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China’s slowing growth may not be a bad thing

As Premier Li Keqiang guides China towards lower growth rates, economists everywhere are grappling with this question: How slow is too slow for the world’s second-biggest economy?

Mainland Chinese visitors rest outside a shop at a shopping district in Hong Kong on February 24, 2015. Photo: Reuters

Mainland Chinese visitors rest outside a shop at a shopping district in Hong Kong on February 24, 2015. Photo: Reuters

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As Premier Li Keqiang guides China towards lower growth rates, economists everywhere are grappling with this question: How slow is too slow for the world’s second-biggest economy?

Number-crunchers have traditionally believed that China must grow at least 7 to 8 per cent annually to generate enough jobs and prosperity to keep protesters from flooding Tiananmen Square. But what if China is already operating at a significantly lower rate of output — more like 5 per cent — without a significant uptick in unrest? And what might that mean for Asia’s economic outlook over the next five years?

The consultancy Oxford Economics has created a Li Index that tries to estimate Chinese growth by using measures such as electricity output, credit growth and rail freight. Contrary to the official headline gross domestic product number, those data suggest Chinese GDP growth has been stumbling along under 5 per cent for a few months now.

While some may quibble with the index’s emphasis on heavy industry, the fact is that official Chinese GDP and trade data are not a whole lot more reliable.

If Oxford is right, that means there may be a much lower threshold for preserving social stability in China than previously assumed. The consultancy’s explanation, while highly technical, boils down to this: China’s shrinking population and the slowing of migration to cities means there are enough jobs to go around, even while GDP growth also eases.

“With population growth slowing, in particular growth in the working-age population, the rate of growth needed to preserve urban employment is likely to slow to around 5 per cent by 2020,” said Oxford’s Dr Clare Howarth.

While the United Nations said China’s working-age population will not start shrinking until next year, econometric analysis suggests otherwise. Between 1979 and 2013, for example, urban employment grew about 3.7 per cent a year relative to GDP growth of about 9.8 per cent.

That encouraged the view that high growth rates were needed to generate acceptable levels of employment and maintain stability. As recently as 2013, Mr Li indicated that growth well above 7 per cent remained a critical priority for Beijing. Now, though, labour scarcity in cities is leading to big wage gains for lower-income workers. China may run out of cheap labour sooner than anticipated; the evidence points to urban population growth approaching only the 2 per cent mark between 2014 and 2020.

At the same time, there is ample reason to believe China’s GDP is already overstated, as Oxford said. The ratio of urban employment growth to GDP needed to avert protests may thus also be exaggerated.

It is entirely possible that urban population dynamics — and social stability — over the next several years can be sustained by 4.5 to 5 per cent growth.

This is both bad news and good news for the global economy. Bad news because a Chinese slowdown will rob the world of another vital growth engine amid already tepid demand. Good news because Mr Li and President Xi Jinping would have more latitude to rebalance the economy. They will need to take advantage of that opportunity, though. Already middle-class incomes are stagnating in China.

Unless the country can ultimately create better-paying jobs, particularly in the services sector, this period of labour calm will not last forever.

ABOUT THE AUTHOR:

William Pesek is a Bloomberg columnist based in Tokyo and writes on economics, markets and politics throughout the Asia-Pacific region.

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