China’s GDP is widely expected to grow around 7% this year. But, 7% does not mean the same thing to all stakeholders. After decades of rapid growth in nearly all sectors in tandem, within China’s economy divergences are growing dramatically as Beijing reins-in some sectors and stimulates others to force restructuring.
China’s service sector and consumption continue to outpace the industrial sector. This is important to note, because China’s demand of goods and services from the outside world is dominated by commodities and industrial machinery (why would the world’s biggest maker of things need to import consumer goods from outside). See my trade info graphic for details on China's import composition. The effect of rebalancing on demand from the outside world will be asymmetrical. There are limited beneficiaries from a robust service sector and increased household consumption, but no shortage of China suppliers suffering a significant slowing of commodity and industrial machinery demand.
If you are concerned with negative China headlines roiling markets, then 7% might be the number you want to follow. If you are concerned with China’s growth rate on fundamentals of companies and countries outside of China that feed China's demand for raw materials and machinery, then a more granular analysis is required. 7% is not the number you want to watch.
For this purpose I have split my GDP tracker into two parts: services and the industrial sector. As you can see from the chart below the industrial sector has been weakening much faster than services. For most of China's suppliers, China’s growth might as well be closer to 6% (a significant drop from 14.5% five years ago), not 7%. If you are a coal or metals exporter, China’s growth might as well be negative or in the very low single digits, as most heavy industries have decelerated much faster than overall industry. If you supply the raw materials for China's construction market (almost half or China's iron ore demand is used for construction), then demand will continue to decline until we see a pickup in new starts.
As consumption driving reforms unfold and the service sector continues to outpace industry the divergence will grow. It is probable that the industrial sector slows to the a rate in the low 5%s over the next year or two, as the overall GDP number moderates only slightly from its current 7% pace. And as mentioned, that low 5% growth rate will be the effective of growth for most of China's suppliers.