Misreading China's Economy

Why the Old Measures of Growth Don't Work

Skyscrapers Oriental Pearl Tower and Jin Mao Tower (L) are seen from the Shanghai World Financial Center, China, January 28, 2016. Aly Song / Reuters

January’s global stock market rout was initially triggered by mounting concerns over China’s shrinking industrial sector. But such concerns are unjustified. By now, it is clear that Beijing is doing everything in its power to rebalance its economy from industrial to service-based. In 2013, services overtook the industrial sector in both total size and pace of growth, and they now account for almost 50 percent of China’s GDP. Yet the analytical tools that we use to assess China’s performance haven’t caught up with the structural changes now under way, which means that observers can easily get China wrong.

At the moment, markets track the performance of the Chinese economy by focusing on indicators that apply, for the most part, to the old economy and pretty much ignore developments in services. Every month analysts closely monitor data on China’s exports, consumption of raw materials, and industrial production.

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