Zhang Lianjin remembers the 2008 global financial crisis well. It nearly shuttered his brand-new metal casting factory in Wuhan, the steel centre of China.
Sales for the firm, SAFE-Cronite Asia, have been recovering slowly since the crisis. But while orders are still rising, so far this year they’re growing at only about half the pace the company was expecting. The company’s automotive business is strong, but there’s been a drop-off in orders tied to heavy machinery. And the broader steel industry in China is a worry.
“Many steel mills are really impacted. Some are even closing. There is too much [capacity] in steel mills in China, the economy is slowing down, the market doesn’t need so much and the production is much higher than the market needs,” said Mr. Zhang, the Beijing-based general manager of the European-owned company.
On top of overcapacity and massive overstocking, some competitors are also caught in a shadow banking crisis in which companies borrowed money against their inventory and find themselves unable to repay.
Now, firms like Mr. Zhang’s are having to adjust to the reality that China’s economy is maturing, and double-digit growth is a thing of the past.
China’s annual economic growth slowed to 7.7 per cent in this year’s first quarter – still an enviable rate for most of the world, but below expectations and continuing a string of weaker expansion in recent years.
News of China’s surprisingly slower growth helped trigger a broad selloff of gold, copper, oil and other commodities this week, and sent a chill into global commodity producers including Canada, which have previously enjoyed years of relentlessly strong demand and prices thanks to the building boom in the world’s second-largest economy. As growth cools, so will China’s appetite for coal, iron ore, copper, nickel and many of the key commodities Canada sells.
“The commodities supercycle of the past decade was predicated on ever-expanding Chinese demand,” pointed out Drummond Brodeur, vice-president and global investment strategist at Signature Global Advisors in Toronto. “But the demand-side shock is dissipating.”
China’s economy is unlikely to grow at a rate of 10 per cent a year again. “China is going to a six-per-cent-a-year economy” after 2013, Mr. Brodeur said.
As growth slows, China’s economy is undergoing a profound shift where the service sector is playing a far more important role as the traditionally dominant industrial sector gears down a notch after years of runaway expansion. China’s service sector is finally beginning to catch up to industrial production as a share of gross domestic product, now making up slightly under 45 per cent. The fraction is still well behind mature Western economies where services contribute closer to 55 to 60 per cent or more, which means China’s shift to a consumer economy will likely continue to play out for years.
“Big industrial projects will shrink in importance. That’s what happens when economies mature. Why would China be any different?” said Ron MacIntosh, a former Canadian diplomat and now a research associate at the University of Alberta’s China Institute. “The stated goal of the Chinese leadership is to move to a more consumer-oriented economy, to meet the aspirations of the rising middle class.”
China’s service sector is a low proportion even for an emerging economy, added Louis Kuijs, China economist with RBS in Hong Kong and previously an economist with the World Bank in Beijing.
“We have seen that the impact of the service industry has grown in recent years and it should continue to increase because of how the development of China’s economy means people have more purchasing power and more interest in buying services rather than goods,” Mr. Kuijs said.
At the heart of China’s slowdown is the country’s new leadership team, led by President Xi Jinping, and its early determination to restructure the economy. This is no longer the growth engine that powered the world’s economy out of the last recession. China’s new normal is a little slower.
“A telling sign of China's business cycle status is usually the government's reaction, both before and after key data are released. ... There was little indication of concern this time around. Most statements on the economy revolved around the property market, expressing concern that prices are still rising too fast,” wrote Alastair Chan, Asia economist at Moody’s Analytics, which now forecasts China’s GDP to grow 7.8 per cent this year. “The government may be acknowledging that China’s long-run potential rate of growth has slowed, an inevitable byproduct as the country attains middle-income status.”