China’s new leadership is focusing on quality not quantity when it comes to economic growth. The economy slowed further to 7.5% year on year in Q2, but the government is willing to accept a slower pace of growth now in order to secure long-term growth prospects. Wood Mackenzie forecasts GDP growth of at least 6% per annum over the next 15 years. China's growth may have slowed but it is growing from a larger base. The last time GDP growth slowed to 7.6% was in 1999. Incremental GDP growth this year will be almost 4 times larger than in 1999 because of the base effect.
In the short-term there are global implications arising from China’s slowdown. Close trading partners in Asia, such as Taiwan, South Korea and Malaysia, will be most severely affected. Europe will also feel the impact through Germany, which is a key exporter of capital goods to China. Elsewhere, a potential turning point in US monetary policy has increased uncertainty. However, the Federal Reserve’s impending ‘tapering’ of asset purchases and eventual unwind appears to be more of a risk to emerging economies than the US itself. Are the golden days of emerging market growth over? Restructuring and reform are necessary to ensure long-term growth prospects are ripe.
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