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Is the current slow economic growth at- tributed to the periodic back-fall caused by tight policies or a reflection of the decreasing middle- and long-term potential of economic growth of China? Based on various aspects, experts believe that it is quite possible for China to see its high economic growth rate turn to middle economic growth rate.
Recently, the economic growth rate in China fell as the commodity price dropped from the peak. To understand the trend of economic growth in the future needs to get to know how the current slowed economic growth came out.
China has gone through 30 years in which the annual economic growth rate was maintained at around 10%. How long will this trend be kept? After studying into foreign countries, experts found that Japan, Korea, Germany and Taiwan all went through decades’ fast development and when their income per capita reached 11,000 international dollars (an average purchasing index recognized by most countries in the world), they unexceptionally encountered a “natural drop”in their economic growth rate and the decrease is between 30%-40%. The high growth rate all went back to the normal growth rate and the discipline was applicable for Germany in the middle 1960s, Japan in the middle 1970s and Korea in the late 1990s. The income per capita in China went close to 8000 international dollars in 2010 and will reach the level of 11,000 international dollars in the next two or three years if the current growth rate is continued. Then it is the time for the slowed growth to appear. That’s why the experts think that it is quite possible for the long-term high growth rate to turn to normal rate.
Let’s look at the nature of the back fall of this time. Is this a sign of the start of the periodic changes? It is worthwhile to pay attention to several marks having appeared in 2011.
Firstly, the proportion of infrastructure investment keeps decreasing. In the entire demand structure in China, the increase in consumption is stable but the import and export are going through great fluctuations. The high growth rate depends on high investment. In the past few years, the infrastructure investment took 30% of the total investment while the real estate investment took 25% and facility investment accounted for around 30%. These three subjects could explain 85% of the investment increase. Among them the infrastructure investment decreased from 31.2% in 2009 to 23% in 2011. In addition, the real estate investment will not keep the increasing trend without the additional investment in the indemnificatory house, while the facility investment to a great extent relies on the infrastructure investment and real estate investment. Secondly, the coastal provinces and cities with strong economic power, including Guangdong, Jiangsu, Shandong, Zhejiang, Shanghai and Beijing, saw their annual economic growth rate stand below the national average level. The investment in Shanghai even had a negative increase. This is unprecedented before. These provinces and cities contribute to half of the whole country’s GDP. Basically, the periodic change of national growth rate will start with the developed coastal areas.
Thirdly, people’s concerns about the local financing platform and real estate risk largely reflect the worries about the return on these middle- and long-term investments.
Certainly, when and how will the periodic slowed growth come out remain uncertain. Some experts believe that it had begun.
The experts also stress that the periodic change is a normal phenomenon and advise people to have a correct understanding of it.
One: this is normal reflection of the rule of economic growth. By now no countries were able to avoid the “natural rule” that the economic growth went slow after the income per capita reached 11,000 international dollars. It is a sign that the country has successfully gone through the industrialization.
Secondly, the potential decrease to the growth is different from the result of the government’s regulation over it. This means that people cannot increase the growth rate again based on their own will.
Thirdly, though the economic growth rate jumped from 10% to 6%-7%, it is still a high level internationally. If such a growth rate can be kept for one or two dozen years, China will avoid various types of “middle-income traps” that the other countries have encountered and successfully stepped into the high-income society. This is a good thing and should be the goal for the next phase of development. This means that it is reasonable for people to keep an optimistic attitude towards China’s economic outlook if the shift into middle-term growth rate is smoothly done.
Against this background, there are three major thoughts about the economic growth next year.
One: based on the international experiences, the growth rate might have a mild and gradual decrease or a drastic one. The Chinese government is advised to take measures to strive for the mild and gradual slowdown. Therefore to keep stable economic growth is an important mea- sure in 2012 and the following two or three years. Two things should be avoided from now on. The first one is the continuation of previous expectation for growth and the way of thinking or any fruitless efforts to recover previous high-speed growth which might lead to results opposite to people’s wishes. The Japanese government tried this in the 1980s, only causing severe assets bubbles instead of increasing the speed. Another notice is that the uncertainty of growth and fragility during the shifting period might easily lead to a drastic slowdown in a short term if any external or internal impact is implemented. If this happened, a new risk will be triggered. The economic growth rate in 2012 might have a back fall but will not be lower than 8.5%. The commodity price will drop as well in 2012 but the stress from middle-term inflation should not be ignored. The current inflation is driven by cost and the factors pushing the cost up, such as the prices of labor force, agricultural products and services, will all see an upward change. In addition, the energy and resource prices will increase as well. Therefore, the government needs to improve our ability to afford the increasing commodity price and certainly should take measures to reduce the impact of low-income groups against people.
Two: risk control should be placed in a more important position than ever before. Previously the fast economic growth was thought to be unsustainable but it proved to be not true because the high-speed economic growth has the ability to solve or postpone the apearance of these characters. Upon entering into the shifting period, the previous risks may not be held any more while new risks will emerge out as well. In 2012 it is very, very important to pay attention to the risk control. Risks from these aspects need special attention. The third risk is that some industries might see surplus production capacity when they enter the shifting period and this will lead to the great loss in these industries. The current situation in the steel industry might serve as a good example. The fourth risk is the emerging breach of capital chain for illegal credit and shadow bank. The fifth one is the impact over the Chinese economy brought by the recession of international economy.
Three: the shift from high-speed growth to normal means the shift of growing stimulus. Reform is needed for the growing stimulus to shift from low cost to innovation. There are two threats for the innovation-based shift – the assets bubble and big enterprises’ monopolization. Both problems are present in China. The government should take measures to deepen the reform, move the capital and other resources to other entity economy, innovative industries and industrial upgrade. The main methods are to increase the access, especially the one of infrastructure and service, encourage the competition in these fields and provide new stimulus for the new type of economic growth.
