Li Keqiang’s bottom line – back to balanced growth
Everyone is talking about China’s economic slowdown. Last year, Chinese GDP growth reached a 13-year low, and no upturn is in sight.
But, as Premier Li Keqiang seems to recognise, this trend could actually be beneficial – spurring the structural reforms that China needs to achieve its longer-term goal of more balanced and stable GDP growth.
Recent assessments have offered a downbeat picture of the world’s second-largest economy. In its latest Global Economic Prospects report, the World Bank cut its 2013 economic growth forecast for China from 8.4 per cent to 7.7 per cent. Moreover, recently released central-bank data show that Chinese banks increased their lending by only about ¥667 billion in May – a roughly ¥125 billion decline from the same period last year.
But simply lending more would not improve the situation. Given that outstanding loans already amount to nearly double China’s GDP – a result of the country’s massive stimulus since 2008 – new loans are largely being used to pay off old debts, rather than for investment in the real economy. Thus, the more relevant concern is that the balance of outstanding loans has not risen.
KEY TO RESTORING GDP
In recent years, tight monetary policy and increasingly strict controls on the real-estate sector have caused the growth rate of fixed-asset investment to fall, from more than 25 per cent annually before 2008 to around 20 per cent today.
Furthermore, the growth rate in China’s less developed eastern regions amounts to less than half of the national average. As a result, growth of industrial value added – which contributes almost half of China’s GDP – is slowing even faster, from an average annual rate of 20 per cent during China’s boom years to less than 10 per cent in 2010-2012 and just 7.8 per cent in the first quarter of this year.
The key to restoring China’s GDP growth is, therefore, returning fixed-asset investment growth to at least 25 per cent. With a new round of stimulus, China’s excess production capacity and under-used outlays (for example, built-up real-estate assets) could be mobilised immediately, restoring 9 per cent annual GDP growth.
But the willingness of China’s new leadership to initiate another round of growth-securing stimulus depends on what rate of GDP growth Li can tolerate. With China’s leaders having offered no indication that they will change current monetary policy, some economists have estimated that Li will not act until GDP growth falls below 7 per cent.