These are all legitimate concerns, but we don’t think investors are drawing the right conclusions. While a slowdown in China could be ugly for commodity suppliers and Asian neighbors (GRR) linked by production chains, the point is this: China is now an economy dominated by services, not manufacturing.
Real estate, finance, hospitality, wholesale/retail, transport, construction and other services accounted for some 55% of gross domestic product (or GDP) in 2014, up from 47% in 2006, according to data compiled by CLSA and Citic Securities. Their share will likely continue to rise, and not only because industrial activity is shrinking. The contribution of the service sector to the economy may also be underreported.
Market Realist – The Chinese economy is shifting gears from manufacturing to the service sector.
The slowdown in China’s manufacturing sector is generating a lot of headlines. But does a slowdown in manufacturing mean doom and gloom for the Chinese economy? We don’t think so. For a large part of the past two decades, China (YINN) has focused on building infrastructure and investing in heavy machinery equipment. This was the reason behind the almost insatiable consumption of resources and demand for commodities (DBC) (DJP) during that period. However, the Chinese economy (GCH) is now shifting gears to a more consumer-based economy.
The focus is shifting from manufacturing and industrial production to the service sector. The Chinese consumer is now looking for experiences rather than products. This is clear from the composition of China’s GDP. It focuses heavily on services now. The above graph shows the composition of China’s GDP by industry.
China’s primary sector now accounts for only 9.2% of the GDP while its secondary sector makes up 42.7% of GDP. The tertiary sector takes the cake by making up 48.1% of the country’s GDP. The contribution of the tertiary sector has been rising steadily over the last ten years and is expected to continue on an upward trajectory.
Read on to the next part of this series to see how the service sector continues to prosper despite China’s gloomy economic outlook.