China meets the ‘new normal’
Anyone who takes even a passing interest in China can’t have failed to notice a shift in mood of late. Gone are the decades of soaraway growth, when the economy expanded by an annual average of 10%, enabling around half a billion people to lift themselves out of poverty.
Instead, at the annual “two sessions” gatherings of legislators and political advisors this month, Premier Li Keqiang announced a growth target for this year of “around 7%”. That’s slightly down on the past two years’ target of 7.5% (although still pretty stunning for most countries). If that forecast holds true, it would see China recording its smallest expansion in a quarter of a century. But, as Premier Li also said (paywall), “it will by no means be easy for us to reach this target”. That’s the reverse of how things used to be. Throughout much of the long boom, the official growth target, typically 8%, was routinely overshot.
There’s a phrase for this change in pace in China – the “new normal”. These days, it’s rarely off the lips of Chinese leaders, from President Xi Jinping on down. What it essentially means is a shift towards slower but more sustainable growth.
As the OECD’s 2015 Economic Survey of China discusses, reaching this new normal will require some long-term transitions. Notably, the reliance on exports will need to give way to a greater role for domestic consumers. And the state will need to step back to allow more room for innovation and entrepreneurship. That will require reforms that Premier Li has dramatically described as “not nail-clipping” but “like taking a knife to one’s own flesh”.
There are shorter-term challenges, too – most notably, ensuring that the slowdown in growth is kept under control. This is not unlike a driver touching the brakes of a car on an icy road – in other words, not without risks. Part of this immediate challenge is the need to cope with some hangovers from the boom years. There are signs of these in many areas of the economy, but two areas are perhaps of particular interest.
The first is overcapacity in industry – in other words, too many businesses, especially in the state sector, have invested more in plant and production facilities than could be justified by their potential market share or profitability. The impact of this is evident in fierce price competition and industry inefficiencies.
It’s also evident in China’s hazy skies. What China’s own National Development Reform Commission has described as “blind” investment in steel mills and smelters has contributed to the air pollution estimated to be causing about 1.3 million premature deaths a year. The issue is attracting growing public concern. When Under the Dome, a documentary about air pollution by journalist Chai Jing, was released last month, it was reportedly watched by more than 150 million people online.
Unwinding overcapacity in industry will be tricky. Rationalising too quickly risks disrupting existing production and employment. Waiting too long only risks exacerbating current problems. And while the state has signalled that part of the solution will lie in a greater role for the private sector, this, too, is not without risks. “Private firms reportedly pollute more than their state-owned counterparts, in particular in the cement, steel and flat glass industries,” the OECD report notes.
A second hangover is to be found in China’s property market, where there is substantial overcapacity – the famed “ghost towns” are just one sign of this.
Over the past couple of years, China’s property market has been cooling, especially in smaller cities, many of which now have an excess of housing. The slowdown reflects a number of factors, including the broader economic cooling and measures by the government to restrict purchase. More recently, some of these restrictions have been eased, likely reflecting official concern that the market may be cooling too quickly.
The Economic Survey of China sounds a note of caution, suggesting that the “price correction ought to continue until the inventory overhang is worked off”. More affordable housing, it suggests, would allow more Chinese to realise their dream of owning a home – a possibility only since the 1990s. There are, as the Survey readily acknowledges, risks to such a strategy. But, it argues, the relatively low levels of household debt in China, among other factors, should help to contain these.
Still, there’s no doubt that the property market will continue to weigh on China’s economy for some time to come, perhaps especially in the provinces, where there are concerns about the level of debt built up some local governments to fund real estate and infrastructure projects. We’ll come back to that subject soon.
A number of other OECD reports are also being released this week to mark 20 years of China and the OECD working together, including All on Board: Making Inclusive Growth Happen in China and China in a Changing Global Environment.
网站 (中文) (The OECD’s Chinese-language site)