Is the Chinese economy in a crisis? The report delivered by prime minister Li Keqiang to the National People’s Congress recently does not mention a crisis. But it uses a new phrase to describe the current state of the Chinese economy: the emergence of a ‘new normal’.
The new normal, according to Chinese authorities, refers to a phase of growth in the Chinese economy where the emphasis is less on the rate of growth and is more on its quality. The objective is to keep economic growth at a level where it is adequate to generate a certain number of jobs and restrict the growth of registered unemployment to a maximum. In terms of targets, this roughly amounts to creating around 10 million new jobs per year and confining the registered jobless growth to around 4.5%.
While these targets would reflect a certain degree of confidence on part of the government in ensuring that economic growth is adequately ‘inclusive’, there is admission of a definite slowdown in the economy. This is evident from the change in the macroeconomic policy stance.
The People’s Bank of China has begun cutting interest rates in a calibrated fashion, signalling the easing of monetary policy. The pro-cyclical policy would still aim to achieve a lower growth of 12% in broad money next year compared with 14% in the current year.
Fiscal deficit is increasing and is projected at 2.3% of GDP the next year. The export growth target has been pegged downward at 6%. Even this lower target might be difficult to achieve given that the current year has seen exports grow by only 4.9%.
While the government has fixed a GDP growth target of 7% for the next year, most analysts are looking at a shortfall with the consensus being at around 6.8%. This would clearly be a record low for China given its impressive growth record of the last three decades.
The Chinese government’s rationalisation of a lower growth target comes from a realisation that an obsessive focus on high growth for years has created perverse incentive structures leading to high pressure on resources. Natural resource depletion has reached an alarming high, as has the damage on environment through high carbon emissions. Moreover, high growth has clearly not been egalitarian by nature with several sections having enjoyed only marginal benefits of China’s economic miracle.
The ‘new normal’ offers premier Li—the key architect of China’s new economic approach—and his advisors the opportunity of introducing new structural reforms. Most of these, keeping in line with President Xi’s unrelenting stress on curbing corruption, are expected to focus on institutional reforms and regulatory changes.
There is no denying the necessity of greater structural reforms. It is also true that these changes will take time to implement, and even more time to yield the quality and level of growth that China aspires to. In the meanwhile, however, what is happening to the Chinese economy is not great news for the rest of the world.
By conservative estimates, the Chinese economy contributed to around a quarter of the global growth in 2013. Indeed, China’s role as a major importer and consumer of resources and products is often overlooked.
China is not only the world’s largest exporter of goods, it is also the second-largest importer of goods. At the same time, it is also the second-largest importer of commercial services. These services reflect the importance of the Chinese market for several major producers around the world.
A slowdown in the Chinese economy is going to reduce its absorptive capacity. This has already begun reflecting in lower prices of energy and commodities. Several countries exporting energy products to China such as coal, crude oil and refined petroleum would feel the impact. These countries include major resource exporters like Australia, Canada, Indonesia, Chile, Peru, Nigeria and a large number of natural- and energy-resource exporting countries from Asia, Africa and Latin America. India might also see its exports of minerals and raw cotton to China taking hits.
China’s slowdown will also affect its consumption of services including transport, financial and business services. This is obviously not good news for major service exporters like the US and EU. The service exporters would also be concerned over the fact that China is trying hard to reduce its reliance on service imports. Indeed, services have overtaken manufacturing to become the largest contributor to the Chinese GDP, now with their share inching close to 50% of the GDP. The bulk of the new jobs expected to be created in China now are in domestic services like tourism, hospitality, education and healthcare.
A slowing China and the advent of the new normal might actually imply more pains for the rest of the world than China. Because the new normal is much different from the normal China that the world has got used to!
By Amitendu Pal
The author is senior research fellow at the Institute of South Asian Studies in the National University of Singapore.
Views are personal