China’s government has to shift its priority from growth to transforming the development pattern and restructuring the economy, and this will only be achieved by allowing for a slowdown in growth, Yu Yongding, a well-known Chinese economist who served as a member of the Monetary Policy Committee of the People's Bank of China, told Emerging Markets.
“In my view, China has entered a new period of adjustment and paradigm shift, which may last for several years,” Yu wrote in an opinion piece.
China’s growth slowed to 7.4% in the third quarter from 7.6% in the second quarter but, after a series of good data in September, many economists said the economy had bottomed out.
Yu said the slowdown is “mainly policy-induced” and it is “a reflection of the success of the government’s effort to rein in the real-estate bubble, as well as of other policies aimed at rebalancing the economy.”
“While China’s economic growth is truly stunning, its structural problem has become increasingly worrisome, thanks to its relentless pursuit of the investment-driven and export-promotion growth strategy,” he wrote.
WHY GROWTH CAN’T CONTINUE
Other famous economists and investors warned that China’s stellar growth cannot continue as before.
Marc Faber, the bearish investor and author of The Doom, Gloom and Boom Report forecast “a harder landing than expected” for China.
Faber’s arguments are the slowdown in credit, “lots of overcapacity,” high inventories and “an underground lending business” that caused lots of problems by inflating a property bubble. Harvard professor Kenneth Rogoff told Emerging Markets that a rate of growth of just 3% for China was possible in five years’ time.
In recent years, China’s investment rate neared 50% of gross domestic product (GDP), with investment in real estate making up around 10% of GDP, but not all this investment was put to good use, Yu noted.
“Given the prevalence of repetitive constructions and ubiquitous waste, investment efficiency has deteriorated significantly,” he wrote.
Yu identified five areas where China’s economy needs to rebalance over the next few years, during which he sees growth in a range of 7-8%.
“Thereafter, growth will pick up again and will eventually lift China to a new plateau of a high-income country,” Yu said.