China’s slowdown is a structural shift
The Chinese economy needs to rebalance to jump to the next level of development, so a temporary slowdown is inevitable
The slowdown of the global economy in general and the European sovereign debt crisis in particular have dealt a serious blow to Chinas growth via the export channel. However, the slowdown in Chinas growth is mainly policy-induced, and a reflection of the success of the governments effort to rein in the real-estate bubble, as well as of other policies aimed at rebalancing the economy.
While Chinas 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. In recent years, Chinas investment rate has approached 50% of GDP, with real-estate investment accounts for some 10% of GDP.
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On the one hand, by persistently running current account surpluses, China has accumulated $4.7 trillion in foreign assets, the bulk of which is US Treasuries. On the other hand, by running a capital account surplus continuously, mostly in the form of FDI inflows, China has accumulated $2.9 trillion foreign liabilities. However, with $1.8 trillion net foreign assets, China suffers investment income deficits most of time. In 2011, its investment income deficit was $27 billion.
To make things worse, following the expansion of its trade, Chinas terms of trade have been worsening steadily. As pointed out in an IMF report, Chinas imports have become more linked to commodities and minerals, where supply is relatively inelastic, while its exports have become increasingly tilted toward machinery and equipment, where supply is relatively elastic. As a result, China has to export more manufacturing goods to get the same value for energy and mineral products.
Certainly, China needs to maintain a decent growth rate to create enough new jobs to absorb the increasing working-age population. However, in order to achieve sustainable development, the Chinese government has to shift the priority from growth to transforming the economic development pattern and restructuring the economy, and hence a slowdown of growth is a price China has to pay.
Though belatedly and slowly, the Chinese government has started to tackle the structural problems and rebalance the economy in a serious manner. In many areas, important progress has been made.
First, the growth rate of investment in real-estate development plummeted by 16.3 percentage points year-on-year in the first half of 2012, thanks to the policies aimed at reining housing bubbles. That led to an investment slowdown in many related industries, such as construction materials, furniture, and appliances, causing annual growth in fixed-asset investment to fall from 25.6% to 20.4%. The steel industry has been hit especially badly.
Second, Chinas wage levels are rising steadily. According to the 12th Five-Year Plan, the minimum wage should grow by 13% per year. Although official statistics show that growth of households disposable incomes is still lagging behind that of GDP, plentiful anecdotal evidence indicates that the growth of household disposable incomes has accelerated.
Third, China has made significant progress in building its social-security system. The number of people covered by basic old-age insurance, unemployment insurance, workers compensation, and maternity insurance has risen substantially. Moreover, universal medical insurance is emerging, and a comprehensive system for providing aid to students from poor families has been established.
As a result, the motivation for precautionary saving has been weakened somewhat, while some researchers have found statistical evidence that the consumption rate is rising - supported by Chinas emergence as the worlds fourth-largest importer of luxury goods.
Fourth, since 2005, the renminbi (RMB) has appreciated roughly by 30% in real terms, which must have had a serious impact on exporters, reflected in the bankruptcy as well as the upgrading of many enterprises in coastal areas. The Peoples Bank of China (PBOC) has reduced its intervention in the foreign exchange market and widened the RMBs trading band.
Though the market shares of Chinese exports seem to have held up quite well, over time, real exchange-rate appreciation will cause a shift in expenditures, making Chinas rebalancing more apparent.
Fifth, while growth in coastal areas has slowed, provinces in middle and west of China have maintained double-digit growth. Labour-intensive industries in coastal areas are moving inland. The regional disparity in economic development is narrowing.
Faced with harsher external environment and heaver competition, enterprises in East of China and coastal areas in particular are forced to redouble their efforts for upgrading their position in global value chains and raising their ability of innovation and creation.
Certainly, the slowdown is not painless. The Chinese government has to deal with numerous social and economic contradictions head on, many of which will surface or resurface as a result of the slowdown of economic growth. However, the government should not be unnerved by the slowdown. It should stay the course.
In my view, China has entered a new period of adjustment and paradigm shift, which may last for several years. During this period, the Chinese economy will grow in a range of 7-8 percent. Thereafter, growth will pick up again and will eventually lift China to a new plateau of a high-income country.- Yu Yongding was President of the China Society of World Economics and Director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences. He has also served as a member of the Monetary Policy Committee of the People's Bank of China