That China’s third quarter growth rate of 9.1 per cent, just marginally below forecasts, would spark a sell-off in the markets says a lot about the gloomy state of the global economy. Analysts have not yet decided whether a rate below expectations is good or bad, given the concerns about inflation.
Some have focused on the minor changes in sector growth patterns; evidence that China is finally rebalancing, with consumption rising relatively faster than output; and signs that fixed investment is becoming more judicious, with a slowdown in property development. While the general sense is that macroeconomic policies do not need major adjustments, globalists tend to worry more about whether China will continue to be a strong source of demand given the weakness of the US and eurozone economies.
Ostensibly, Beijing’s goal is to manage a “soft landing”. But even at home, many have not fully accepted the premise of the current five-year plan that slower, but higher quality growth, averaging seven per cent, is better. Skeptics believe that this target is no more credible than the 7.5 per cent target (compared with the actual 11 per cent achieved) in the just-completed plan.
Many recognise that slower growth would be more environmentally sustainable. Yet some vested interests still feel that these are issues for richer, more developed countries.
Thus making a credible case that seven per cent growth is better than ten means challenging the traditional objectives that have preoccupied China’s leaders during the post-Mao reform era. Two targets have been sacrosanct – price stability and employment generation – with the understanding that rapid economic growth makes them more achievable.
But times have changed. Keeping prices stable was much simpler when the main concern was providing access to a range of basic consumer goods at affordable prices. Having become the world’s assembly plant for such items has solved that problem. Instead, the current bout of inflation stem from the demand of a rising middle class for a varied diet of modern goods and services that are more costly to provide. Part of this is driven by the search for housing in cities where real estate prices have surged with urbanisation and speculative pressures. Pushing the economy to grow too fast will make it only harder to maintain price stability in the future.
However, employment generation made considerable sense when the stock of surplus labour in the countryside and in bloated state enterprises had to be absorbed by a small, but expanding, private industrial sector. China had to grow out of its past distortions and inefficiencies. But its employment needs today are quite different from those a generation ago. Faced with a declining labor force due to a rapidly aging population, creating copious, but relatively low-skilled, jobs is no longer the priority. The focus now is on fewer, but higher value-added, positions.
On both scores, Beijing and the rest of the world need to be more relaxed about China’s declining growth rates, provided that the process is managed well – which, of course, is a big if.
The writer is a senior associate at the Carnegie Endowment and a former country director for the World Bank in China
Cast your mind back a couple of years. The world’s second biggest economy was growing at an unsustainable rate. Exports, the pundits and the markets agreed, had recovered too well from the late 2008 downturn. Property and infrastructure spending under the stimulus package launched in response to the dip was too high and badly allocated. The accompanying credit boom was producing excess liquidity and a plethora of impending bad loans. Then inflation more than doubled from the two to three per cent China had enjoyed for much of the first decade of this century.
Now consider what we have today. Growth is slowing. The property market has cooled. The authorities have put the brake on credit growth. Though inflation is still 6.1 per cent and will remain a structural problem until Beijing reforms agriculture, consumer prices seem to have peaked.
That might appear to be a success story. But, as Yukon Huang writes, times have changed. Markets and the media prefer the bad news story, so that a 9.1 per cent growth rate is cause for concern. The expanding trade surplus in the second and third quarters is ignored, while the fall in export growth is highlighted.
On top of this, China, as the nation which has benefited so much from globalisation, cannot avoid being caught up in the deep uncertainties about the eurozone and the US – and fears about the effect on the People’s Republic despite efforts to diversify its export markets.
A recession in the developed would, of course, be a major blow. But a sense of proportion is needed. The current account’s share of gross domestic output has fallen from 20 per cent in the middle of this decade to ten per cent in 2007, and to five per cent last year. Yes, small private sector companies face a potentially crushing combination of rising wages, credit curbs and late payment by western buyers as highlighted in a stream of reports from the manufacturing hub of Wenzhou. Two dozen firms are reported having gone bust. No doubt the true figure is much higher compounded by the contagion effect of lending between individuals and firms in the shadow banking sector, but there are anywhere from 250,000 to 400,000 enterprises in the city.
If China faces a serious downturn, its leadership will take remedial action as it did in late 2008, probably by selective stimulus measures. That may introduce distortions and create a fresh set of problems. But it is the way the last major Communist-ruled state on earth operates.
The writer is China director at Trusted Sources
