A blog on Chinese economy & society

China will see slower growth in the future

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The current debate is largely on the B word, bubble that is. The common perception is either China is a gravity defying economic miracle or it’s a complete fraud that will collapse and burn to cinders in no time. Both camps are clueless.

About 40% of China economy is export dependent. To expect it to be immune to the global downturn that is going to last several years (yes, the worst ain’t over yet) is plain stupid. It will see recession, perhaps even rather severe one, but it will fair a lot better than the developed world, simply because it’s a late comer to industrialization. It hasn’t seen peak productivity yet, unlike the west or Japan.

Going forward, it will look increasingly inward for further growth. Yes yes yes, I know China has been talking about this since…1998? But this time around it’s likely to be serious, as there’s no other choice. Its customers are bankrupt and protectionism in the the developed world is inevitable. While focusing on its domestic market will ensure a more balanced and sustainable economy in the future, growth rate will be a lot slower, which is why China has been putting off this change until now, when it really has no other choice.

And my proof that China is serious this time around? The newly launched Caijing National Weekly (which btw, has official backing and targets straight at the influential Caijing, the leading financial magazine in China) ran a story on policy changes for the 12th Five Year Plan (yup, China’s still a command economy and things planned usually got carried out) that is being drafted now. A major difference from previous plans is the omission of explicit GDP target. In fact GDP growth is not even treated as priority. Rather, the focus is on balancing the economy. So policies aiming at increasing household income and expanding social safety net come naturally.

Xinhua, the state news agency, also ran stories on similar theme, including increases in minimum wage in key manufacturing provinces. The officials of Inner Mongolia, which enjoyed regional GDP growth of 18.7% annually from 2000-2009, have stated publicly that it will calm down a bit going forward to pursuit “higher quality” growth, whatever that is.

Scholars at the Chinese Academy at Social Science, which is a key government think tank, have openly called for slower growth target of around 6%. It was widely believed that China needed 8% growth at the minimum to absorb the amount of labor entering the market every year. I don’t know where this number came from and I have not seen the actual number crunching, but it was widely cited so we’ll just leave it at that for now. However, given the change in demographics (see here), there’s less pressure on creating new jobs now. So China can actually afford a slower growth to the benefit of other objectives now, liking increasing consumption power of the people and cleaning up the environment.

How long will this process take? A decade at the least will be my guess. So if you are hoping that China will pull the world economy out of this depression (and it’s worst than the last one), you will be grossly disappointed. On the other hand, if you are wishing the collapse of China to prove the superiority of democracy, you will have to wait…and wait…and wait. It will come eventually, like all other developed economies in the world, just not this time.


Written by Cindy Luk

March 2, 2010 at 10:45 pm

Posted in China, Macro

Tagged with , , , ,

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