In the January of this year, when growth figures were released, the global economy had never been so alarmed. After decades of miraculously high growth, and for the first time in a quarter of a century, economic growth in China had slowed down to 6.9%, down 0.4% from 7.3% growth in the same quarter just twelve months before. What seemed even more worrying, is that the International Monetary Fund had predicted China’s growth only to be 6.3% this year, and just 6% for 2017. For an economy of the size of China ($10 trillion) and all the turmoil, the other emerging markets are facing, this should be treated with positivity. But why is there any reason for concern?
Over the last few years, China’s figures have been clouded a strong degree of ambiguity. The past six quarters have yielded growth figures of 7.2%, 7.2% 7%, 7%, 6.9% and 6.8% according to The Economist. Such tight clustering of numbers is certain to cast doubt. There has been a long-standing uncertainty over China’s growth data, with suspicions of data being adjusted to smooth growth trends. For a country still severely lacking in political transparency, concerns over economic figures are understandable, following recent monetary statistics. Nevertheless, the political consequences will be unsettling. The failure to hit the golden target of 7% growth will cause some disturbance amongst consumers, who will grow even more sceptical of Xi Jinping’s increasingly authoritarian reign.
For a country seeking to make the second transition a few decades after its initial and successful one, these figures should not come as a surprise. With time ticking on China’s capacity to operate as an export-led growth economy, a transition into a consumer-led growth economy, exploiting the gift of an enormous and still expanding middle-class, is what the state deems appropriate to maintain its growth target. For countries who have looked to China to stimulate their growth, the next few years could mark a desperate search for other tools to boost aggregate demand in their economies.
Looking at what seems to be fuelling the slowdown, it is certainly the bad shape of the heavy industry, due to falling demand. Crucially, the economy is becoming more and more self-sustainable, robbing international firms of the chance to capitalise on growing consumer demand in China. This is shown with figures showing services output grew by 11.6% year-on-year in nominal terms in the first nine months of 2015, whereas manufacturing grew by just 1.2%. With capital outflows surging and increasingly reported bankruptcies, the problems are starting to catch up with their incredible growth, emphasising that this slowdown is certainly real. Possibly, only structural reforms could be able to cushion what is set to be a nasty blow to the economy, as well as the ‘middle-income trap.’ Also, with national debt levels escalating to 250% of GDP, there is concern over the sustainability of the economy, questioning the viability of the fiscal and monetary policy in place. To overcome this, it would make sense to look to privatisation as an escape route. For a Communist declared country, however, letting go of state-owned assets is impossible.
When China embarked on its decades of phenomenal growth, the world was initially surprised, but soon became accustomed to it, labelling it as normal for China. Twenty-five years after China’s last period of slowest growth, the global economy seems to be biting its nails due to grave uncertainty over how this slowdown will create ripples across the world. With all the indicators suggesting the party is over for China’s economy and that growth will slow down, it makes sense for this sub 7% growth to become the new normal for China.