China, like Australia, is undergoing an epic economic transformation at present. Gone are the days that infrastructure, industry and trade powered its phenomenal economic growth rate. Now it’s all about consumption and services, the blueprint seen in many nations that transitioned from being developing to developed in the decades before them.
The chart below, supplied by the NAB, reveals the composition of China’s economic growth seen over the past 15 years, breaking it down into primary, secondary and tertiary industries.
Secondary industries, encompassing the traditional drivers of economic activity such as manufacturing and construction, is clearly slowing, replaced by tertiary industries such as services, retailing and real estate.
The NAB not that secondary industries contributed just 2.5 percentage points to Chinese GDP during the September quarter, the smallest contribution to overall growth seen since the global financial crisis. Tertiary industries, on the other hand, blossomed, contributing a whopping 4 percentage points, around 58% of all economic growth registered over the quarter.
While a clear sign that China’s economic transition is gathering speed, when the tertiary growth figure is broken down into individual components, it does raise questions over whether the acceleration in services growth can continue in the years ahead.
Although down on the near 35% contribution to services growth seen over the June quarter, largely on the back of the nation’s booming stock market, financial services still contributed 28% to services growth in the most recent GDP data, overshadowing contributions from wholesale and retail trade along with real estate services.
Even with a near 50% correction in the nation’s stock market that occurred during the quarter, it provided the vast majority of growth in the sector.
As it has done over the past year, financial services will be relied upon to be a growth engine for China’s economy in the decades ahead as household wealth increases and the nation’s financial markets mature.
While many have been quick to point out that direct household exposure to stocks is low in China compared to other nations – something that to some suggests sharp market movements in either direction will have little bearing on overall levels of economic growth – given the evidence of recent GDP data that’s clearly not the case.
With secondary industries slowing fast and the outlook for the property market subdued, the stock market, more than ever, remains a key cog in determining the outlook for Chinese growth.
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