Employees at an automobile factory fine-tune a vehicle in Qingdao, Shandong province. China's GDP grew by 7.3 percent in the third quarter of this year. Provided to China Daily

China is slowing. It grew by 7.3 percent in the third quarter, the weakest quarterly growth for 66 months, in figures released by the National Bureau of Statistics on Oct 21.

Although some expect a slight rebound in the final quarter, the consensus among economists is that the world's second-largest economy, which is now set to grow at its slowest annual rate for 24 years, is entering a new phase.

Premier Li Keqiang spoke this month of "positive and profound changes" taking place as the economy makes the transition from being investment-led to one where domestic consumption plays a bigger role.

Consumption contributed 48.5 percent to GDP in the first three quarters, compared to 45.9 percent in the same period last year.

Many economists now expect the government to set a growth target of 7 percent for 2015 at next March's meeting of the National People's Congress, compared to 7.5 percent this year, although this is far from certain.

Until 2012, the target had been held at 8 percent for eight successive years but this was regarded only as a floor below which it would not fall and so was often significantly exceeded.

While slowing growth might be ultimately good for the health of the Chinese economy, it comes at a difficult time for the rest of the world, particularly Europe with increasing concerns Germany may slip into its third recession since the financial crisis began as well as heightened worries about a new eurozone crisis.

Louis Kuijs, chief China economist at the Royal Bank of Scotland who is based in Hong Kong, says China's slowdown comes at a problematic time for Europe in particular.

"There is no doubt about that. It is not just the fact that China is slowing but the way that it is slowing which is the key factor," he says.

He says the big concern is slowing fixed asset investment, which is mostly likely to affect exports to China, particularly those of capital goods on which economies like Germany depend.

Two major components of FAI have fallen markedly over the past year: growth in corporate investment has fallen from 19.8 percent in December last year to 13.8 percent in August, according to RBS' own analysis of China's NBS figures; and real estate investment growth from 21.2 percent to 10 percent over the same period.

"If you look at the overall economy, the slowing of GDP does not appear to be that drastic but it is where the real story is. It is what is happening to these components of fixed asset investment that is really bad news to countries like Germany.

"It has little to do with falling consumption in China, as many seem to think. Consumption in the country is not actually very import-intensive. You have only got to look at the shopping baskets in Chinese supermarkets. Even Mercedes cars are by and large made in China," he says.

Ruchir Sharma, head of global macro and emerging markets at investment bank Morgan Stanley, based in New York, argues the world is now almost more dependent on China's growth than that of the United States.

According to Morgan Stanley's own analysis, a one-point slowdown in China's growth will now take a half point off global growth.

"When the US sneezes, the world catches a cold; but now it is China's health that matters most," he writes in his Wall Street Journal blog.

Sharma, also author of Breakout Nations: In Pursuit of the Next Economic Miracles, about emerging economies, says Europe could be at that sharp end of further declines in GDP growth.

"China's slowdown is also sharpening Europe's polarized debate about how to revive growth that is no longer fully within European control."

Zhu Ning, deputy director and professor of finance at the Shanghai Advanced Institute of Finance, believes China is now so integrated into the global economic system that whatever that happens to its economy is headlines everywhere.

"China accounts for a quarter of global growth. We have reached a stage where you cannot fully understand the global economy without understanding the Chinese one. Countries around the world have such huge exposure to China, particularly resource exporting countries such as in Africa, Australia and Canada."

Weaker demand from China has been one of a number of factors behind the recent sudden fall in oil prices, which have slumped 15 percent over the past three months. This has hit badly a number of African countries, including Nigeria and Angola.

It has also been a major factor in this year's fall in commodity prices that has had a weakening effect on many other African economies.

Goolam Ballin, chief economist and global head of research for Standard Bank Group, based in Johannesburg, says the major concern would be if growth fell further.

"If China were to grow at 6 percent while that is nominally still a respectable rate, it would be tantamount to causing a recession in commodities markets. This would have a severe effect on countries like South Africa, Angola, Nigeria and the Democratic Republic of Congo. The resources economies are really at the raw end of China's nerve," he says.

But Michael Power, global strategist at Investec Asset Management, based in Cape Town, believes Africa has developed a certain resilience and is no longer so reliant on China's demand for resources.

"A lot of Africa is beginning to develop its own internal momentum that is no longer reliant on continued stratospheric growth for commodities. Growth in Africa is becoming increasingly driven by productivity gains domestically and supported by the demographics of being one of the few parts of the world with a young population."

He says there is increasing focus on Chinese private sector investment on the continent that has not been impacted by slowing growth that is turning parts of East Africa into a new manufacturing hub.

"Chinese companies are investing in manufacturing facilities, making textiles and shoes in Ethiopia and metal bashing in Kenya. Chinese companies are saying to the Bangladeshis and the Vietnamese that if you are going to undercut us, we are going to undercut you. They are making their products where labor costs are even lower."

