Warnings of short-term pain
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 GDP 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 Australian 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, Mr 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 Mr 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 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 mean its labour force has already peaked and is steadily shrinking. While this has major repercussions for how it can support its ageing demographic, it at least means a lower rate of economic growth is needed to support new 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 2011-2015.
But there are also those who think any quarterly growth rate with a 7 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.
Frequently Asked Questions about this Article…
Recent figures show China’s economy is slowing, which has market-moving implications for global investors. Economists are worried China could miss its official 7.5% GDP target for the year, and that slower growth may cause short-term volatility. Everyday investors should watch for how this slowdown affects global demand, commodity prices and share markets, and consider focusing on diversification and risk management rather than panicking.
A 'hard landing' refers to a rapid, sharp slowdown in China’s economic growth. Economist Yiping Huang warned at the ANU China Update that a hard landing is 'inevitable' and could even spark a 'China-induced global recession.' While the article highlights this risk, it also notes Huang sees short-term pain as part of necessary policy adjustments, so investors should weigh both the risks and the potential for policy responses.
Likonomics, a term coined by Yiping Huang and his team at Barclays, describes Premier Li Keqiang’s economic approach to transition China away from an unsustainable investment-led model and an addiction to cheap credit. It emphasizes deceleration and deleveraging to improve growth quality. For investors, Likonomics signals possible short-term economic pain but a move toward more sustainable long-term growth, which can shift sector performance and investment opportunities.
Li Keqiang’s leadership has been associated with the shift in policy called Likonomics and a willingness to accept slower growth to fix structural imbalances. The article notes economists are even considering the unthinkable — that China could miss its official 7.5% GDP target under his premiership. Investors should factor in that policy choices under Li aim at longer-term stability even if near-term growth numbers disappoint.
According to Yiping Huang, a hard landing in China could trigger a 'China-induced global recession.' Investors should monitor Chinese GDP releases, credit conditions, trade and commodity demand, and policy signals from Beijing. These indicators can foreshadow spillovers to global growth and markets, so staying informed and diversified is prudent.
The article explains that demographic changes from the one-child policy mean China’s labour force has peaked and is shrinking. That reduces the need for very high GDP growth rates to create jobs and supports the case for slower, higher-quality growth. For investors, this demographic shift suggests structural changes in consumption, healthcare and pensions sectors over time.
The article cites China’s official yearly GDP target of 7.5% (which some economists fear may be missed) and the 12th five-year plan’s target of an average 7% GDP growth for 2011–2015. It also suggests that if reforms go to plan, longer-term growth may settle closer to about 6% over the next decade. Investors should align expectations with this trend toward more moderate growth.
The article notes skepticism among some observers who think quarterly growth rates with a '7' in front may be overstated and could lead to suspicions that numbers are being 'massaged.' Everyday investors should treat official data cautiously, look at multiple indicators (like trade, investment, credit and employment), and focus on underlying trends rather than any single headline figure.
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