Chinese President Xi Jinping. Photo: Vladimir Smirnov/Tass/PA Images

China announced last week that its economic growth had slowed to 6.2 per cent in the year to the second quarter of 2019, the lowest rate since 1992, and half the rate of the mid-2000s.

The official GDP data tell us next to nothing about how China’s economy is really doing. The figures are manicured to show a trend which lacks any sense of cyclicality or volatility.

Other data, though, allow us to see that the economy slowed through 2018 because of the effects of deleveraging. Shadow banking assets, for example, dropped especially sharply as a share of GDP. From October, the economy lurched sharply lower, necessitating a significant shift in government policy. Credit expansion picked up again, and the government cut taxes, boosted infrastructure spending, and eased regulations for the housing sector and beleaguered automobile sector. The economy stabilised between January and April, weakened again in May. The data suggest the economy perked up again in June, but this may have been temporary.

Donald Trump has wrongly taken ownership of the slowdown, attributing it to the effects of the trade war with the US. The short-run focus, though, is a bit of a sideshow. More important is the structural downshift in China’s growth, and the question of what the government is, or isn’t, going to do about it. The real causes of these economic travails are much more made-in-China. Indeed, the country’s growth is set to halve again in the next few years.

China’s trend or sustainable rate of growth, the product of the growth in the labour force and productivity, has dropped to around 3 per cent. The working age population has been falling since 2012 and will decline for the foreseeable future. Productivity growth has become quite pedestrian. This has certainly been undermined by the political emphasis on ubiquitous Party control, while a more restrained government approach to the private sector, slow implementation of necessary reforms, and insufficient use of the markets are also contributing factors.

The accumulation of debt and need for deleveraging are also sapping China’s capacity for growth. The increasing limitations on the debt-carrying capacity of some of the largest borrowers, such as local governments and state enterprises, are constraining things. Households, among which mortgage and other consumer debt has grown rapidly in the last five years, are…

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