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China's lowest growth for 25 years: what does it mean?

19 January 2016, 18:35

Beijing - China's economy, the world's second-largest, grew at its slowest pace in a quarter of a century last year, decelerating to expansion of 6.9 percent.

International financial markets have been hammered in recent months by worries over a slowing China, which has been the main driver of global growth.

Here are some key points which explain China's economic transformation and how it affects the rest of the world.

Q: Why does China's economy matter?

The days of isolation for the People's Republic are long over. China is the world's second-largest economy and its largest trader in goods.

From Australia to Zambia, via the European Union and United States, China's influence on other economies is pronounced, whether through the prices of commodities such as iron ore, oil, and copper, or through rising consumer demand for luxury and consumer goods from foreign companies.

Retail investors can also feel the effects. The bourses of Shanghai and Shenzhen have been in varying degrees of turmoil since a debt-fuelled bubble burst in June, but worries over the economy have also fuelled sell-offs in overseas stock markets in recent weeks.

Q: Are the latest growth figures good or bad?

China has already served notice of a "new normal" of slower expansion as it seeks more sustainable growth, supported by domestic consumer spending rather than cheap exports and massive government investment.

So to the government, 2015 was a year of "moderate but stable" development in line with the annual target of around seven percent.

Such rates would be the envy of developed economies in North America or Europe, and the figures matched market expectations.

But after decades of rapid Chinese growth, often with double-digit annual GDP increases, which helped the world navigate both the 2008 global financial crisis and the earlier Asian financial crisis, a quarter-century slowdown is a worrisome sign.

Q: Why has growth slowed?

Analysts point to a multitude of reasons: a weaker external environment which caused Chinese exports to drop last year and a limping property market, a key source of revenue for the government.

More alarming in recent months, a stock market collapse which caused the financial sector to contribute less to the economy, and a weakening currency which has seen capital storm out of the country.

Chinese officials say the Asian country is willing to accept slower growth as part of the cost of carrying out deep structural changes. For the first time, services made up more than half of GDP in 2015.

But analysts fear the current environment has actually caused much-needed economic reforms to halt, delaying policies needed to sustain China's development in the long term.

Q: Are China's economic figures reliable?

When Wang Baoan, the chief of China's National Bureau of Statistics, was asked the question as the data was released on Tuesday, he answered: "The GDP data we publish is true and trustworthy."

But even Premier Li Keqiang has previously expressed doubts about man-made data, and many analysts take Wang's assurance with a grain of salt.

As well as political pressure, they point to the frequent revision of prior quarters' data, which can change comparison bases, and the speed with which China produces its figures, less than three weeks after the end of the calendar year.

Some estimate the real growth rate is significantly lower than official statistics. Capital Economics said that its own measures pointed to Q4 growth of just 4.5 percent, but its economist Julian Evans-Pritchard said in a note that the economy was nonetheless "broadly stable".

Q: What will the government do now?

Beijing wants to keep growth steady and stable, while shifting the economy away from its traditional dependence on exports and infrastructure spending. This is easier said than done.

Analysts anticipate that Beijing will further loosen monetary policy this year to fight deflation, with the weak growth figures spurring expectations.

But the government's bungled handling of a volatile stock market and yuan devaluation have called into question its ability to steer China safely through a tough transition.

This year's big challenges include: how to handle a massive oversupply of property and rein in continued overproduction in heavy industries, many of them still state-owned, that dominate much of the economy.

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