China must keep the brakes on and find new ways to grow
The World Bank has cut its 2013 economic growth forecast for China from 8.4 per cent to 7.7 per cent. Moreover, recent central-bank data shows that Chinese banks increased their lending by only 667 billion yuan ($108 billion) in May - a 125 billion yuan decline from the same period last year.
But simply lending more would not improve the situation. Given that loans amount to nearly double China's GDP - a result of the stimulus since 2008 - new loans are largely being used to pay off old debts, rather than for investment. Thus, the more relevant concern is that the balance of outstanding loans has not risen.
In recent years, tight monetary policy and strict controls on the real estate sector have caused the growth rate of fixed-asset investment to fall. Furthermore, the growth rate in the less developed eastern regions is less than half of the national average. As a result, growth of industrial value added - which contributes almost half of China's GDP - is slowing even faster, from an average annual rate of 20 per cent during boom years to just 7.8 per cent in the first quarter of this year.
The key to restoring China's GDP growth is returning fixed-asset investment growth to at least 25 per cent. With a new round of stimulus, excess production capacity and underused outlays (built-up real estate assets) could be mobilised, restoring 9 per cent annual GDP growth.
But the willingness of China's new leadership to initiate another round of stimulus depends on what rate of GDP growth Li can tolerate. The reason for Li's inaction emerged in June, when President Xi Jinping told Barack Obama that China had deliberately revised its growth target downward, to 7.5 per cent, to support stable and sustained economic development.
Xi's statement suggests the new government will seek to restore pre-2008 fundamentals. In 2005, China was experiencing currency appreciation, which can stimulate the government and businesses to pursue structural reforms and industrial upgrading. But the increase in official fixed-asset investment - which rose by 32 per cent in 2009 alone - delayed structural reforms, while overcapacity and a real estate bubble became more deeply entrenched.
The government must now dispel the remaining vestiges of the over-investment of 2008-2010, however painful it may be. This means allowing the economy to slow, while maintaining tight macro-economic policies that force local governments and business to find new sources of growth.
Over the past decade, structural changes to China's economy have caused unemployment pressure to decline. Now, the setting is favourable to build the stronger, more stable economy that Li wants - and that China needs.
Frequently Asked Questions about this Article…
China's growth has slowed because post‑2008 stimulus left the economy with large debt and excess capacity, and recent tight monetary policy and strict real‑estate controls have curbed investment. The article notes last year's GDP growth hit a 13‑year low, signalling a structural shift rather than a short, sharp downturn. For everyday investors, that means expecting slower but potentially more stable growth as China works through over‑investment and pursues structural reforms.
The World Bank cut its 2013 forecast for China from 8.4% to 7.7%. That downgrade reflects weaker lending and investment dynamics in the economy. For investors, a lower official growth forecast can affect global commodity demand, corporate earnings expectations and sentiment toward China‑exposed assets.
Not really. The article explains Chinese banks added only about 667 billion yuan ($108 billion) in lending in May — 125 billion yuan less than the same period last year — and much new credit is being used to roll over old debts rather than fund fresh investment. Because outstanding loans already amount to nearly double China’s GDP, simply increasing lending is unlikely to deliver durable growth.
Tight controls on the real‑estate sector, combined with restrictive monetary policy, have reduced the growth rate of fixed‑asset investment. Since fixed‑asset spending is a key engine of growth in China, weaker investment has contributed to a slowdown in industrial value added and overall GDP expansion.
According to the article, restoring fixed‑asset investment growth to at least 25% is seen as central to reviving China's GDP. A new round of stimulus that mobilises excess production capacity and underused real‑estate outlays could, in theory, push annual GDP back toward about 9% — but that depends on policy choices and willingness to re‑engage in large‑scale investment.
The new leadership appears prepared to tolerate slower growth to force structural change. President Xi Jinping reportedly said China deliberately lowered its growth target to 7.5% to support stable and sustained development. That suggests officials are cautious about reintroducing large stimulus that could entrench over‑investment and debt problems.
Industrial value added — which the article says makes up almost half of China’s GDP — has slowed sharply, dropping from an average annual growth of about 20% in boom years to 7.8% in the first quarter. For investors, slower industrial growth can mean weaker demand for commodities, slower earnings for manufacturers and a shift in opportunities toward services or higher‑value industries as structural reform proceeds.
The article argues China should allow the economy to slow and keep tight macro‑economic policies to force local governments and businesses to find new growth sources, even though this may be painful. Over time, such structural reform could produce a more balanced, stable economy — an outcome that may be healthier for long‑term investors who prioritise sustainable growth over short‑term stimulus bursts.
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