One of the major debates surrounding China's third quarter GDP figures was whether they signaled the beginning of a "new normal" for China.

Julian Evans-Pritchard, China economist based in Singapore of the leading independent macroeconomics consultancy Capital Economics, believes it is evidence of a fundamental shift.

"I think what is happening is quite significant. If you look at the crackdown on shadow banking and the passing of budget laws to control local government spending, there has been a real shift in policy. The one disappointing area has been financial reform but you can still see the direction of policy.

"Even if there was to be a rebound in the fourth quarter, I think you can see the way things are going. A lot of the reforms that are going to be needed are going to result in slower growth, at least in the short term."

Zhu at the Shanghai Advanced Institute of Finance wonders whether the government is as relaxed about slowing growth as it may superficially appear.

He believes GDP growth might have slowed in the current quarter as a result of certain stimulus measures, particularly increasing liquidity, not producing a fillip in time.

"The slowing growth could be a result of the policy not working. We might see another run of big stimulus measures to try and make the year's growth target. The government would have to pull a lot of rabbits out of the hat to do this since we would need 7.7 percent in the fourth quarter to make 7.5 percent for the year," he says.

Oliver Barron, head of the Beijing research office of London-based investment bank, NSBO, who is based in Beijing, disagrees.

He believes that because employment levels have not been affected, the government has become more relaxed about slowing growth.

Unemployment has remained steady this year at around 4 percent, partly helped by a continued long-term decline in the working population as a result of the country's one-child policy. In the first nine months of the year, more that 10 million jobs were added in urban areas, meeting the full year's target well ahead of time.

"I think policymakers are now okay with slowing growth because employment continues to remain stable and I think as long as that remains the case the government will be willing to tolerate a further slowdown.

"The National Bureau of Statistics, on their own commentary on the data, said that employment remained a positive surprise. I think this all increases the likelihood of a target of 7 percent being set next year."

Barron also believes that the weak property data also means that there is unlikely to be a rebound in the fourth quarter. Real estate investment rose 12.5 percent in the first three quarters compared to 13.2 percent in the first eight months of last year. Housing sales, however, fell 10.8 percent in the first nine months compared to a year ago.

"I think this is all well set in now and it is unlikely there will be a rebound in the latter half of the year," he says.

Kuijs at Royal Bank of Scotland also believes the situation with the housing market reveals that policymakers are not likely now to come up with some emergency response just to boost growth.

"China is now undergoing its first market-led downturn in the real estate market and there has been no significant policy response. I think if we had something similar five years ago they would have acted. I think from this you get some indication that policymakers are allowing growth to fall below 7.5 percent."

One of the challenges for China if it is trying to engineer a slowdown is whether it can achieve it without sending the rest of the world into recession and then being impacted itself again in second-round effects by the resultant fall in global demand.

Ballin at Standard Bank Group believes this is something Chinese policymakers will be very much aware of.

"There are these risks of a downward spiral. You can't just see this in terms of an isolated GDP growth decline. China is so much now integrated into the global supply chain so there is a synchronicity of risk to any slowdown," he says.

Zhu at the Shanghai Advanced Institute of Finance believes there is less of a risk of this than there was five years ago when in the wake of the financial crisis the world was completely reliant on China demand.

"You can't rule out the risk of a downward spiral since China remains so important. What the world needs, however, is a China soft landing rather than a hard one. This relatively stable decline in growth that we are seeing reduces the possibility of a crash, which was what everybody feared.

"We have also moved into a situation where it is not just China contributing to global growth although it remains very significant but also the so-called frontier economies of Indonesia, Pakistan and Turkey, which gives greater scope for China to slow without destabilizing the world economy."

For Power at Investec, the real threat to global growth comes from Europe itself and not China as has been made clear by all the worrying data of the past fortnight that has created turmoil on global stock markets.

"We are now seeing Germany moving into negative growth and the whole problem with the eurozone countries. I think we are also going to see an end to the so-called German export miracle," he says.

"The Chinese are beginning to reverse engineer some of the capital goods they have been sold by the Germans such as magnetic trains. I think the US will begin to start to lose its competitive advantages, too within three to five years and we will move to a situation where there is more creativity coming from Asia."

For the moment, there is going to be increasing interest in the growth data coming out of China.

Evans-Pritchard at Capital Economics says it is often too easy to be bearish about China.

"I think a lot of people were too pessimistic after the very weak data we had in August. The latest growth figure therefore was not as bad as some people had expected," he says.

Kuijs at RBS believes the Chinese government is still very much weighing up all the options as to what growth level it wants the economy to achieve.

"I think they are still making up their mind as to how far to let this process go. I think there, however, still remains an element of ambition about achieving a certain minimum level of growth. I think that is why we are all still wondering what the growth target for next year and beyond will eventually be."

andrewmoody@chinadaily.com.cn

A worker at an instrument factory in Huaibei, Anhui province. Unemployment has remained steady this year at around 4 percent. Provided to China Daily

(China Daily European Weekly 10/24/2014 page6)