China’s economic slowdown is a realignment of Beijing’s economic policies, which favours quality economic growth over high quantity growth.
In late 2014, the first statistics appeared indicating that China’s economy was slowing down.Unsurprisingly, many began to predict the knock on effects this would have around the world. The OECD predicted that a, ‘two-percentage-point decrease in the growth of Chinese domestic demand for two years would reduce world GDP by 0.3 percentage points a year.’
These statistics, compiled with the latest figures which report that China’s manufacturing sector shrunk for the first time in two years, have left many economists genuinely worried about the state of China’s economy.
Ample evidence points to another narrative: China’s leaders have expected the economy to slow down as they seek to provide more sustainable long-term growth rather than rapid and unpredictable growth.
Indeed, Beijing has sought to slow down the growth of China’s economy over the last five years. The official manifesto for China’s growth, China’s 12th five year plan (2011-2015), aims for 7% of economic growth. Therefore, China’s economic growth which currently stands at 7.3% is little to worry about. By contrast, the 11th five year plan (2006-2010) aimed for growth at 7.5%.
Instead, Beijing is actively seeking to achieve better quality growth at the expense of the high and unreliable growth of the last decade. China’s double digit growth was successful in bringing the country forward, making it the second largest economy in the world.
However, those policies produced some of the worst excesses of industrialisation: China now faces a severe pollution problem and has one of the worst wealth inequalities in the world – factors which will exert a large cost on the economy should business continue as usual. Its endemic pollution is estimated to cost up to $300 billion a year.
China’s leaders have become acutely aware of this, and have instead instilled policies that focus on ‘inclusive’ and ‘sustainable’ growth. Therefore, we should expect China’s economy to slow down further, resulting in what many in the government have called the ‘new normal’ – a slower but steadier Chinese economy.
China’s leaders have been confident about the country’s capacity to adapt to this ‘new normal’. The real problem with China’s economy they argue, are the vast inefficiencies which plague the system. China’s massive state owned enterprises still hold strong influence and despite their sluggish performance, have continued receiving extensive government support at the expense of the private sector. How the leadership decides to deal with them will be an indication of how serious they are about structural reforms.
Before multinationals begin to panic, they should remember that there is still extensive scope for economic development in China. It may be the second largest economy in the world, but it ranks 121st in terms of GDP per capita between Thailand and Turkmenistan. As the wealthier city markets saturate, companies will begin moving inland and sell to China’s second and third tier cities, a step which General Motors recently announced.
China’s leadership has also seen through its promise to revaluate the yuan and bring it closer in line with its actual value, consequently giving Chinese consumers more for their money. China’s manufacturing woes can also be put down to the fact that China is becoming increasingly expensive to produce in. Since at least 2011, Chinese companies have been exporting their manufacturing to cheaper countries such as Cambodia, Vietnam and Laos.
China’s ‘new normal’ is not just a propaganda campaign aimed at keeping investor and consumer confidence high. It represents a real change in the way China is managing its economy. Beijing has shown it is willing to sacrifice short-term growth (including jobs) to succeed over the long term. It will be a tricky formula to balance, but China has an uncanny way of achieving success when most think it will fail.
