This year’s slowdown is consistent with the purpose of macro-control, spelling good news for inflation mitigation, economic restructuring, energy saving and emission reduction. For the first three quarters, growth continues to beat 9%. The annual growth expects to overpass 9%, faster than other economies. This will strongly support the recovery of world economy and its efforts to avoid a double dip.
China’s economic potential is propped up by a set of positive factors. On the demand side, industrialization and urbanization are accelerating, household spending are expanding with focus on housing and auto vehicles, and regional growth points are burgeoning. Robust investment and consumption make the market increasingly resilient and maneuverable. On the supply side, liquidity has turned from shortage to relevantly abundant and the advantage of overall huge amount supply of labor forces will remain positive, and can be translated into comparative advantages in international trade.
However, China’s economy is exposed to multiple challenges, some of which are quite tough. It is undeniable that the climbing costs of labor, land and other resources, coupled with aging population encroaching upon China’s demographic dividend, will undermine its traditional competitive strength of low costs.
China is still in the process of industrialization and urbanization. Its growth pattern is rather extensive, where the speed of growth is important for achieving the benefits. Moreover, China is constantly challenged to create more jobs. The working-age population will not stop growing until 2015. The labor force will bulge by 8 million to 9 million people each year in a foreseeable future, making it necessary to keep the economy on a relatively high gear. However, it is increasingly difficult for China to continue growing by 9% and above.
Growth of economies will diverge. Recovery of the US and EU turns out to be a bumpy ride. QE policies of the US remain a major uncertainty to the world economy. China suffers a host of external uncertainties.
Inflationary pressure is building up. Even though China well control the liquidity at home, the mid-to-long term pressure of inflation caused by feed in inflation and cost hike cannot be neglected. To harness the overheated housing market and real estate bubbles, the long-term mechanism shall be optimized.
Short-supply of oil and power at home highlights the need for reform. In April, not the traditional high season of demand, China suffered nationwide shortage of oil and electricity, the aftershock of which is still lingering in the southern provinces. This is a mirror of structural problems and the extensive growth pattern. More importantly, reform is desperately needed on resources pricing and energy supply system. Despite some adjustments of power prices, pricing mechanism of resources still need reform.
The small and micro enterprises are ailing. Upsurge in costs and difficulties in securing finance make their life ever harder.
The opportunity for restructuring is precious and elapsing. Slowing down of the economic growth usually represents a great opportunity for restructuring. China is also facing a new round of technical and industrial revolution, increasing its pressure for restructuring.
Financial risks of local governments are emerging. The public is increasingly concerned over Local Government Financing Platforms(LGFP) and their balance sheet. The central government is sorting out and regulating the LGFPs. China’s overall public finance is healthy and is capable to respond to these issues. The key is to set up a mechanism to ensure a positive fiscal cycle between the central and local levels.
Quality of companies listed abroad need to be improved. The foreign exchange regime also deserves optimization, yet in a proactive, gradual and controlled manner.
China is making efforts to tackle the domestic challenges. To solve the problems and prevent risks, it will take greater efforts and create more enabling institutional arrangements, even get ready for a possible learning experience of improving after trying in the risk of making errors and correcting the errors.