Beijing’s central business district.Brent Lewin/Bloomberg
As China develops its new five-year plan, much is being made of the fact that these changes are taking hold just as its economy slows to a pace not seen in eons.
Indeed, the country's 6.9-per-cent year-over-year trend in real gross domestic product growth may have been the slowest since the opening months of 2009 but still managed to fractionally beat consensus views of 6.8 per cent (although it goes without saying that other indicators point to a softer number than that).
And despite all the "crash-and-burn" narratives, you really don't have to scratch the surface to see the good news in that conditions are actually starting to stabilize there. In fact, on a sequential basis, China's economy (at least according to the official GDP measure) actually rose 1.8 per cent in the third quarter from the second, or very nearly a 7.5-per-cent annual rate. That's slow?
The mobilization of resources away from industrial investment and exports toward the consumer and the service sectors – the story beneath the story – continues unabated.
Note that Chinese retail sales, despite the negative wealth effect from the dramatic stock market reversal, increased 10.9 per cent year-over-year in the third quarter, a tad stronger than 10.8 per cent in the second quarter (industrial output slowed to 5.7 per cent, compared with consensus estimates of 6 per cent, and fixed-asset investment came in at 10.3 per cent versus the 10.8 per cent that was expected).
It's been more than 20 years since the U.S. last posted a retail sales trend such as that, but apparently, according to the bloggers and media types, China is in some sort of crash landing. Right.
The hidden message is that through the first nine months of the year, the consumer has been responsible for 58.4 per cent of China's overall growth. Services in aggregate are running at a pretty decent 8.4-per-cent year-over-year clip – this is where the new "super cycle" resides – but this sector has yet to reach a critical mass large enough to offset the softening in goods-sector activity.
Now, even if the bears are correct and China ends up slowing even more, how concerned should we be?
Well, I want everyone to think of Japan, which owned the 1980s just as China owned the 2000s.
By 1989, Japan's share of global GDP had risen to around 16 per cent – almost doubling in less than a decade.
The country could do no wrong, racking up huge trade surpluses and spreading its buying power around the world.
If you told anyone that Japan would spend 40 per cent of the time in recession over the next quarter-century, nobody would have believed you.
If you told anyone that its share of global GDP would drop below 6 per cent by today, you would have thought that we were going into a period of economic Armageddon.
Well, maybe that proved to be the case in Japan, but how exactly did it end up affecting anybody else in the world?
Today, China's share of global GDP is 15 per cent and may have peaked. When the Chinese boom began in the early 2000s, its share of global GDP was 4 per cent.
The question is: What could provide the offset to China (just as it was the offset to Japan)?
Maybe India – it is now more than 3 per cent of world GDP, doubling in the span of a decade and basically where China was two decades ago.
Its demographics are far superior (over a billion people and youthful in comparison to many other countries) and the country has a pro-growth, reform-minded Prime Minister in Narendra Modi and a superstar central banker in Raghuram Rajan, who has won the war against inflation. India is also one of the few countries left that has the capacity to ease monetary policy using conventional methods.
A decade ago, India was the 15th-largest economy in the world; today it is ranked seventh.
It has replaced China as the world's growth leader with an 8-per-cent-plus real GDP gain year to date, and if that pace persists, a decade from now it will be the third-biggest economy on the planet.
China makes the front pages, true, but it is what is on the back pages of the morning papers, the "sleepers" if you will, that are destined to make it to the front pages in the future.
That was China two decades ago. It may very well be India today.
David Rosenberg is chief economist with Gluskin Sheff + Associates Inc. and author of the daily economic newsletter Breakfast with Dave.