A Slowing China Needs Reform

China’s growth prospects just got another downgrade. Cutting the estimate it made in July of 7.8 percent annual growth, the IMF announced Oct. 8 that China’s economy instead is likely to expand by 7.6 percent in 2013. Next year it will grow 7.3 percent, down from the original prediction of 7.7 percent, the IMF said (pdf). Just a day earlier, the World Bank also cut its estimate for China, down from 8.3 percent to 7.5 percent for 2013.

“Previous expectations that the Chinese authorities would react with a strong stimulus if output growth were to decline toward the government target of 7.52 percent have had to be revised,” says the IMF’s World Economic Outlook report, released Oct. 8.

China’s leaders aren’t acting very concerned. Indeed, they are well aware that growth must continue to slow in the future. “Though lower than the near double-digit rates seen in previous years, growth in the neighborhood of 7.5 percent is still considered high for any major economy in the world,” Premier Li Keqiang said in a Sept. 11 speech at the World Economic Forum meeting in Dalian. “As the economy enters a phase of transformation, the slowdown on prospective growth and moderation of the Chinese economy from a high speed to a medium-to-high speed are only natural,” Li said.

What’s the transformation Li is talking about? Weaning China off its excessive reliance on exports and investment and rebalancing toward a more household consumption-driven economy. And to get there successfully will require serious reforms, say most economists. “Without fundamental reform to rebalance the economy toward consumption and stimulate productivity growth through deregulation, growth is likely to slow considerably,” the IMF warned.

The good news is that deregulation appears to be on the agenda: A key Communist Party meeting likely to open in early November is expected to announce plans (albeit probably in broad brush strokes) aimed at reforming China’s restrictive household registration policies, encouraging the growth of job-creating service industries, and allowing banks more flexibility in offering market-based interest rates—all necessary for China to achieve its rebalancing goal. The upcoming meeting, known as the Third Plenum, will “be a springboard for major national reform,” predicted the official Xinhua News Agency on Aug. 30.