World economy engine China’s growth at 25-year low of 6.9%

For the first time in 25 years, China’s economy grew at its slowest pace at 6.9 per cent in 2015, sparking global concerns over the health of the world’s second largest economy and its impact on investors as the Communist giant embarked on painful economic reforms. The growth rate, released by China’s the National Bureau of Statistics (NBS) on Tuesday, moderated to 6.8 per cent for the fourth quarter, the lowest quarterly rate since the global financial crisis in 2009, and 6.9 per cent for 2015.

The 6.9 per cent growth rate is slowest in the country since 3.8 per cent in 1990, a year after the bloody Tiananmen Square crackdown rocked the country and isolated it internationally. Chinese Premier Li Keqiang last year had said that the Chinese government targeted an annual economic growth of around seven per cent for 2015.

As per the new data, China’s Gross Domestic Product (GDP) reached 67.67 trillion yuan (about $10.3 trillion) in 2015, with the service sector accounting for 50.5 per cent, the first time the ratio exceeded 50 per cent overtaking the manufacturing, the NBS said.

Analysts said if the economy slips below 6.8 per cent the government may have to opt for a stimulus package which it is trying to avoid. The slowdown has already destabilised China’s stock market last year which also had negative effect in the world markets. China had worst stock market crashes last year which wiped out about $3.2 trillion of capital, prompting government initiate investigation. Since then the market experienced severe volatility. Over 20 million small investors who lost heavily in the fluctuations deserted the market. After experiencing rapid growth for more than a decade, China’s economy has experienced a painful slowdown in the last two years. Since last year the government has also been vocal about the slowdown saying that the Chinese economy has entered a “new normal” in view of the transition from a state-led investment and manufacturing growth to one more dependent on services and consumption.

Some argue that China’s focus on creating an economy driven by consumption is misplaced. They say as the country attempts to rebalance its economy, it should focus on productivity in order to sustain high growth. 

“While higher consumption can support growth in the short run, there is little in economic theory that emphasises the expenditure side of GDP as a driver of growth,” BBC quoted HSBC’s John Zhu as saying in a note.

China is the biggest market for goods produced by some nations. With the Chinese buying fewer goods or commodities, it’s dragging down those countries’ economies and commodity prices. Last week, India’s Commerce and Industry Minister Nirmala Sitharaman said the devaluation of the Chinese currency is a “worrying” development which will make Indian exports expensive and widen the trade deficit with the neighbouring nation.

Tuesday’s data said China’s service sector contributed 50.5 per cent to the country’s GDP in 2015, up from 48.1 per cent in 2014 as manufacturing which fired China’s development in the last three decades has taken back seat.

The ratio, which has continued growing over the last two decades, exceeded 50 per cent for the first time, indicating China’s economic restructuring has made progress, NBS said. Factory contribution to the GDP was 10 per cent lower than services as the Chinese government tried to shift from investment powered growth to innovation led expansion.

Playing down the concerns over the slowdown, the NBS said China’s economy still “ran within a reasonable range” in 2015, with its structure further optimised, upgrading accelerated, new growth drivers strengthened and people’s lives improved. However, the country faces a daunting task in deepening reforms on all fronts and needs to step up supply-side structural reforms, NBS chief Wang Baoan said.

Major economic indicators softened in 2015, with industrial output growth slowing to 6.1 per cent year on year from 8.3 per cent in 2014.