At sixes and sevens over Chinese growth
One of the oddities in the discussion about China’s economic growth rate is the way in which its slowing is interpreted despite the fact that the explicit and stated objective of its new leadership is a slowing and re-orientation of growth.
The 7.5 per cent GDP growth China says was generated in the second quarter shows that the new government headed by President Xi Jinping is getting what it wished for – a lower and less export and investment-dependent growth rate.
While, if the trend of slipping growth is maintained, China would produce its lowest economic growth rate in more than two decades, China’s leadership appears to be unfazed.
It wants, indeed needs, to transition the economy from the old model of investment and exports to one with a better balance of consumption. It is acutely aware that there has been significant unproductive investment and there are quite severe credit quality and allocation issues within its financial system as a result of the heady double-digit growth rates over the past decades.
It would also recognise that with Europe in recession, the US economy growing only weakly, the renmimbi appreciating and its cost advantages reducing as its living standards increase, reliance on the export-driven growth model isn’t sustainable.
Since the financial crisis in 2008 – which China responded to with a massive stimulus program oriented towards infrastructure investment – China’s GDP has significantly more than doubled, from around $US3.5 trillion to more than $US8 trillion.
That level of growth over such a relatively short timeframe would inevitably have created imbalances and excesses – and a lot of leverage against poor quality assets – and it is clear the new regime have decided they have to implement structural reform to reduce the level of risk and leverage within their economy.
The official growth target for this year is 7.5 per cent but it would appear the new regime is less fixated with targets than its predecessors and may be prepared to see it slip a little lower if it is apparent the desired redirection of the economy is occurring without any threat to social and political cohesion. Unemployment levels will be closely watched.
Ultimately, however, if China decides it needs to give its economy a bit of a kick along it has both the financial firepower and the control over the levers of its economy to do so.
The leadership will be reluctant to do so before bringing their domestic financial system and its misallocations of capital and credit under control but it remains an obvious option for putting a floor under the rate of growth if the attempt at a controlled slowdown looks like overshooting.
It used to be taken as an article of faith under the previous leadership that China would never allow its growth rate to slide below 8 per cent a year, which was seen as the rate at which the economy needed to grow to manage the large-scale and accelerating urbanisation of its population that has occurred over recent decades.
It would appear that the new leadership is quite prepared to live with something with a '7' in front of it and might even tolerate something lower for short periods if it can contain social tensions while pursuing its quite ambitious attempts at reform.