Monday June 1, 2020


March 14, 2014


During this week’s meeting of the National People’s Congress in Beijing, China’s leaders reaffirmed their commitment to a target of 7.5% national Gross Domestic Product (GDP) growth in 2014. Despite a gradual downward trend in China’s annual GDP growth over the last decade, economist Song Li of China’s National Development and Reform Commission argued that the reform dividends of economic measures announced at November’s Third Plenum, combined with an improving global economic environment, will guarantee that the 7.5% growth target will be met (The reforms that Song refers to are a series of broad measures aimed at improving the quality of economic growth, including more emphasis on market forces and curbs on the power of state-owned companies in some sectors). However, at the NPC’s closing press conference, Premier Li Keqiang emphasized that while 7.5% remained the target, the state would prioritize any measures that sustained employment and income growth. He criticized the government’s past ‘Economy First’ – at any cost – model, saying this kind of thinking led to the country’s rampant environmental pollution.

The ‘Economy First’ policy, which started in the late 1970s under Deng Xiaoping, translated into double-digit GDP growth for most years during the last three decades, pulled millions of Chinese out of poverty, and rapidly raised the country from third-world status. In the recent past, government officials have prioritized economic policies that would achieve 8% annual GDP growth. This was believed to be the minimum level necessary to create jobs at a pace that matched China’s urbanization rate and keep social unrest in check. “Protect the eight” became the government’s mantra, and local officials poured state funds and local taxes into projects that guaranteed instant results but did not necessarily improve China’s long-run growth prospects. However, global economic woes and China’s overcapacity in industrial sectors have forced it to revise its recent growth targets. China’s economy only saw 7.7% GDP growth in 2013. Even as China further lowers its growth target, officials may still need to institute monetary easing and additional fiscal stimulus to hit 7.5 percent. Stephen Green, head of research for Greater China at Standard Chartered in Hong Kong, said slowing growth in lending and a softer housing market may make it difficult for China to accomplish increased growth through government policies. This has left some worried that despite Premier Li’s rhetoric about a flexible growth target, any threat to job and income growth could test the leadership’s resolve to curb pollution, rein in shadow banking and control risks from a credit boom.

Lending-induced growth

In the past, China has encouraged economic growth by using its state-controlled banking sector to make cheap loans to state-owned enterprises (SOEs) for large-scale development projects. However, overcapacity in industrial sectors, like construction and agriculture, has led China to institute policies to minimize lending to companies in these sectors. Thus, bank lending has slowed, despite growing numbers of entrepreneurs and small businesses. Banks do not want to lend to these new customers for fear of defaults; whereas, banks feel more confident that bigger companies and state-owned enterprises will mount highly visible development that have the implicit backing of the government. One step China could take to boost lending to entrepreneurs and small business would be to cut banks’ reserve requirements (the amount of money banks must hold in their vaults at all times). This way, banks would have more funds to take on the risk of making loans to new customers, and thus, entrepreneurs and small business would not have to delve into the unregulated shadow banking industry to procure a loan.

Real Estate

Since the collapse of the American housing market in 2008 and the subsequent financial crisis, China watchers have feared that the housing price bubble in China will also pop – pointing to examples of newly constructed apartment complexes and subdivisions which have very few occupants. A bubble burst would certainly cause panic among investors and have disastrous consequences for China’s economic growth. Yet, housing prices have continued to spiral higher in recent years (According to the Economist Intelligence Unit, living costs in Shanghai are now even greater than NYC). At the NPC meeting, there was no announcement of any new measures that would aim to curb housing prices. When directly questioned about whether the leadership was contemplating new measures that could affect the property market, Premier Li Keqiang gave an ambiguous response about ending speculation and building more affordable homes.

The property sector remains a key source of economic growth. Yet, new construction projects, measured in terms of area, are down 27% from a year ago. This trend is most likely related to a slowing in lending to avoid overcapacity, as discussed above. New experiments with property taxes in Shanghai and Chongqing could set more realistic prices on new buildings and homes. Taxes reign in property speculation because investors have to pay taxes on their property purchases – the higher the price, the more tax they will pay. Thus, taxes could drive down housing market prices because demand will not be as high when property taxes are a heavy burden.

Economic Takeaways for the US

Despite troubles in lending and consumer markets, China doubters should be taken with a grain of salt. China’s economic slowdown may simply signal the emergence of an increasingly services-based, consumer-led rebalancing of its economy. In 2013, the services share of GDP hit 46 percent – exceeding the combined manufacturing and construction share. Services-led economies almost always grow more slowly than manufacturing-led ones. In addition, a shift to services fosters more labor-intensive growth, which allows a more slowly growing China to continue to absorb surplus labor through increased employment and poverty reduction, which Chinese leaders posit as the key to maintaining social stability.

While China has used the November plenum and the recent NPC meeting to signal its economic rebalancing, there is no such evidence of a similar transformation in the United States. Foreign Policy faults the United States’ post-financial crisis policy stimulus for “resurrecting the timeworn model of consumer-led growth – the same recipe that got the U.S. economy into such trouble in the first place.” However, relying on a growth in consumption for economic recovery is a bad bet when American consumers are personally constrained by high debt, subpar saving, and fears of the next economic malaise. In addition, if China institutes more policies designed to encourage domestic consumption and lending, China will need to draw on its surplus saving, which it has invested dollar-denominated assets in the past. This means that China will cash in some of its investments in the US or not invest as heavily as before. Thus, absent its biggest foreign lender – the Chinese own about $1.3 trillion in Treasury notes and about another $700 billion of government-sponsored Fannie Mae and Freddie Mac securities – the United States may find it exceedingly difficult to stay the same course and shirk economic transformation.

For more information on China’s economy, see the following news articles:

Bloomberg News“China Stimulus Decision Looms as Investment Slows”

Foreign Policy“Hard Landing, USA”

New York Times“Life’s Guarantees: Death, Taxes and 7.5% Chinese G.D.P. Growth”

Wall Street Journal“Despite Low Inflation, China Has Little Room to Cut Rates”

Wall Street Journal“Economists React: China’s Slowdown Confirmed, but No Hard Landing”

Wall Street Journal“China Premier Li Chooses ‘Softly, Softly’ Approach to Property Market”

Wall Street Journal “Shanghai is more expensive than New York”

Compiled and edited by Amanda Conklin