China adjusts to a new normal as its sizzling economy cools
China is putting the brakes on growth as it works to reform an economy that has been growing too fast and for too long. By shifting the basis of economic growth from low-hanging, external sources, such as its investment and manufacturing sectors, to the more internal drivers of domestic consumption, China hopes to slow its stride while keeping its economy on its feet.
This may not be an easy shift. “The good news is that in the past couple of years we did not resort to massive stimulus measures for economic growth,” Premier Li Keqiang said in March, 2015, during the annual meeting of the National People’s Congress.
Since 2014, China’s leaders have been pushing a carefully controlled message aimed at both lowering, as well as shifting, the expectations of two generations of Chinese that have grown accustomed to record-breaking growth. They are being careful to pave the way for slower growth—the loose target set at 7 percent with talk of a drop to 6.5 percent—while avoiding any considerations of a collapse.
This is a fine line to walk.
“When looking at China’s economy, one should not focus only on the growth rate,” President Xi Jinping said in a speech to the annual summit of the Boao Forum for Asia. “We will focus on improving quality and efficiency, and give even greater priority to shifting the growth model and adjusting the structure of development. This new normal of the Chinese economy will continue to bring more opportunities for trade growth and development for the countries of Asia and beyond.”
The attitude that the government is taking towards the lower levels of growth that China will likely experience going forward is quite distinct from the attitudes of other, mostly foreign, observers who worry that China is not heading for a shift but for a crash.
As far back as 2001, Chinese-American lawyer Gordon Chang wrote a book entitled The Coming Collapse of China. Economic collapse, suggested Chang, was imminent and to be closely followed by the fall of the government. Nearly 15 years later, China is still growing. Not only that, but the government is actually more open to discussions surrounding the concerns voiced by Chang and others (real estate bubbles, an enormous amount of bad debt and the incredible speed at which the Chinese economy has expanded over the past 25 years) than it has been in the past.
China’s economy will, at some point, dip into a recession of some kind, as all rapidly expanding economies do from time to time. The challenge for the government, now, is to undertake reforms that can prevent a dip into any kind of actual depression.
Efforts so far appear to be working. China’s 7.4 percent growth in 2014 was both in line with expectations and the lowest in 24 years. The World Bank is projecting growth of 7.1 percent in 2015 and 6.9 percent in 2016. The International Monetary Fund is predicting growth of 6.8 percent and 6.3 percent this year and the next.
This rate of growth is what Xi talks about when he speaks of a “new normal,” but the growth rate is only the tip of the iceberg.
“Some people think the ‘new normal’ is all about slower economic growth,” says Jiang Jianqing, chairman of the Industrial and Commercial Bank of China (ICBC), the largest bank in the world by assets. “It actually means much more.
“China is moving toward a more advanced economic form, with more sophisticated economic specialization and a more reasonable economic structure,” he says, explaining that this includes changing how China develops by moving away from growth driven by investment and towards more domestic consumption.
After 2001, when it joined the World Trade Organization, China grew by leaps and bounds. It did so by throwing cheap labor at both manufacturing and infrastructure building. As exports grew, so did the country’s coffers. As soon as it could, China also started dealing with restrictions on growth by building impressive infrastructure projects.
Then real estate speculation entered into the equation. Municipal governments, private developers and government institutions started acquiring land and putting up buildings, which they then used to access credit and build more. Fortunes were made. The rise in the value of real estate in cities like Beijing, Shanghai or Guangzhou was nothing short of spectacular. But it is now dropping in places, and fears of a crash are again surfacing.
A crash in real estate could also lead to the unwinding of bad performing loans, which many fear are widespread.
These fears make it easy to overlook the fact that the Chinese economy is built on some fairly strong fundamentals. A lot of things get made in China and a lot of people are spending more than ever before. Companies have bases here. Universities are pumping out graduates. Entrepreneurs are creating new businesses.
Consider the real estate sector, says Ge Huayong, the chairman of China UnionPay, a payment processing company that is expanding around the globe.
“The property sector has always been about regional markets. It may be more of a problem in second or third-tier cities, but the rigid demand in cities like Beijing and Shanghai is still very high, so the sector is not likely going to collapse,” he syas.
And even in the “new normal,” China’s Gross Domestic Product growth remains impressive. This year, it will account for about a third of global growth.
China also appears to be managing other risks. In a surprise move, the People’s Bank of China lowered its interest rates and there are widespread expectations that further measures to stimulate the economy will be made as Beijing tries to fine tune its interventions to let the economy evolve, ensure ongoing growth and reduce dependency on big spending projects such as high-speed railways and massive bridges.
And the government is also encouraging entrepreneurship and innovation to create a class of savvy businesspeople to help power the economy.
And, while it contends with its domestic issues, China also has to deal with factors that are outside its control that are slowing down economic growth globally. Soft commodity prices and persistently low interest rates are at the top of the list of these issues and they are leading to weak international trade for the manufacturing powerhouse.
Larry Summers, the economist and former Treasury Secretary pointed out, in a working paper, that past growth is no guarantee of future growth.
On the other hand, neither is past growth a guarantee of future collapse.