Why China’s growth may drop to 6%

By Kanupriya Vashisht | June 9, 2015 | Last updated on June 9, 2015
2 min read

China has entered an era of relatively sluggish growth. But, the country’s leaders are touting lower growth levels as the new normal.

And, for the long run, the government’s prioritization of quality growth is a good thing, even if it means a drop to 6% or 6.5% GDP growth, says Kenrick Leung, director of investments at Amundi Asset Management in Hong Kong. He manages the Renaissance China Plus Fund.

When analyzing China’s slowdown and what drove its growth in the past, he adds, you need to go back in history. “Over the last decade, China’s GDP growth has been very good. And, especially since the crisis in 2008, we’ve seen a lot of pump priming, and that’s led to acceleration of growth — although the kind of growth we’re talking about is more quantity than quality.”

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That’s why the country’s new leaders are turning toward restructuring the economy. They’re moving away from purely fixed-asset investment growth to more balanced consumption-based growth. And, as a result, “over the next few years what we’ll see in terms of capital expenditures and fixed-asset investments will be much more targeted to things that are more efficient,” says Leung.

Instead of China building a lot of roads and cement plants, for example, he predicts city-based transportation systems will be improved. And, “the focus will shift to improving people’s standard of living.”

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That will translate into higher wages, he adds, which will lead to higher consumption growth. Plus, “there [may] be improved productivity in the service sector, which is lagging at the moment.”

As the Chinese working population ages, there could also be less need to generate employment opportunities. “The labour force growth will [likely] start to taper off over the next decade, and the provincial governments will no longer need to build excess capacity just to employ people,” says Leung. He finds this is a positive development since, as the quality of growth starts to improve, the earnings growth of a lot of companies likely will as well.

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“Even though [China’s] GDP growth has been very good over the last 10 years, many companies haven’t really benefited. That’s why we’re kind of stuck in this doldrums in the stock market. Better quality of growth will mean much more to the market than just better quantity of growth.”

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And, as long as the flow of growth is steady, notes Leung, “We [will] not be in a hard-landing scenario,” which the government is trying to avoid by stimulating demand and injecting liquidity.


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Kanupriya Vashisht