China 2014 growth the template for years to come

LAUNCESTON, Australia: The important thing from China’s economic deluge isn’t that fourth quarter growth was slightly higher than expected, or even that growth over the whole of 2014 was the weakest in 24 years.
These are merely the headline grabbers. What really matters is that 2014 provided the template for what China’s economy is going to look like in the next decade.
The trends that started to come to fore in the past year are likely to continue, and these include an economy less reliant on export-led manufacturing, slower growth in commodity consumption and imports and a lesser role for state stimulus spending.
There will be those who bemoan the slower growth, having grown accustomed to China’s extended and rapid expansion over the past three decades.
However, a gradual slowing of the Chinese growth rate has to be seen as an overall positive, lowering the risk of creating unsustainable bubbles in the economy and transitioning the world’s most populous nation from the source of the world’s cheap labour to being the engine of middle-class consumerism.
Fourth-quarter gross domestic product (GDP) expanded 7.3 percent, above expectations for a gain of 7.2 percent and matching the third quarter number, according to official data released Tuesday.
However, GDP for 2014 came in at 7.4 percent, down from 7.7 percent in 2013 and the weakest number since 1990.
The change in the Chinese economy can be seen in the other economic data released alongside the GDP numbers.
Retail sales surprised to the upside, rising 11.9 percent, while industrial output also beat expectations with a 7.9 percent gain.
However, it’s worth noting that industrial output used to be consistently in double digits, and the drop to average around 8 percent over 2014 shows this sector is slowing, while consumer spending accelerates.
This dynamic also shows up in the electricity generation numbers, with power output rising 3.2 percent in 2014, the slowest growth rate in 16 years.
It’s likely that in coming years, electricity generation will continue to grow at less than half the pace of GDP, given that the major power consumers are heavy industry, and the Chinese economy is trying to diversify away from this sector.
Another headline-grabbing number was the rise in 2014 implied oil demand to a record 10.08 million barrels per day (bpd). This is the first time the annual figure has been above 10 million bpd.
But the important thing here is that the annual growth rate was 3 percent in 2014 from 2013, again showing that oil demand is rising at pace of less than half of GDP.
Steel output also hit a record high in 2014 at 822.7 million tonnes, but again the growth rate from the prior year was just 0.9 percent.
Rising steel exports last year also mean that the gain in output was shipped out of the country rather than meeting any additional domestic demand, again underlining the changing nature of the Chinese economy.
The overall picture that emerges for China’s commodity imports is that the prior years of fast-paced growth will be replaced with slower growth.
But the key word is still growth.
Much recent commentary has focused on how commodity producing companies and nations are going to suffer from China’s changing economy.
This has been based on the rapid decline in commodity prices seen in the second half of last year, especially in crude oil and iron ore, while coal chalked up a fourth consecutive year of losses.
This ignores that much of the decline in commodity prices is the fault of the producers themselves, who have ramped up supply to the point where most markets are now structurally over-supplied.
They did this for a variety of reasons, ranging from the argument of major miners like BHP Billiton and Rio Tinto that their low-cost assets gave them a huge advantage, to the naive belief that China would expand at double-digit pace forever.
The decline in commodity prices is largely self-inflicted by the producers, and had very little to do with Chinese demand.
After all, China bought in record volumes of crude, iron ore and copper in 2014, with only coal recording a drop among major commodity imports.
A Chinese economy growing in the region of 7 percent for the next few years, then easing gradually back toward 5 percent thereafter is still an economy that will require substantial and rising commodity imports.
To blame China’s economy for the woes of low commodity prices is to misunderstand the dynamics at work in the market.