The Chinese economy continues to be a hot topic in international media forums as its export growth rate starts to decline due to the dark economic clouds hanging over developed countries, particularly in the EU. When Chinese Premier Wen Jiabao announced a lower growth target of 7.5% for 2012 during the recent National People’s Congress, some pessimists took it as proof of their belief that China’s economy is in trouble. It gave some of them cause to get even more pessimistic that China faced the prospect of a so-called “hard landing”. These views misinterpreted the government’s growth target adjustment and overlooked the basic economic characteristic of continental China. They extrapolated what are partial economic problems to imply that they represented the overall situation and ended up with the wrong assessment.
To better understand the true situation, it is worth looking at the latest revised projections for China’s economic growth rate for 2012 made by the IMF and World Bank. The IMF”s figure is 8.2% and the World Bank’s forecast is 8.4%, figures which still constitute the highest growth rate in the world. Even if we take the Chinese government’s 7.5% target growth rate as the actual rate, it is lower than the past 30 years’ average growth of 9.8%, but still higher than the 7% target rate set out in China’s 12th Five Year Plan. In this plan, the Chinese government has already shifted its focus from the headline measure of high economic growth to implement more sustainable and deeper economic development. Setting a marginally lower growth target to leave more room for economic structural adjustment and efficiency improvement is one of the CPC Central Committee’s grand policies for a strategic approach to the future.
There is no doubt, however, that the Chinese economy is facing serious challenges and the most immediate come from external uncertainties. The problems in other markets have caused China’s export growth rate to drop from more than 20% in the past 10 years to less that 10% at present. Exports were the most important driving force of Chinese economic growth in the past but this is changing. Even without the EU debt crisis and slow growth in the US, increasing protectionist measures in many countries have reduced the export growth of Chinese enterprises. Other internal factors such as increasing cost of Chinese labor and land rates, among others, are important in checking the economy’s continuous dependence on exports. Slower export growth, however, won’t pull the economy into an immediate recession. China’s State Statistics Bureau reports that the contribution of exports to GDP in 2011 was down 5.8%, while the contribution of fixed asset investment to GDP was 54.2% and consumption added 51.6%. Even the World Bank’s figure showed that exports’ share in GDP was only 28.7%, much less than investment’s share of 46.1%. The contribution of exports to GDP was about the same as consumption. Statistics from the two sources vary due to different calculation methods but the meanings are basically the same: that exports are already making less contribution to economic growth while consumption is increasing in importance. So a decline in the export growth rate will have some negative impact on the Chinese economy but will not drag it into recession.
One of the earlier mentioned pessimistic views is based on Chinese local government debt which is believed to have reached a risky level of RMB 14 trillion. The views are based on concern that China may develop a similar government debt crisis as exists in the EU and that this may lead to an economic downturn. In fact, this type of assessment is also misleading. Even if the debt figure is true, it represents only about 30% of Chinese GDP which already exceeds RMB 40 trillion. It is by no means a fuse set to trigger a crisis. The debts are not local government budget deficits, but rather they are the liabilities of government-owned financial vehicles which have significant off-setting assets, such as land and toll collection licenses, etc. These kinds of debt are not comparable to Western country’s government debts. There can be no denying that they are a potential problem that needs careful handling and debt reduction measures have been identified. These include instigating controls over new borrowing by state-owned financial companies. The problem areas will be ultimately resolved in the economic development cycle and will have no time bomb potential.
Another negative view is linked to the possible burst of China’s real estate bubble. This view believes in a domino effect that could lead to a financial disaster similar to the US sub-prime mortgage crisis. The issue demands careful analysis On one hand we have to accept that there are, and will be, bubbles in China’s real estate market. It is for this reason that the Chinese government has taken several administrative and economic measures to cool down the market, such as limiting investment property purchase, raising mortgage rates and trialing a housing property tax. After a year or more of macroeconomic adjustment, housing prices have slowly come down. But this decline is not a collapse and will not lead to financial crisis. On the other hand, a cooling down is a good thing for the Chinese economy. Otherwise, continuous expansion of the bubble will really lead to a sudden collapse. So the slow cooling of the real estate bubble under a macroeconomic adjustment policy is by no means setting a fuse to trigger crisis.
China’s other worries include the decreasing “population dividend”, rising cost of labor which leads to the diminishing competitiveness of manufacturing, and deterioration of business conditions for small and medium-sized enterprises, among others. These factors have led to worries that China has reached the end of its high growth period. There is substance in this view and it recognises the real challenges of China’s economy. But the pessimists have overlooked the structural adjustment and industrial shifts in China and neglect the critical fact that rising productivity in manufacturing is outpacing the rising costs of labor. Rising wages is actually a good thing, correcting a long period of slow wage growth due to excess supplies of labor. As long as productivity is increasing faster than wages are rising, it will not necessarily harm the competitiveness of manufacturing industries. Industry shifting between regions also has the effect of easing the pressure of increasing wages and prolongs the lifecycle of industries, in turn leading to longer phases of high economic growth. Of course, deterioration of business conditions for small and medium-sized enterprises is a real problem and needs to be handled by government with tangible effort. It should be solved with reform measures that provide fiscal subsidies. Although it is difficult to fix the problem with one strategy in a short time, we have no reason to doubt it will be brought under control. The process of reform and opening up in the past 30 years has involved meeting challenges and solving problems. As long as the basic factors that support the economic growth remain unchanged, China’s economic prospects are still bright.
There are some other issues, such as the widening gap between rich and poor, the influence of interest groups in policy making and social disputes related to land leasing which could have some negative impact on China’s future economic growth. But they are not only of the day. They have emerged gradually in the past and will have to be tackled gradually in the future, with real efforts that have already been applied through various measures and policies.
The problems with potential to have a negative impact on China’s economic growth have already been extensively discussed by many scholars and we have no reason to doubt that government is also paying more and more attention to finding solutions. There is no reason to be so pessimistic as to predict that China’s economy will fall into recession in 2012. On the whole, the Chinese economy is still in the middle of this significant phase of industrialization and urbanization. Basic investment and consumption demand is immense. The regional economic development pattern provides strong capacity for industrial shifting. All of these factors will enable China to maintain growth trends despite the export growth rate dropping to around 10%. I personally have an optimistic view that China’s economic growth rate in 2012 and for the next 5 years will continue to be as high as 8%.
Xu Mingqi is a professor and deputy director of the Institute of World Economy at Shanghai Academy of Social Sciences)