As China slows down, where would its next round of growth come from?

In 1978, China opened up to the world, as the Communist Party slowly adopted a market economy. The economy steadily grew, rapidly picking up pace to post blistering double-digit growth by the 1980s. It was an economic growth that made the country the second biggest economy in the world in less than a generation.

The China Statistical Yearbook shows that between 1978 to 2009, China’s average growth rate was 9.90%, while the average for the world was 2.98%.With the financial crisis of 2008, however, the world’s factory was badly hit by falling demand for made in China goods. By December 2015, the giant economy had slowed to its lowest growth rate in 25 years.

The China National Bureau of Statistics (CNBS) released figures on the country’s gross domestic product (GDP) on 19 January. In line with market expectations and the 7% growth target set by Premier Li in early 2015, growth settled at 6.9%, with GDP amounting to 67,678 billion Renminbi (RMB) ($10,285 billion). The slowing down was mainly driven by weak real estate investment and poor imports and exports, according to CNBS.

Growth of investment in fixed assets slowed down by 2.9% compared to 2014, while investment in the real estate sector only grew by 1%, far below the annual target at 7%. The real estate sector saw significant diversification in various parts of China last year. Although tier one cities like Beijing, Shanghai, and Shenzhen saw on average 10% growth in both sales and transaction volumes, some tier two and most tier three cities recorded negative growth. The crash of property prices and foreign capital outflow exerted a negative impact on banks’ balance sheets.

Both imports and exports declined in 2015. Gross imports declined by 13.2% while gross exports dropped by 1.8%, which nevertheless still resulted in a trade surplus of around RMB 3,686.5 billion ($560.3 billion). The trade surplus, which further exerts pressure on the RMB, is not good for banks’ treasury and transaction banking businesses. The Japan-based ADBI already warned in 2011 that such surplus will generate severe upward pressures on the RMB, and companies’ margins will be squeezed further even as flooding the market with exports already lowers export prices.

The very success of China in exports through the years has led to its current account surplus. When the 2008 financial crisis happened, the falling-price effect on exports came not from downward pressure on prices, but from falling demand especially in developed countries. It was such a far left-field hit that China may not have anticipated; or if it did, it underestimated. After all, in 2008, GDP had already entered single-digit territory to 9% from 13% in 2007.

Prior to opening up in 1978, China had made land-related institutional reforms and social sector investments. These factors successfully complemented the subsequent export and foreign direct investment (FDI) promotion strategies the country followed after 1978. Its large population also attracted this FDI, which saw a large potential market. But those reforms no longer seem enough for the country. Continued depreciation of the RMB could accelerate capital outflows out of China, reversing the FDI inflows in previous years. In fact, emerging markets saw an estimated $735 billion in net capital outflows in 2015, with all but $59 billion of that coming from China, according to the Washington-based Institute of International Finance.

As a result of all of these factors, in December 2015, manufacturing output fell. But that was simply the knock-on effect that was already years in the making. The coup d’grace that was the New Year stock market rout, which wiped out all of 2015’s gains in the first few days of 2016, was simply a confluence. A perfect storm. Millions of individual Chinese investors bailing out, not so much from their reading of global events, but more from what they see in Chinese firms.

President Xi Jinping has urged officials to stabilise short-term growth, but no concrete solutions have been put forth so far. Recent moves by the government such as currency reference rates, circuit breakers, government buying stocks to save the plummeting equities markets, and “dubious” economic figures are not helping any, and this time, are not helping foreign investors any as well. Instead, they may be addressing the wrong symptom, or worse, exacerbating the problem.

Wang Bao An, CNBS director said that China’s 6.9% growth is still within expectations in the face of “uncertainties in the international economic environment,” and that “the figure is genuine and without any manipulation.”

The British economy is one of the strongest in Europe due largely to consumption. A large population, such as China has compared to Britain, should provide a greater internal market for the goods and services that the economy produces. That individual Chinese investors make up more than 80% of the Chinese stock market shows how much purchasing power China has within the country itself. Whether China could recoup lost ground by transitioning to consumption-led growth remains to be seen.