China Eyes Moderate Growth – Analysis

By Michael Lelyveld

After a year of transition, China is poised for moderate economic growth under new leadership, experts say.

Gone are the days of excessive expansion that produced growth rates of 10.4 percent in 2010 and 9.3 percent last year. China will finish out 2012 with more modest gross domestic product (GDP) growth of 7.7 to 7.8 percent, economists predict.

Analysts say this year’s slower rate reflects both external factors and internal policy decisions of the outgoing government.

“The long-term program has been clear for some time, and that is to rebalance the economy away from exports and toward the domestic economy,” said Harvard University economist Dale Jorgenson.

“I would say the Chinese economy has made a lot of progress on that over the past year, and you could safely project that into the future,” Jorgenson said.

Housing speculation

This year has been marked by the necessity of dealing with weaker demand for China’s exports in key markets and the decision to curb unsustainable development in the real estate sector.

Premier Wen Jiabao’s policy of discouraging speculation in housing began in 2010, gradually deflating the property bubble and the double-digit growth of energy-intensive sectors like steel, aluminum and cement.

The result has been losses for some industries but also hope that more buyers will be able to find affordable homes in China’s cities.

“They very, very slowly and carefully tightened the noose on speculative buying, and it looks as though that has paid off,” said Pieter Bottelier, a China expert and senior adjunct professor at Johns Hopkins University’s School of Advanced International Studies.

Managing property prices has been a problem for both growth and social stability as the government struggles to narrow the gap between rich and poor.

“That real estate bubble was seen as very threatening by the top leadership from Wen Jiabao on down,” Bottelier said. “The Chinese said, ‘We will kill the bubble before it kills us.'”

In the past year, the double-digit price hikes in housing that prevailed before the crackdown have been replaced by declines or very slight growth.

In November, new home prices in 100 major cities rose a scant 0.26 percent from October but fell 0.46 percent from a year earlier, said a China Index Academy survey cited by state media.

Slower growth

Government policies have also shown success in wringing inflation out of the economy, addressing one of the public’s most pressing complaints. In November, the consumer price index (CPI) stood at 2 percent, down from 5.4 percent for all of last year, the National Bureau of Statistics reported.

But constraints have come at the cost of prolonged slower growth that is unlikely to resume the levels of 2011 anytime soon.

GDP growth slipped to an annualized rate of 7.4 percent in the third quarter, dipping below Premier Wen’s official target of 7.5 percent for the year.

Industrial output rose 10.1 percent in November from a year before, suggesting a relatively strong finish for the economy in the fourth quarter. But exports increased only 2.9 percent and imports showed no gain at all, according to General Administration of Customs data.

A report by the official Xinhua news agency on Dec. 10 noted that “trade data remains ugly, as external demand has faltered.”

Forecasts

The mixed results have given rise to a range of forecasts as the new leadership under ruling Chinese Communist Party’s General Secretary Xi Jinping takes charge.

Both Jorgenson and Bottelier believe China can look forward to continued recovery in 2013 with GDP growth in the range of 8 percent, but some estimates are lower.

Gary Hufbauer, senior fellow at the Peterson Institute for International Economics in Washington, sees signs that the government is more confident of winning its fight against inflation and property prices, allowing it to loosen credit for faster growth.

“I think this means pretty good growth in 2013,” said Hufbauer. “I think they will achieve 7 percent.”

“It would be lower than this year, but it’s not low by world standards and it’s better than some commentators had feared two or three months ago, when manufacturing seemed to be lagging,” he said.

The new government is expected to keep the growth target at 7.5 percent for next year, Reuters reported.

At an annual central economic work conference over the weekend, officials did not announce a 2013 target but called for “greater political courage and wisdom” to promote further reforms, Xinhua said.

Some of the difference in forecasts may come down to the reading of the external factors. Recessionary trends in the Europe Union and Japan along with slow growth in the United States could put a chill in China’s exports next year.

In the first eleven months of this year, trade with the EU dropped 4.1 percent while trade with Japan fell 2.9 percent. Overall trade growth of 5.8 percent has stayed far below the government’s target of 10 percent, Xinhua said.

Dale Jorgenson sees an encouraging sign that the economy appears to be improving despite the shortfall on trade, while Hufbauer’s forecast suggests that weak exports may sap some strength out of growth.

Narrowing the gap

While 7-percent growth would be spectacular for a developed economy like the United States, it is below the benchmark level of 8 percent that has been seen as necessary to provide jobs for those moving into China’s cities.

The outgoing government has been talking for years about shifting the basis of China’s growth from investment and exports to domestic consumption, which is another way of saying that the gap should be narrowed between rich and poor.

The focus on sustainable development and more moderate growth may offer hope that the new leadership will accelerate the trend.

But Gary Hufbauer believes the government has a long way to go before it can make that transition.

“They talk about it a lot. It gets a lot of rhetoric,” he said. “I imagine it is a goal, but the only way that they could turn that corner in a big way would be to furnish fairly large wage increases.”

But that would blunt China’s edge in low-cost manufacturing and drive exports down.

Either way, the new government may face risks with the country’s workers. In the meantime, it will also feel pressure from industry and investment interests that have thrived under the high-growth model.

So far this year, retail sales have risen 14.2 percent but fixed-asset investment has grown even faster at a 20.7- percent rate.

Dale Jorgenson said the signs are encouraging that China is rebalancing its economy away from its heavy reliance on exports and investment, but the tasks are far from complete.

“This is something that is underway and will require probably another five or seven years to accomplish,” he said.