China’s latest release of economic numbers at the weekend showed that growth in industrial production slumped to a five-year low in August, despite a mini stimulus earlier this year.
Hitting a 7.5% economic growth target will be difficult if these numbers indicate a broader slowdown. However, slower growth is not always a bad thing. In China’s case, lower growth is an inevitable consequence of meaningful reform — because such reform would mean less of an obsession on an arbitrary growth target.
Xi Jinping has already taken some positive steps. The planned share-trading link between Hong Kong and Shanghai should eventually pave the way for further liberalisation of China’s capital account, while reforms to state-owned enterprises could introduce greater private ownership and improve efficiency. The corruption crackdown is also a step in the right direction.
But Chinese officials are struggling to kick the stimulus habit.
“China is still an investment-driven economy,” said Francis Cheung, head of strategy for China and Hong Kong at CLSA, at the broker’s annual investment conference. With problems of oversupply affecting the property and manufacturing sectors, it is only infrastructure investment that is still propping up growth.
What happens when there is nothing left to stimulate?
“When they run out of industries, Chinese policymakers will be forced to reform,” said Cheung.
China’s recent stimulus has stopped growth from falling below the all-important 7.5% level, but it also stands in the way of a shift towards more efficient, market-based pricing — and cannot work forever, according to Cheung.
“If China keeps the 7.5% target it will forever be in a stimulus cycle,” he said. “And the cycle keeps getting shorter. The game changes, it gets harder.”
Not so easy
Not everyone agrees that the Chinese central bank is out of ammunition. Chen Long at Gavekal Dragonomics blames the weak August numbers on hawkish sentiment at the People’s Bank of China and argues that a sustained easing of monetary policy would help to revive the economy.
“Banks are unwilling to accelerate lending without very strong support from the central bank — support which so far has not been on offer,” he wrote in a recent report. “Policymakers are facing a tough choice: accept higher debt in order to get higher short term GDP growth — which brings longer term risks — or accept slower growth in the near term.”
However, CLSA’s Cheung is more focused on reform as the best path for China to follow, though he too has been disappointed with progress, particularly when it comes to rationalising the public sector.
“We need to take away the protection for SOEs and work out what is really strategic,” he said. “No country has ever gotten rich through SOEs.”
The good news is that strong job creation, mainly in the services sector, gives Chinese policymakers plenty of room to reduce the bloated public-sector workforce without threatening social stability.
But it is still a difficult goal. Decentralising the Chinese economy has been a priority since at least Mao Zedong’s Great Leap Forward in 1958 — and is still very much a work in progress.
