China’s slowdown is real — but relative. While President Xi Jinping has told China’s officials to worry less about GDP and more about quality of life, investors still focus on the crude indication. The official target of a 7.5% increase would already have created China’s slowest growth since 1990. The official acceptance of a lower number shows that the old received wisdom — anything below 8% puts China at risk of rising unemployment and social unrest — has been discarded.
For China-watchers, 6% growth sounds bizarre. It was not that long ago that double digits were normal. But by the standards of the other middle-income countries, China is still doing exceptionally well. The International Monetary Fund expects 3% GDP growth this year in both Latin America and the Middle East.
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It has three causes. First, demand for exports from China is slowing. June’s 3% decline is especially weak, but the average increase over the last twelve months is the slowest rate since the beginning of 2010. A strong currency hurts, as does weak demand. But as China gets richer, it’s natural that the currency rises and that exports based on cheap labor fade away.
Second, economic gravity is catching up. The Chinese workforce is no longer increasing and the pace of urbanization is slowing because so many people have already left the farms. Of more concern is the decreasing efficiency of investment. A few years ago, only one yuan of investment was needed to add a yuan to GDP. Now it takes almost four yuan.
Finally, the authorities are not trying to fight gravity. The government knows about stimulus; it did a huge one in 2009. With a fiscal deficit of just 2% of GDP and total control of the big banks, it has the means. It also controls the statistics, so can basically report whatever number suits. Clearly, the authorities are comfortable with lower GDP growth numbers.
China’s growth has been fueled by borrowing. But there’s no sign that the slowdown has been created by a credit crunch. The official effort to rein in “shadow banking,” loans that do not appear on banks’ books, may hurt; and total social financing, the government’s favored measure of new money pumped into the economy, has come down recently. But the six-month average of social financing, a good measure of what’s affecting GDP today, is rising.
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Still, there’s a monetary problem. Because profitability is falling and leverage has risen, companies have to put more of their profits into servicing debt and less into investment. The government does not seem too bothered. Officials seem to have learned the lesson of the last stimulus: mandated mega-lending leads to wastage and recklessness.
The key issue is not pace of growth, but the effect on society. There is a good argument that by that standard China’s recent growth has been too fast. The all-out pursuit of more production led to grave environmental degradation and probably encouraged a lax attitude towards corruption.
A slower-growing economy could allow for more investment in things that make China a happier, healthier place over the long run. Those would include cleaner production, genuine innovation and human capital. But some recently announced projects — the world’s largest free-standing building, the longest under-sea tunnel, a flamboyant space program — suggest old habits die hard.
Investors’ talk of a hard landing in China is unhelpful. Even GDP growth of 2% a year would be quite acceptable, as long as employment remained adequate and social unrest low. Conversely, 7% growth with a spike in labor-related protests and bankruptcies would be tough.
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Perhaps the best test of a hard landing is whether the authorities appear to remain in control. Deducing that is largely a question of parsing political rhetoric. It’s encouraging that Premier Li Keqiang says growth hasn’t fallen below the minimum acceptable rate, whatever that is.
What seems most likely is that policymakers are biding their time. The tools they have — forced lending, currency depreciation, vast infrastructure mandates — are powerful but they are also rough, and come with uncertain consequences. For now, the mentality of “best left alone” looks about right.
Read more at Reuters Breakingviews.
