China’s Economy Appears To Have Regained Some Of Its Mojo

China, which has the world’s second largest economy, has until recently posted growth rates averaging more than 10% over a 30 year time span.

Indeed, as the following chart illustrates, when the global financial and economic meltdown started in 2007 China’s economy was actually growing at an astonishingly fast 15% annual rate. As the Great Recession deepened China’s growth decelerated sharply and then rebounded back up to a 12% in 2010. However, over the past seven years the economy has been on a decelerating growth path due to the troubled global economic environment as well as a series of internal domestic problems. 

Among the structural concerns preoccupying investors is that China's public sector accounts for a larger share of the national economy than its rapidly growing private sector. In this environment how successful will China be in forcing an economic transition towards a high-tech, innovative economy driven by domestic consumption and the service industries, and away from the old economy of manufacturing, construction, steel and coal? While the desired structural shift seems to be underway, nonetheless how can it succeed with so much of the economy dominated by large state-owned enterprises? Moreover, there is also the real concerns about the financial health of lending institutions in China.

Skeptics are also correct to question the veracity of the government’s published statistics. Nonetheless, there are a number of recent indicators (private investment growth, fiscal stimulus and less reliance on bank financing) that suggest that growth could be improving in the short term.

China’s real GDP expanded at a 6.9% y/y pace as of the end of the first quarter of this year, while nominal GDP soared by 11.8% The nominal growth recovery is extremely positive for corporate profits and should lead to stronger wage gains and consumption spending. The official government forecast is that the economy will grow by 6.5% in 2017 compared to a 6.7% expansion in 2016.