China's Next Economy
China: Manufacturing Down, Retail Up

Look carefully enough at China’s economic woes and there are some bright spots: The Wall Street Journal reports that despite a pronounced and persistent manufacturing slowdown, retail sales continue to rise. More:

Chinese consumers appear to be weathering the slowdown better than the economy’s traditional growth engines amid weak exports, a manufacturing slowdown and slumping real-estate investment.

A recent McKinsey survey of 1,200 Chinese consumers found that 71% expected their pay to increase this year, and 84% expect to spend more.

That dovetails with official data released Wednesday that showed retail sales in October grew 11% from a year earlier, up from September’s 10.9% expansion. Meanwhile, industrial production decelerated to a 5.6% rise from September’s 5.7%. Retail-sales growth has increased modestly in five of the past six months as other economic indicators have weakened.

Because China has been a manufacturing giant for decades, it is easy to base one’s assessment of the country’s future solely on the relative health of heavy industry. But there have been signs that the Chinese economy is moving away from its historical reliance on manufacturing exports and towards one based on services. A rise in retail is further indication that the shift to a services-based economy is happening, because a consumer-based economy will necessarily be a more services-based economy. As the middle class spends more money on toys and clothes, they’ll also spend it on things like entertainment and travel, health, and education. As a result, demand will rise for lawyers, doctors, math tutors, and taxi drivers.

Of course, strong retail sales still aren’t enough to keep everything chugging along, and more reforms—market- and government-driven—will be needed to ensure a smooth transition to China’s new economy.

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