beijing posted GDP growth of 6.6% (link in Chinese) for 2018, in line with expectations of analysts polled by Reuters, and slightly above the target set by officials last year of 6.5%. While that may seem like a robust figure when compared with Western growth rates, it’s the weakest showing for China in nearly three decades. Growth in the last quarter of the year slowed to 6.4%.
For this year, China has set a target of 6-6.5%—a Reuters poll of economists predicts growth to slow to 6.3% in 2019.
December retail sales grew at 8.2%, again in line with expectations, and slightly better than November’s numbers that showed growth of 8.1% versus the year before, the lowest rate in 15 years. In data published earlier this month, China revealed its first annual drop in car sales since the 1990s.
Ahead of today’s data, China’s authorities had already announced stimulus measures. These include a series of tax cuts to boost small businesses and consumption, though exact details are not yet public. China’s longstanding goal is to ramp up consumption and reduce its reliance on trade. To a large degree, this makes sense. The country for decades operated by the motto, “China makes, the world takes.”
The Chinese consumer market is now growing faster than any other country, and consumption growth has risen faster than overall economic growth. Last year, it drove four-fifths of GDP growth (paywall). The advent of e-commerce and high-tech efforts to help far-flung consumers shop online and receive deliveries have helped. At the same time, the growing availability of foreign brands offline and online in China, and overseas travel by Chinese (pdf), have seen foreign companies generate profits by tapping the growing Chinese consuming class.
In a broader sense, China’s consumption share is still small relative to the size of its economy. It remains 30 percentage points lower than the US as a share of GDP. Meanwhile, the savings rate stands at around 46%, towering over the US’s 18%. Chinese consumers can easily tighten their belts when they’re spooked about the economic outlook, as recent data show.
Also putting a damper on things are moves to make credit harder to get for Chinese consumers. Analysts attributed part of the drop in car sales to a crackdown on peer-to-peer lending sites, through which some people were taking loans for purchases. At the same time, some households already have more debt than in the past, due to housing purchases in recent years, making them likely to be more cautious about their spending.
A smaller social safety net also means Chinese consumers want to save more for a rainy day. For example, while health insurance coverage has expanded from a decade ago, patients can pay a lot out of pocket for medicines.
Although Donald Trump has sought to balance trade between the US and China, China posted a record surplus last year with the US of $323 billion, up 17% from the previous year. A similar pattern holds true with China’s trade with the rest of the world. Still, the share of exports was 20% of GDP in 2016, down from a high of 36% in 2006, a sign that the economy is tilting away from investment and towards consumption.
Tit-for-tat tariffs covering nearly $250 billion of Chinese goods and $110 billion of US goods, as well as global unease over potential escalation of the US-China trade spat, have reverberated around the world.
For example, Apple announced lower revenue forecasts earlier this month. The tech giant laid the blame on weaker sales in China and the trade war, and the company’s stock price tumbled on the news.
The US and China are looking to come to an agreement on trade before March 1, with both sides talking up progress in talks over three days at the start of the month in Beijing. Vice Premier Liu He is scheduled to go to Washington on Jan. 30 and 31 for the next round of negotiations.
An agreement is unlikely to meaningfully reduce the trade deficit or shift spending and savings patterns between Chinese and American consumers. Based on current trends, though, over time they will increasingly converge.
Update, Jan. 21: This story was updated with China’s GDP figures released Monday.