Why China Is Suddenly Content With 7.5 Percent Growth
For years, there’s been one constant for people talking about the Chinese economy: GDP growth would exceed 8 percent. It didn’t much matter what happened in the rest of the world—the U.S. and other export markets might be thriving or might be struggling, but China would grow at least 8 percent, year in and year out. The country needed to create enough jobs for the millions of young people entering the workforce every year, and the Chinese leadership decided that anything below 8 percent would put job creation in jeopardy. And the policy makers were consistent: The last time China had a growth target below 8 percent, George W. Bush was still in his first term and the Boston Red Sox still hadn’t broken the Bambino’s curse.
That magic, 8 percent number, though, is now history. At his annual address to open the National People’s Congress in Beijing, Chinese Premier Wen Jiabao on March 5 announced that the government has a GDP target of 7.5 percent this year. China hasn’t had a growth target that conservative since 2004.
The European debt crisis is one culprit, with demand falling for Chinese exports. But it’s not just about the Europeans. After years of torrid growth of at least 9 percent, China needs “higher-quality development over a longer period of time,” Wen told lawmakers at the country’s parliament. Economists and investors agree that China is now entering a new era of slower growth, one where the old 8 percent figure is no longer so important. “We think the leaders in Beijing realize that the trend growth in China has to slow down,” Credit Suisse chief regional economist Dong Tao wrote in a March 5 note.
Everyone should get accustomed to slower growth. “It’s going to be numbers below 8 that are now more the more common mantra for China,” says Sean Darby, chief global equity strategist in Hong Kong for Jefferies Group. Anything much higher than 8 percent, he adds, would “unsustainable.”
And what about the job-creation imperative that made the 8 percent target so critical for so long? China is going through a major demographic shift, thanks to fast economic growth and the one-child policy. As the population starts to age, job creation for millions of young people isn’t so vital anymore. While China needed 10 million new jobs a year in the early 2000s, today it needs just half that number, says Jian Chang, China economist in Hong Kong with Barclays Capital. “The labor force as a whole is barely growing now,” says Stephen Green, head of Greater China research for Standard Chartered Bank in Hong Kong. As a result, Chinese policy makers “just don’t need to create as many jobs as they [once] did.”
Indeed, in some parts of China there’s now a labor shortage as young Chinese workers who once flocked to factories along China’s coast find they don’t need to travel so far from home to find work. That’s one reason local governments are raising minimum wages. Last week, the city government of Shanghai and the provincial government of Shandong raised minimum wages, part of a nationwide trend to boost take-home pay for Chinese workers.
Slower growth and higher wages are two elements of the Chinese economy’s new normal. The Chinese will also need to learn to live with higher inflation, says Barclays economist Chang, who expects inflation to average about 5 percent over the next decade, compared with 2 percent over the past 10 years. Since “they don’t need to worry that much about job creation,” she says, there’s less urgency to subsidize the cost of electricity, water, and oil for producers. “China is changing from this miracle growth to a more normal growth stage,” says Chang.
The good times were a long, one-off party that followed China’s entry into the World Trade Organization in late 2001, argues Tim Condon, Asia chief economist for ING Financial Markets in Singapore. Over the past decade, he says, China enjoyed a WTO windfall that led to extreme growth. Profits for industrial enterprises soared, going from 4 percent of GDP before WTO entry to 11.8 percent last year. All those profits contributed to a big increase in savings, with China’s current-account surplus moving from 2 percent before WTO to 9.9 percent in 2007 and 4.4 percent last year.
That kind of growth can’t last indefinitely, not even in China. “The economy is normalizing after this extraordinary period,” says Condon. In the new era of higher costs and slower growth, “it will be painful for some companies,” he says. But having enjoyed a period of 10 fat years with high profits and high savings, the pain won’t be too great. “China,” says Condon, “can afford this.”