China’s famed model of growth is under pressure due to fallin exports and investment

The Chinese economy is seeing the first signs of troubleafter long years of sustained growth that rode on cheap labour and high volumesof exports. Data released by the National Bureau of Statistics on Mondayrevealed that the economy grew by 6.2% in the second quarter, its slowest pacein 27 years. This is in contrast to the growth rates of 6.4% and 6.6% reportedfor the first quarter and the full year of 2018, respectively. The falteringgrowth rate was due to a slump in exports in June amidst China’s ongoing tradewar with the United States and the downturn witnessed by sectors such ashousing construction, where investor sentiments play a major role. Manyeconomists believe that the worst may not yet be over for China and thateconomic growth could further worsen in the coming quarters. But just as growthseems to be faltering, the latest growth figures also showed that the retailsales and industrial output components of the growth numbers witnessed steadygrowth, suggesting that domestic demand may be compensating for the droppingappetite for Chinese exports weighed down by high tariffs. But with China stillheavily reliant on exports and its trade war with the U.S. showing no signs ofcoming to an end, the pressure on growth is likely to remain for some moretime. So the Chinese government, which has tried to boost the economy throughmeasures such as tax cuts, increased public spending and a relaxation in bankreserve requirements to encourage banks to increase lending, will hope thatdomestic demand for its goods will hold up the economy.

China’s quarterly GDP numbers, while useful in many ways,don’t reveal very much about the underlying challenges facing the country. Oneis the need to improve the credibility of data released by the Chinese government.An even larger challenge is the urgent need to restructure the Chinese economyfrom one that is driven heavily by state-led investment and exports to one thatis driven primarily by market forces. The high-growth years of the Chineseeconomy were made possible by the huge amount of liquidity provided by theChinese state and the large and affordable workforce that helped build Chinainto an export powerhouse. But now, with China’s tried and tested growth modelfacing the threat of getting derailed as the export and investment boom comesto an end, the Chinese will have to build a more sustainable model, or forfeithopes of double-digit economic growth in the future. As of now, there are nosigns to suggest that the Chinese authorities are looking at implementingdeep-seated structural reforms reminiscent of its early decades ofliberalisation that can help fundamentally restructure the economy. There mightnot be a need for radical macroeconomic changes, but China’s economic troubleswill not go away unless the government boosts domestic consumption and reducesthe reliance on exports.