Making Sense of China’s Slow Growth Trajectory


23rd May 2016

(Caixin)

Against the backdrop of a slumping economy, the party-run People’s Daily newspaper has once again sought answers from an unnamed “authority.”

A “person in authority” told the paper in an interview published May 9 that China’s economy is on an “L-shaped” trajectory for recovery.

The interviewee’s point was that neither a U-shaped nor a V-shaped line would appear on charts tracking the nation’s economic growth rate. Instead, the chart would reflect a drastic decline followed by slow yet stable growth.

The message conveyed did not stray far from what analysts had previously agreed upon. Nevertheless, the interview generated a lot of discussion among economists over its timing and implications.

The interview, apparently aimed at dispelling market jitters over slow growth, triggered steep declines that day on the Shanghai and Shenzhen stock markets. Each bourse’s composite index closed the day down by nearly 3 percent.

Equity market traders usually overreact to the Chinese economy’s ups and downs. But the early May sell-off was certainly indicative of the deep shock felt by investors who read the People’s Daily projection.

Investor reactions thus underscored the challenges ahead as the nation adjusts expectations and rethinks the way the economy should be managed, even as the growth rate follows the trajectory described in the newspaper over the next year or two.

In recent years, overseas analysts have offered sometimes contradictory explanations about the health of the Chinese economy. Some thought the economy would inevitably slow, and that a slow-growth economy would have a positive effect by spurring economic reform. Others tended to fuss when the economy’s growth accelerated a little quickly or abruptly slowed.

A look back at recent history may help clear the air and help analysts and economists at home and abroad understand what “L-shaped” economic growth in China is all about.

Back in 1995, China’s GDP was less than US$ 800 per capita. A decade later, it had risen to US$ 1,800. And last year, it was US$ 8,000.

The growth was no doubt impressive. But one day, that kind of growth will certainly reach its limit. What follows could be much more moderate growth, and perhaps a contraction.

As internationally renowned economists such as Lawrence H. Summers have pointed out, a rapidly expanding economy is likely to see its growth rate eventually retreat to mirror the long-term, global average. Many academic researchers have similarly concluded that economies not only slow after enjoying years of brisk expansion but are likely to decelerate by a wide margin.

Anyone who agrees with these conclusions should not be surprised to see that China’s economic growth has slowed in recent years.

Of course, China’s sheer size and impact on the global economy should raise concerns about a slowdown. Fluctuations in China can affect international trade and global finance. Therefore, it is understandable that economists have been anxiously watching China.

The nation’s GDP was less than one-tenth that of the United States in 1995 but reached 60 percent at the end of 2015. If the GDP of each country were measured according to purchasing power parity, the two economies would be almost the same size.

The International Monetary Fund (IMF), in a report based on its 2015 Article IV consultations with China, predicted that the economy would slow by half a percentage point in 2016 but could actually increase by one percentage point in 2020 if the nation carries through with a pledge to further market-oriented reforms.

Thus, striking a balance between short-term aspirations for rapid growth and the long-term goal of promoting sustainability calls for heeding the message delivered by that anonymous authority interviewed by the People’s Daily.

What practical steps should be taken? First, reform the economy’s supply side. Dealing with the nation’s excessive stockpiles of industrial products and unsold homes should be a top priority, according to the authority. Second, the interviewee urges policy makers to stimulate demand and thus help address the constraints affecting the economy’s supply side.

China as well as the global community must accept the challenges associated with the nation’s slow economic growth. Few expect China to prop up the economy by introducing another round of stimulus like the massive government injections witnessed after the 2008 global meltdown.

Some overseas critics, speaking out of self-interest, could wag a finger while blaming China for the global decline in commodity prices. China’s slowdown might indeed help drive down the prices of iron ore and copper, according to an IMF analysis, but not crude oil. It’s not fair to blame China for financial hardships in any oil-rich country, especially since other factors such as geopolitics come into play.

Resource-rich countries such as Brazil, Australia and Canada have benefited enormously from China’s breakneck development and almost insatiable demand for raw materials. As the Chinese economy continues to slow, these countries must adjust.

China is also adjusting. After the slowdown began, the Ministry of Commerce tried to revive demand for China’s exports but with little success. And Chinese businesses that tried to offload excess capacity by expanding overseas have found many developing nations wary of their intentions and reluctant to let them in.

Adjustments, not government stimulus, will help China trim overcapacity and manage financial risk.

A new phase of globalization emerged after the 2008 economic crisis. It’s a phase driven by multi-lateral treaties such as the Trans-Pacific Partnership Agreement. Still, economic stagnation in many countries has given rise to populist movements.

China must remain committed to opening up its economy and promoting win-win cooperation. Domestic and overseas businesses look forward to a level playing field in China – an aspiration in line with the essence of the nation’s campaign for a supply-side reform movement.

So an L-shape growth trajectory is nothing to fear. It poses challenges but it also offers new opportunities for China and the world.

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