The New Normal Economic Growth in China

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   In the past 30 years, enterprises and investors were used to the 10% annual GDP growth rate of China. In that period, though the Chinese economy went through depression, the economic growth rate of this country was always around 10%.
  Now analysts believe that the days with double-digit growth rate are gone, but they have not reached a consensus about the new economic growth tendency yet. The expected annual GDP growth rate ranges from 7% to 9.5%.
  Maybe this disagreement sounds unimportant. After all, China could easily defeat any other country even with the 7% annual GDP growth rate. But actually, the difference means a lot. If the growth rate is 9.5%, China could accumulate about 3-trillion-USD assets more than it could do with the 7% growth rate. In addition, it could maintain the price of bulky commodities in the world at a higher level.
  Qu Hongbin, an economist serving HSBC unhesitatingly stood along with the camp that is bullish on the Chinese economy.
  In his latest report, Qu Hongbin wrote: “The Chinese economic growth is slowed, but it is mainly attributed to the cyclical factors like the depression of external demand and the lag effect resulted from the previous tight policies.”
  In his opinion, the Chinese government must take countercyclical measures (increase the fiscal expenditure and issue more easy monetary policies) to push the growth of GDP.
  
  The newly-issued data assured analysts that the economic growth rate in the third quarter of 2012 is closer to 7%. The value added of the industry dropped to the lowest level in August from May 2009. But the Chinese government said yes to a large number of big investment projects in early September, including 25 new urban light rail projects, which might invigorate the economy in the rest part of this year.
  Many analysts advised the government not to launch a new patch of projects with big expenditure. Independent economist Andy Xie is one of the firm pessimists. In his opinion, China has hit a real turning point of structural change –at this moment, the government-oriented growth pattern, which is very inefficient, will damage the economy. Andy Xie said: “With the end of the redundancy of labor force in China and the incessant depression of western economy, the exports growth cannot neutralize the influence of the low economic efficiency.
  For the short-term prospect, analysts made different opinions. Some of them think that the economic performance of China conforms to the potential level in spite of slowed growth. Others, nevertheless, think that the Chinese economic growth is beneath the potential level.
  Hen Qiao, an analyst at Morgan Stanley, said that that the decreasing profits of enterprises and the drastic easing of inflation are proofs for the current economic growth of China below its potential level.
  In a report she wrote: “These are the evidence for the negative output gap, which called for the adjustment of policies. In 2012, the potential growth rate of China should be still around 8.5%.”
  The potential growth rate refers to the proper economic expansion rate, which can neither push up the inflation too quickly nor increase the unemployment rate too slowly.
  Then, it is just the unemployment rate that made many analysts believe that it is a natural course for China’s economic growth to be slowed down.
  Though stress has been felt in the labor force market of China, the employment opportunities are not reduced so much as in the global financial crisis in 2008. This shows that the Chinese economy does not need to develop as fast as years before to create working opportunities for all migrant workers who left their rural areas to cities.
  Arthur Kroeber, managing director of the research institution Dragonomics, said: “We are not saying that the economic slowdown does not always signify the advent of ‘doomsday’ of unemployment.”
  The change of demographic structure is the main factor. In the past five years, the increase of working-age population in China was greatly eased and will drop to the historical low in 2015.
  But the potential economic growth rate is not only determined by the demographic structure. It is also related with the productivity, which is also called the actual output of each employee.
  The leadership change of China is thus under heavy scrutiny because the future development path of China is related with the new decision makers in Beijing.
  As Qu Hongbin said, he is optimistic about the Chinese economy based on the significant assumption that China would continue its marketoriented economy reform as it did in the past 30 years. He said: “the reform is very important for keeping the improvement of productivity.”
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