Recently, the economic growth rate in China fell as the commodity price dropped from the peak. To understand the trend of economic growth in the future needs to get to know how the current slowed economic growth came out.
China has gone through 30 years in which the annual economic growth rate was maintained at around 10%. How long will this trend be kept? After studying into foreign countries, experts found that Japan, Korea, Germany and Taiwan all went through decades’ fast development and when their income per capita reached 11,000 international dollars (an average purchasing index recognized by most countries in the world), they unexceptionally encountered a “natural drop”in their economic growth rate and the decrease is between 30%-40%. The high growth rate all went back to the normal growth rate and the discipline was applicable for Germany in the middle 1960s, Japan in the middle 1970s and Korea in the late 1990s. The income per capita in China went close to 8000 international dollars in 2010 and will reach the level of 11,000 international dollars in the next two or three years if the current growth rate is continued. Then it is the time for the slowed growth to appear. That’s why the experts think that it is quite possible for the long-term high growth rate to turn to normal rate.
Let’s look at the nature of the back fall of this time. Is this a sign of the start of the periodic changes? It is worthwhile to pay attention to several marks having appeared in 2011.
Firstly, the proportion of infrastructure investment keeps decreasing. In the entire demand structure in China, the increase in consumption is stable but the import and export are going through great fluctuations. The high growth rate depends on high investment. In the past few years, the infrastructure investment took 30% of the total investment while the real estate investment took 25% and facility investment accounted for around 30%. These three subjects could explain 85% of the investment increase. Among them the infrastructure investment decreased from 31.2% in 2009 to 23% in 2011. In addition, the real estate investment will not keep the increasing trend without the additional investment in the indemnificatory house, while the facility investment to a great extent relies on the infrastructure investment and real estate investment. Secondly, the coastal provinces and cities with strong economic power, including Guangdong, Jiangsu, Shandong, Zhejiang, Shanghai and Beijing, saw their annual economic growth rate stand below the national average level. The investment in Shanghai even had a negative increase. This is unprecedented before. These provinces and cities contribute to half of the whole country’s GDP. Basically, the periodic change of national growth rate will start with the developed coastal areas.
Thirdly, people’s concerns about the local financing platform and real estate risk largely reflect the worries about the return on these middle- and long-term investments.
Certainly, when and how will the periodic slowed growth come out remain uncertain. Some experts believe that it had begun.
The experts also stress that the periodic change is a normal phenomenon and advise people to have a correct understanding of it.
One: this is normal reflection of the rule of economic growth. By now no countries were able to avoid the “natural rule” that the economic growth went slow after the income per capita reached 11,000 international dollars. It is a sign that the country has successfully gone through the industrialization.
Secondly, the potential decrease to the growth is different from the result of the government’s regulation over it. This means that people cannot increase the growth rate again based on their own will.
Thirdly, though the economic growth rate jumped from 10% to 6%-7%, it is still a high level internationally. If such a growth rate can be kept for one or two dozen years, China will avoid various types of “middle-income traps” that the other countries have encountered and successfully stepped into the high-income society. This is a good thing and should be the goal for the next phase of development. This means that it is reasonable for people to keep an optimistic attitude towards China’s economic outlook if the shift into middle-term growth rate is smoothly done.
Against this background, there are three major thoughts about the economic growth next year.
One: based on the international experiences, the growth rate might have a mild and gradual decrease or a drastic one. The Chinese government is advised to take measures to strive for the mild and gradual slowdown. Therefore to keep stable economic growth is an important mea- sure in 2012 and the following two or three years. Two things should be avoided from now on. The first one is the continuation of previous expectation for growth and the way of thinking or any fruitless efforts to recover previous high-speed growth which might lead to results opposite to people’s wishes. The Japanese government tried this in the 1980s, only causing severe assets bubbles instead of increasing the speed. Another notice is that the uncertainty of growth and fragility during the shifting period might easily lead to a drastic slowdown in a short term if any external or internal impact is implemented. If this happened, a new risk will be triggered. The economic growth rate in 2012 might have a back fall but will not be lower than 8.5%. The commodity price will drop as well in 2012 but the stress from middle-term inflation should not be ignored. The current inflation is driven by cost and the factors pushing the cost up, such as the prices of labor force, agricultural products and services, will all see an upward change. In addition, the energy and resource prices will increase as well. Therefore, the government needs to improve our ability to afford the increasing commodity price and certainly should take measures to reduce the impact of low-income groups against people.
Two: risk control should be placed in a more important position than ever before. Previously the fast economic growth was thought to be unsustainable but it proved to be not true because the high-speed economic growth has the ability to solve or postpone the apearance of these characters. Upon entering into the shifting period, the previous risks may not be held any more while new risks will emerge out as well. In 2012 it is very, very important to pay attention to the risk control. Risks from these aspects need special attention. The third risk is that some industries might see surplus production capacity when they enter the shifting period and this will lead to the great loss in these industries. The current situation in the steel industry might serve as a good example. The fourth risk is the emerging breach of capital chain for illegal credit and shadow bank. The fifth one is the impact over the Chinese economy brought by the recession of international economy.
Three: the shift from high-speed growth to normal means the shift of growing stimulus. Reform is needed for the growing stimulus to shift from low cost to innovation. There are two threats for the innovation-based shift – the assets bubble and big enterprises’ monopolization. Both problems are present in China. The government should take measures to deepen the reform, move the capital and other resources to other entity economy, innovative industries and industrial upgrade. The main methods are to increase the access, especially the one of infrastructure and service, encourage the competition in these fields and provide new stimulus for the new type of economic growth.