While the continuing deceleration of Chinese growth may be a source of concern for the global economy, Chinese authorities should keep their attention on economic reforms that ultimately will contribute to more stable growth in the world’s second-largest economy.
The 7.4 percent growth in China’s gross domestic product in the January-March period was the slowest since the July-September quarter of 2012. After achieving double-digit growth for five years in a row since 2003, the Chinese economy survived the global recession following the 2008 Lehman Brothers shock relatively unscathed with the help of massive stimulus spending worth 4 trillion yuan. It overtook the Japanese economy in size in 2010.
Growth slowed to 7.8 percent in 2012 and to 7.7 percent in 2013, and the government’s target of 7.5 percent growth this year clearly shows that the period of growth at breakneck speed is over. This may be bad news for the world’s economies, including Japan, that have come to greatly rely on China as a driving engine of global demand.
In a speech he gave earlier this month, Premier Li Keqiang said the government is not planning short-term stimulus measures but will try to achieve sustainable and healthy growth through economic reforms. Officials say the pace of January-March growth is still within the range of the government’s expectations.
During the first quarter, the growth of fixed asset investments, industrial production and real estate investments decelerated while exports marked a 3.4 percent decline from a year before. Still these developments appear to be in sync with the Chinese leadership’s attempt to achieve a soft landing of the economy characterized by more domestic demand-led growth and less dependency on export demand.
The government has been trying to rein in housing market bubbles, while growth in industrial output is slowing down and accompanied by factory shutdowns in some sectors that have been suffering from oversupply, such as steel.
China has other economic worries in addition to gradually slowing growth. It needs to overcome a host of problems including excessive investments and production, financial system risks, rising local government debts and the widening rich-poor income gap.
Financial system reform is an urgent challenge as nonbank moneylenders in the expanding shadow banking system, which have heavily lent to real estate developers, are now in trouble as the government makes efforts to contain the housing sector bubbles.
In the January-March period, Japanese direct investments in China plummeted 47 percent from a year before as Japanese businesses, increasingly wary of the rising labor costs in China, are shifting their operation to Southeast Asia. In March, overall foreign direct investments in China declined. China may find it increasingly hard to count on foreign investments to drive its export growth.
China needs a transition from investment and export-propelled growth to one that is driven more by consumer demand. That would require reforms based on market mechanisms and overcoming resistance from vested interests.
Slowing growth may make such reforms even more painful, but the government should not try to revert to its old ways of stimulating the economy. It should stick to its pursuit of reforms instead of aiming for rapid growth.