China\u2019s economy may be slowing again. While the country has weathered the storm of Donald Trump\u2019s trade war better than the United States \u2014 thanks to a more diversified set of trade relationships \u2014 its domestic economy is beginning to sputter. Exports rose in the last quarter, even as American exports fell, but internal economic growth is less promising.<\/p>\n
Industrial output grew 5.7% last month<\/a>, which is robust by Western standards but still marks a significant reduction from June\u2019s 6.8% rate. More worrying yet is that retail sales grew only 3.7%, sharply down from the previous month\u2019s 4.8% pace.<\/p>\n This is particularly worrying because that 4.8% figure was already low. The basic problem with China\u2019s economy is no secret: domestic consumption is inadequate for a country at its level of development. At barely half of total output, it falls well below the roughly 90% average seen in most developed economies, and this gap has widened as consumption has weakened following the collapse of the housing market. Since property investment is the main saving vehicle for most Chinese households, they have compensated for their losses by tightening their purse strings and boosting their savings.<\/p>\n Faced with inadequate demand, therefore, firms have taken to increasing their exports. That has swamped the world with inexpensive goods and drawn increasing ire from trading partners. If it hasn\u2019t already done so, this export-oriented growth strategy is now finally approaching its limits.<\/p>\n The solution to China\u2019s slowdown is, then, no mystery: reduce investment and increase consumption. Beijing has been trying to bring about a long-overdue rebalancing of the economy, and has enjoyed some recent success in the country\u2019s major cities. There, housing has bottomed out, investment\u2019s share of local output has decreased<\/a>, and governments have steered what investment does take place towards high-quality, strategic industries.<\/p>\n Unfortunately, governments in smaller cities haven\u2019t yet got the hang of this new approach. Faced with declining growth, they have tried to meet the national target of over 5% annual expansion by investing yet more. The result is excess capacity and output, unprofitable firms, and falling prices \u2014 all of which only compounds the downward spiral of Chinese firms.<\/p>\n