Nervous wait for economic data
Growth in China's economy is slowing. The question is how rapidly it is doing so, and how much of it is by design.
Poor economic data in recent months has had a growing number of economists pondering the previously unthinkable - that China could miss its official gross domestic product growth target for the year of 7.5 per cent.
Li Keqiang would be the first premier to do so since the Asian financial crisis 15 years ago.
The sentiment towards the health of China's economy has shifted to such a degree that consistently bullish analysts are now warning of considerable pain, especially in the short-term.
Speaking at the Australia National University's China Update last week, noted economist Yiping Huang warned the dreaded "hard landing" of China's economy was "inevitable", and could spark a "China-induced global recession".
As ominous as that sounds, Huang argues that it is necessary short-term pain and that he would be far more worried if the government was not taking action.
"Likonomics", a term Huang and his team at Barclays coined to describe their interpretation of Li Keqiang's economic policies, is all about transitioning China's economy away from its unsustainable investment-led growth model and addiction to cheap credit.
In Japan, Abenomics is about ending deflation and restarting economic growth. Likonomics is about deceleration, deleveraging and improving the quality of growth. But both will come down to the success of its structural reforms.
Consigned to history is the magic 8 per cent economic growth rate target the Chinese government has insisted for most of the decade to be necessary to create enough jobs for the millions of young Chinese entering the workforce every year.
Demographic changes brought about by China's one-child policy means its labour force has already peaked and is steadily shrinking. While this has major repercussions for how it can support its ageing population, it at least means a lower rate of economic growth is needed to support job creation.
Those keeping the faith with the new leadership's stewardship of China's economic miracle will also point out that its 12th five-year plan targets an average GDP growth rate of 7 per cent for 2011-15.
But there are also those who think any quarterly growth rate with a seven in front of it will be overstated and lead to suspicions that things are so bad, the numbers are being massaged.
If it all goes to plan, China's economic growth in the longer term will settle somewhere closer to 6 per cent in the next decade. But as last month's abrupt liquidity crunch brought into focus, it is how the unexpected ructions in China's economy is handled that will be the measure of the new leadership.
Philip Wen is China correspondent.
Frequently Asked Questions about this Article…
Investors should watch headline China GDP growth and signs of acceleration or further slowdown, because quarterly figures can be market-moving. The article describes a 'nervous wait' for the data as markets try to gauge whether growth is decelerating by design (policy) or showing unexpected weakness that could ripple through global markets.
Yes — the article notes growing economist concern that China could miss the official 7.5% target this year, which would be notable politically and economically (the first premier to do so since the Asian financial crisis). Missing the target could increase market volatility and raise questions about policy responses and global growth prospects.
Likonomics, as described in the article, is Li Keqiang's policy emphasis on transitioning China away from unsustainable investment-led growth toward deceleration, deleveraging and higher-quality growth. For investors, Likonomics matters because that structural shift can mean short-term pain (slower growth, weaker commodity demand) but is intended to reduce long-term vulnerabilities.
The article reports that some economists, like Yiping Huang, warn a hard landing could be 'inevitable' and potentially spark a 'China-induced global recession.' However, Huang also frames short-term pain as part of necessary reforms; investors should weigh the risk of abrupt shocks against policy actions aimed at managing the slowdown.
The article says the recent abrupt liquidity crunch highlighted China's vulnerability to unexpected ructions and underscored that how the new leadership handles shocks will be a key test. For investors, this means watching liquidity conditions and policy responses closely, since sudden stress can amplify market moves.
The article notes skepticism among some observers who think any quarterly growth rate starting with a seven may be overstated and could indicate 'numbers being massaged.' Investors should therefore treat official figures with caution and also monitor alternative indicators and policy signals.
According to the article, China’s one-child policy has led to a peaking and then shrinking labour force, which means lower growth rates will be sufficient to create jobs. For investors, a structurally slower growth path affects long-term demand projections, sector winners and policy priorities like social spending and reform.
The article suggests that if structural reforms succeed, China’s growth could settle closer to about 6% over the next decade, while its 12th five-year plan targets an average of 7% for 2011–15. Everyday investors should expect a period of deceleration and reform-driven volatility, and focus on how policy actions influence different sectors and global markets.
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