Coming to Terms with China's Growth Prospects

Source: Getty
Op-Ed Financial Times
Summary
Beijing faces a trade-off between stimulating short-term economic growth and acting on the structural reforms needed to establish a basis for sustainable growth in the future.
Related Topics
Related Media and Tools
 

Markets have not been enthused by the numbers coming out of China in recent months. Typical headlines are “China’s production indicators disappoint” or “analysts are worried that rapid expansion is faltering”. Estimates of China’s economic growth this year are slipping from more than 8 per cent to something closer to 7.5 per cent. Those concerned about the country’s longer-term growth challenges, however, tend to be more relaxed about near-term outcomes but preoccupied with the new leadership’s commitment to reforms.

Is there a trade-off between reviving the economy and establishing a sustainable basis for longer-term growth? Unfortunately there is. Beijing has run out of good options to further stimulate the economy as a strategy to buy time until western economies rebound.

There are lessons from what happened in the aftermath of China’s post Asian financial crisis stimulus more than a decade ago. At that time China responded with a massive programme comparable to its more recent effort in the aftermath of the global financial/fiscal crisis spurred by the economic collapse in the US and Europe.

China’s confidence in stimulus programmes was unrealistically buoyed by its success in dealing with the Asian crisis which resulted in a soft landing followed by years of sustained and rapid growth. But the lingering consequences of the 2009 stimulus package have not been as benign, with no signs that the resulting high debt levels are moderating and that continued expansionary credit policies are spurring production and real demand.

The contrasting results reflect two fundamental differences between the situation a decade ago and the more recent experience.

First, the earlier effort was supported by strong reform initiatives exemplified by actions to secure World Trade Organisation membership in 2001. In contrast the 2009 stimulus was taken in an absence of any path-breaking reforms that might have strengthened the productive base of the economy.

Second, both stimulus programmes led to an increase in the gross debt of the non-financial sector equivalent to about 40 percentage points of gross domestic product. But the first stimulus did this over four years rather than two in the more recent effort – largely because the first programme was more fiscal-based while the second was driven by credit expansion. As a result Beijing has been dealing with a property bubble which has forced policy makers to tighten restrictions on what had been a key growth driver.

Continued easy monetary policies have made it impossible for China’s debt overhang to fall over the past several years compared with the steady decline after the first stimulus. Thus, the new leadership can no longer rely on traditional fiscal and monetary levers to continue stimulating demand without risking the integrity of its financial position.

If so, what can one expect in terms of short-term growth outcomes in the absence of major policy changes and significant improvement in global conditions? The arithmetic is straight forward. Total consumption which accounts for about half of the economy could grow about 8 per cent annually – somewhat less than in the past given unsettled economic prospects. Growth in real investment will be much less than the historic double-digit rates, averaging perhaps 5-6 per cent annually. And assuming that China’s trade balance is neutral in its contribution to growth rather than negative as it has been more recently, then the short-term growth trajectory would be about 6.5-7 per cent. This should be the norm for market expectations.

Other factors such as efficiency improvements, inventory adjustments and external events could affect near-term outcomes, but these factors are unlikely to affect growth rates by more than half a percentage point either way over the coming year.

Much more important is whether Beijing can act on the structural reforms needed to increase productivity so that even with lower investment rates, growth can be sustained about 8 per cent annually for the remainder of this decade rather than pushed down to the 6-7 per cent range. Many of these measures are being given serious consideration by the new leaders.

Key actions include accelerating the pace and efficiency of the urbanisation process, with liberalising the residency or hukou system being paramount. The leadership must be sincere not just about encouraging more workers to move to cities but also providing them with the necessary services.

This needs to be supported by a major overhaul of the fiscal system to encourage more consumption and put financing of public investment on a more sustainable basis. Local authorities need more revenues to provide mandated social services and the requisite financing could come from additional dividend payments from state enterprises and rolling out the property tax experiments already being piloted.

Continued financial sector reforms including liberalising capital movements and more incentives for private sector expansion will also be critical. A major signalling effect would come from selling off state enterprises that cannot be strategically justified and equalising access and costs for public services between private and state entities.

If the new leadership can act on recent public statements to this effect, then China could grow at 8 per cent for many years to come, otherwise expect 6-7 per cent.

This piece originally appeared in Financial Times.

End of document

About the Asia Program

The Carnegie Asia Program in Beijing and Washington provides clear and precise analysis to policy makers on the complex economic, security, and political developments in the Asia-Pacific region.

 

Comments

 
Source http://carnegieendowment.org/2013/05/16/coming-to-terms-with-china-s-growth-prospects/g3oa

More from The Global Think Tank

In Fact

 

45%

of the Chinese general public

believe their country should share a global leadership role.

30%

of Indian parliamentarians

have criminal cases pending against them.

140

charter schools in the United States

are linked to Turkey’s Gülen movement.

2.5–5

thousand tons of chemical weapons

are in North Korea’s possession.

92%

of import tariffs

among Chile, Colombia, Mexico, and Peru have been eliminated.

$2.34

trillion a year

is unaccounted for in official Chinese income statistics.

37%

of GDP in oil-exporting Arab countries

comes from the mining sector.

72%

of Europeans and Turks

are opposed to intervention in Syria.

90%

of Russian exports to China

are hydrocarbons; machinery accounts for less than 1%.

13%

of undiscovered oil

is in the Arctic.

17

U.S. government shutdowns

occurred between 1976 and 1996.

40%

of Ukrainians

want an “international economic union” with the EU.

120

million electric bicycles

are used in Chinese cities.

60–70%

of the world’s energy supply

is consumed by cities.

58%

of today’s oils

require unconventional extraction techniques.

67%

of the world's population

will reside in cities by 2050.

50%

of Syria’s population

is expected to be displaced by the end of 2013.

18%

of the U.S. economy

is consumed by healthcare.

81%

of Brazilian protesters

learned about a massive rally via Facebook or Twitter.

32

million cases pending

in India’s judicial system.

1 in 3

Syrians

now needs urgent assistance.

370

political parties

contested India’s last national elections.

70%

of Egypt's labor force

works in the private sector.

70%

of oil consumed in the United States

is for the transportation sector.

20%

of Chechnya’s pre-1994 population

has fled to different parts of the world.

58%

of oil consumed in China

was from foreign sources in 2012.

$536

billion in goods and services

traded between the United States and China in 2012.

$100

billion in foreign investment and oil revenue

have been lost by Iran because of its nuclear program.

4700%

increase in China’s GDP per capita

between 1972 and today.

$11

billion have been spent

to complete the Bushehr nuclear reactor in Iran.

2%

of Iran’s electricity needs

is all the Bushehr nuclear reactor provides.

78

journalists

were imprisoned in Turkey as of August 2012 according to the OSCE.

Stay in the Know

Enter your email address in the field below to receive the latest Carnegie analysis in your inbox!

Personal Information
 
 
Carnegie Endowment for International Peace
 
1779 Massachusetts Avenue NW Washington, DC 20036-2103 Phone: 202 483 7600 Fax: 202 483 1840
Please note...

You are leaving the website for the Carnegie-Tsinghua Center for Global Policy and entering a website for another of Carnegie's global centers.

请注意...

你将离开清华—卡内基中心网站,进入卡内基其他全球中心的网站。