Economists and China watchers alike have waited for news on whether China’s growth will remain high. Contrary to popular belief, a decline in growth would actually signify effective implementation of reforms and a healthier Chinese economy.
China-watchers and economists alike continue to worry whether China’s economic growth is sustainable. However, if China is implementing its reforms, and hoping to ensure that its social and economic development are sustainable, its GDP growth rate should be falling. And falling quite a bit more than economists seem to want.
There are three key factors that reforms need to address, which should lead to a healthy decrease in China’s GDP growth rate.
1. Bad loans write-off
In February this month, Chinese banks’ bad loans increased for the ninth straight quarter, leaving them at the highest level since the 2008 financial crisis. In fact, non-performing loans rose by 28.5 billion yuan ($4.7 billion) in the last quarter of 2013, to a total of 592.1 billion yuan ($97.7 billion).
This brings the non-performing loan (NPL) ratio to 1.0 percent, up by 0.03 percent. This is the highest ratio since the end of 2011. Chief economist Lian Ping, at Shanghai-based Bank of Communications Company, said that its bad loan ratio might even climb to 1.2 percent this year.
These figures are worrying because of the cost of servicing debt and because these changes demonstrate that Chinese banks are struggling to keep loans under control, emphasizing pressure on asset quality. Government effort to control shadow financing means that borrowers have a harder time repaying debt.
If China can write off its bad loans and accept the losses, its GDP will decline. But in turn, less debt will have to be serviced, and China will be headed towards a much healthier economy.
There is evidence of China already writing off bad loans, as China’s biggest banks tripled the amount of bad loans written off, blocking a potential fresh batch of defaults.
2. Decline in spending on large projects and real estate
Real estate and large infrastructural projects are closely linked to bad loans, as many corporations have spent on ‘white elephant’ projects using said bad loans – especially corporations with strong ties to the government.
The Chinese government has to stop creating incentive for local officials to borrow money to fund these large projects. While they lead to a short-term increase in GDP, there are no long-term benefits to China with these projects. Photo galleries of ghost cities like Ordos in Northern China, and the world’s largest shopping center in the South of the country have cost the country a lot – and are not of any particular benefit.
The same goes for the real estate sector, where prices have rapidly increased, as investors feel safer buying real estate rather than investing in stocks, for example. Although demand for housing in cities will remain high with continued urbanization, policies that attempt to contain real estate growth could help avoid a housing bubble.
3. Social reforms: one-child policy and the hukou system
Long-term, there are also issues with implementing one-child policy changes, as well reduced hukou regulations. These will increase freedom and labour mobility, and in the short term will not lead to a more prosperous nor more productive China – but to a less prosperous China.
Urbanization rates would increase, and many would flock to the cities. Although it can be said that there may be a shortage of jobs in China’s large cities, urbanization rates closer to those in developed countries (roughly 70 percent rather than 50) have the potential to increase many household incomes, and improve living standards for many citizens. And ultimately, that is what China is looking for – a diversion of capital from the economic and political elite towards the ordinary households.
However, we will have to wait and see whether reforms will be implemented successfully. Currently, predictions of China’s GDP growth hover around 7.4 percent for 2014, with China’s GDP growth rate reached 7.7 percent in 2013 and 2012.
