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China’s Stable Economic Growth Driven by Service Sector and Online Sales

China’s gross domestic product growth remained robust in the third quarter, increasing 6.8% year-on-year, easing marginally from the 6.9% growth recorded in first and second quarters this year, compared to a year earlier.

On a quarterly basis, GDP growth was up 1.7% in the third quarter compared to the second quarter, which had increased 1.8% from the first three months of the year.

This level of growth is considered the “new normal” for China, which for many years had posted GDP gains in the 9 percent to 10 percent range. In 2016, China’s GDP grew 6.7% for the first three quarters of the year compared to the previous year.

In 2016, China set its economic growth target at between 6.5% and 7 percent for the year, making it the lowest in more than 30 years. China’s 13th Five-Year Plan, released in March 2016, set the annual economic growth target at an average of 6.5% through 2020.

Rajiv Biswas, Asia Pacific chief economist for IHS Markit, noted that China’s new growth engine continues to be household consumption, which contributed 64.5% of total GDP growth in the first three quarters of 2017–2.8% higher than the same period of 2016.

Exports also performed well in the first nine months of 2017, rising by 12.4% year-on-year, propelled by growth in shipments of mechanical and electrical products, which increased 13 percent and accounted for 57.5% of total export value.

Industrial production also accelerated, with value-added rising 6.7% in the first three quarters of 2017 compared to the same period a year ago. The high-tech sector has led manufacturing growth, posting a 13.4% gain in value-added.

“Sustaining such rapid growth of high-tech manufacturing indicates that the Chinese government’s Made in China 2025 policy is succeeding, which is critical to the vision outlined by President Xi in his speech to the 19th Party Congress to transform Chinese enterprises into world class, globally competitive firms,” Biswas said. “However, fixed investment continued to moderate, growing at 7.5% year-to-year in the first three quarters of 2017, easing by 0.7 percentage points compared to growth in the same period of 2016.”

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In the apparel and textile industry, the policy includes moving away from a low-cost manufacturing model to one of producing value-added merchandise and an upgrading of factories through state-of-the-art technology and machinery. There’s also a concerted effort to manufacture more for the domestic market instead of relying on imports to serve consumers.

[Read more about China’s economic plans: Sourcing 2050: As China Goes, the World Follows]

The service sector has been the leading engine of the economy in 2017, Biswas noted, growing at an 8.3% clip and accounting for 52.9% of total value-added in GDP for the first three quarters of 2017.

Retail sales have remained strong, rising 10.4% through September. Online retail sales have boomed in 2017, increasing 34.2%, a rate of growth 8.1% higher than the same period last year. Online retail sales of physical goods rose 29.1% and accounted for 14% of total retail sales of consumer goods. Online sales of services, which includes fast-growing segments such as travel, hotels and entertainment, soared 52.8% in the first three quarters.

“The robust GDP growth rate of China in the first three quarters of 2017 has been an important factor underpinning global economic growth momentum and the upturn in world commodity prices, as well as helping to drive rapid export growth from the rest of APAC to China,” Biswas said. “China’s strong growth performance is a key factor contributing to stronger world growth, with IHS Markit forecasting that world growth will strengthen from 2.5% year-on-year in 2016 to 3.1% in 2017. IHS Markit forecasts that China’s GDP growth rate will remain strong in 2018 at 6.5%, with world GDP growth forecast to rise to a pace of 3.3%, as U.S. GDP growth improves while Eurozone economic expansion remains robust.”

However, Biswas cautioned that China’s policymakers will continue to walk a difficult tightrope in 2018 due to significant medium-term imbalances in the Chinese economy, including overcapacity in many sectors of heavy industry such as steel and coal, concerns about the lending and collateral of shadow banks, and rapid growth in corporate debt since 2010.

“Consequently, the risk of a China economic slowdown or downside risk scenario of a hard landing remains a significant risk to the medium-term global outlook,” Biswas added. “The rest of the Asia-Pacific is particularly vulnerable to the risk of a China slowdown, as China’s share of total exports has risen sharply over the past decade for most major APAC economies.”