China rebalancing: Slowly but surely – Goldman Sachs

Research Team at Goldman Sachs, suggests that while macro evidence suggests limited progress, micro details reveal clear evidence that the source of Chinese demand has been slowly but surely shifting.

Key Quotes

“The key behind this macro vs. micro disconnect, in our view, is the changing mix in the source of Chinese growth. Although this does not affect the aggregate level of investment, it significantly changes the Chinese demand for different commodities.

Investment in the “new economy” like water conservancy, health care and education has been growing much faster than investment in the “old economy” such as mining and manufacturing. Infrastructure projects are also moving from building railways to building subways. These underlying changes has reduced the metal intensity of fixed asset investment in China.

Limited rebalancing by macro measure…

The most common perception is that the Chinese growth model has been overly reliant on investment and exports. To stay on a sustainable growth path, it is imperative for China to move toward a consumption-led economy. Therefore, China rebalancing can be measured by the investment-to-GDP ratio. At 43%, China’s investment share of GDP ranks the highest among all major countries. This is only 2 percentage points (ppt) lower than the 45% seen in 2010. Therefore, by this metric, China has not made much progress in rebalancing its economy.

...but ample evidence of rebalancing by micro measures

Although macro data show limited progress made by China in rebalancing its economy, micro evidence is more encouraging. For example, we look at detailed international trade data with 255 goods items and find that while the exports share of GDP in China today is similar to the level seen in the mid-1990s, the types of goods exported by China have changed significantly. In 1995, footwear, men’s clothing, women’s clothing, articles of apparel (not elsewhere specified), and toys were the top five categories of Chinese exports. By contrast, in 2014, telecom equipment, automatic data processing machines, cathode valves, furniture, and jewelry became the top five Chinese exports. This is evidence that China has been moving up the export value chain.”