China’s economy has cooled since recording double digit rates of growth in the run-up to the global financial crisis of 2008, but was propped by a surge in investment in infrastructure and real estate. Amid concern that the debt burden was rising to dangerous levels, the authorities tightened credit toward the end of last year, and investment growth slowed.
“This might be bad news for growth numbers, but the good news is that the authorities are no longer adopting loose monetary policy whenever there is a slowdown,” said Shuang Ding, senior China economist at Citigroup in Hong Kong. “They need to be able to accept some slowdown in growth, and slowdown in credit growth, to reduce financial risks. No one knows when the financial risks will lead to a financial crisis. Maybe we are not there yet, but it is better for the government to act earlier rather than later.”
The Communist Party has set great store in maintaining a fast pace of economic growth to bolster its legitimacy with the Chinese people. But this growth-at-all-costs strategy not only has wrought terrible damage on the environment but has also allowed dangerous imbalances to build up within the economy, which has become far too reliant on investment rather than domestic consumption for many people’s comfort.
Experts say the investment binge cannot be sustained indefinitely without producing wasteful spending and creating a mountain of debt.
In November, President Xi Jinping announced a broad agenda for reform meant to tackle those imbalances, but that reform process has yet to begin in earnest, as the authorities acknowledge.
“Generally speaking, China’s economy showed good momentum of stable and moderate growth in 2013, which is a hard-earned achievement,” Ma Jiantang, chief of the National Bureau of Statistics, said during a news conference. “However we should keep in mind that the deep-rooted problems built up over time are yet to be solved in such a critical period for China’s economy.”
Slowing the growth in credit is just the first step in that reform journey, economists say. The government needs to rein in politically powerful state-owned enterprises and create a more level playing field for the private sector, while also boosting social safety nets so its citizens spend more of their income rather than saving. None of that will be easy and will involve taking on powerful vested interests with the Party.
At the same time, mindful of the risks of social instability that could undermine one-party rule, the government aims to achieve this without letting growth dip too far. The target for 2013 was 7.5 percent, while Premier Li Keqiang warned in November that the economy needed growth of 7.2 percent to ensure a stable jobs market.
Nevertheless, there is some good news on the horizon in the form of a pick-up in the global economy, said Louis Kuijs, China economist at the Royal Bank of Scotland in Hong Kong. That bolstered Chinese exports toward the end of last year and cushioned the impact of the investment slowdown. Together with the underlying strength of the Chinese economy, a global recovery could help give the authorities room to maneuver, he said.
“The key story in 2014 is how the government will balance this need for some reining in of credit growth on the one hand, with the desire for economic growth that we still see in Beijing,” he said. “The positive scenario is that we get enough organic growth that there will be enough room, and resolve, to continue with the firming up on the monetary side.”
Some economists, like Michael Pettis of Peking University’s Guanghua School of Management, predict a long and potentially painful period of adjustment ahead for China’s economy, where reforms - if implemented properly - could see a sharp slowdown in the overall growth rate, as borrowing is reined in and industrial overcapacity eliminated.
“Implementing the reforms will have the seemingly paradoxical effect of increasing Chinese productivity while lowering Chinese GDP growth numbers,” he wrote in a note last week.
“In my opinion this effect is likely to be so strong that we will be able to judge how effectively Beijing is implementing reforms simply by looking at reported GDP growth numbers,” he wrote. “If growth remains at seven percent or more, we can assume that the reforms are not being implemented and China is rebalancing at a very slow pace while debt continues to build.”
But most economists at global financial institutions tend to be more optimistic, predicting that the economy will gradually adjust over the next decade or so without a major slowdown or financial crisis. The consensus suggests growth of somewhere between 7 and 8 percent in 2014.
China already has weaned itself off an over-reliance on export growth since 2008, said Tim Condon, head of Asian research at ING Financial Markets in Singapore. “The external adjustment is already behind us,” he said. “On the internal adjustment, we are at the beginning of that. The imbalances, which took a decade to build, are going to take a decade or so to unwind.”