How Much Slowdown Can Beijing Tolerate?
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How Much Slowdown Can Beijing Tolerate?

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The once-mighty Chinese economy is now headed in one direction only – downward. GDP growth was 7.5 percent in the second quarter of this year, down slightly from 7.7 percent in the first quarter. In the last quarter of 2012, the Chinese economy grew 7.9 percent. The deceleration from 7.9 to 7.5 percent may seem relatively minor – only 0.4 percentage point in six months. However, when annualized, this figure means that the Chinese economy has lost about one-tenth of its growth momentum since last year.

The question on the minds of most people is how much of a slowdown Chinese leaders can tolerate. Many people, including senior government officials in the West, seem to believe that Beijing will not allow its GDP growth per annum to fall below 8 percent (sometimes one also hears 7 percent as the magic number) because growth below that line is supposed to trigger social unrest. Typically, those who place a lot of faith in this number argue that unemployment will explode once growth stalls. For a government obsessed with domestic stability, that would be a nightmare.

While seemingly persuasive and plausible, the widespread notion that there is one magic growth number that will trigger panic in Beijing is simply a myth.

One reason to dismiss the purported connection between growth and unemployment-based social unrest is the divergence between growth and employment in the Chinese economy in recent years. Because of its investment-driven growth model, China’s economic expansion has been capital-intensive but labor-light. Modern power plants, steel mills, toll roads, and ports are expensive to build, but require a small number of workers to operate. As a result, each additional yuan invested in the Chinese economy is generating fewer jobs. This disconnect between investment-driven growth and job generation can be seen in these numbers. Between 2004 and 2009, Chinese investment in equipment and plants quadrupled, but the number of manufacturing jobs increased only by 15 percent.

Another factor that has greatly alleviated the pressure on employment is China’s aging population. The labor force is shrinking. Consequently, economic slowdown will not result in an instant increase in unemployment. Even in today’s environment of decelerating growth, China’s unemployment has not worsened.

To be sure, Chinese leaders would prefer balanced high growth to low growth. However, the current leadership is aware of the enormous risks of allowing highly distorted growth to continue. Since 2008, Beijing has maintained growth with a massive injection of credit, much of it invested in speculative real estate, excessive industrial capacity, and infrastructure with dubious financial viability. Continuing this disastrous policy would imperil the political future of new Chinese leaders, particularly Xi Jinping and Li Keqiang, who will be up for reappointment in 2017.

That is one of the main reasons Chinese leaders seem to tolerate persistent growth slowdown – so far.

But will they lose their calm if growth falls below a certain level?

Comments
12
Charles Martin
August 16, 2013 at 04:38

There's no question that China's growth will slow significantly over the next 10 years. With its cheap capital (artificial bond market void of any competition), the bubble in its real estate market ready to burst, low wages, undervalued currency, and hoping that technological advances can save its environment from continued ecological disaster, there is simply no way to boost its consumption level — where Beijing demands growth in, the household segment, to expand its GDP. The real problems that are surfacing now are going to continue to plague its economy over the next 10 years, as it did to Japan in the 1980s, clearly have a full death grip on it from: continuing to printing money, massive price spikes and hyper-inflation.

Observer
July 27, 2013 at 06:09

Look like the mystical $100 Trillion USD economy will remain a pipe dream for china and chinese. Keep on dreaming, comrades.

Dewey Last
July 24, 2013 at 07:24

Doublespeak!

 "China's economic growth must not slip below the "bottom line" of seven per cent," Premier Li Keqiang quoted to news sources.

"The bottom line for economic growth is seven per cent, and this bottom line must not be crossed," Li told a meeting earlier this month, the Beijing News reported.

I was about to write something about the man, but it came out apologetic. No amount of editing made what I wrote worthwhile. I really want to believe this man was capable and honest. Unfortunately, I cannot. 

Dewey Last
July 24, 2013 at 07:01

Even China does not know what their GDP is:

"By looking at these three figures,  Li Keqiang [China's Premier] said he can measure with relative accuracy the speed of economic growth. All other figures, especially GDP statistics, are 'for reference only,' he said smiling." "GDP figures are 'man-made' and therefore unreliable. 

1) electricity consumption; 2) volume of rail cargo, which is fairly accurate because fees are charged for each unit of weight; and 3) amount of loans disbursed, which also tends to be accurate given the interest fees charged."

Some thoughts:

1. Some companies cannot be measured using the three criteria for GDP inclusion, such as internet firms and information systems. 

2. Local governments "cook the books", so to speak to make themselves look good. Government building projects are mostly non-performing. As of today, China has a five-year moratorium new projects.

3. Slowdown of technology, management and financial transfers. Japanese, South Korean and Taiwanese firms have been rapidly pulling out due to inflation and political reasons. 

4. China has a reasonably well-educated workforce. Infrastructure is fair-to-good. Productivity is hampered by the relatively low skill level of managers and the state's interference in the allocation of resources to low – [non -] yielding projects.

I have no idea what the other posters are writing about.

sang
July 23, 2013 at 20:42

If we read Why nations fail, the truth is that China owns extractive institution, so if there is no political reforms, there is not sustainable development.

applesauce
July 23, 2013 at 14:42

no magic number as in no set number, if growth drops too low, obviously the government willl step in, but we and maybe even the government at this point dont know what number is "too low" as its guide by many factors

applesauce
July 23, 2013 at 14:40

"The once-mighty Chinese economy is now headed in one direction only "

shouldnt speak in absolutes, even if that trend is likely.

but anyways, i agree there is no "magic" number and 7% would still make china one of the fastest growing economies in the world and the level of growth deem unacceptable by chinese leadership is vastly complex and affected by a variety of factors but it been hinted that 7%-7.5% this year is perfectly acceptable by the government and if reforms continue and goes well, even lower numbers(5-6%?) would be fine(quality fo growth vs quantity of growth).

JaegerJade
July 23, 2013 at 11:47

Well if there is no magic number to make leaders think or behave differently and if Beijing can’t surmise what will happen by looking at the American economy and its fallout from bad real estate loans then they may be in for a rude awakening.

captainjohann
July 21, 2013 at 14:10

Is the recent border incursions in to India is a way of turning the ire of masses into Jigoism with short jab to teach India a lesson?

Matthew Hall
July 19, 2013 at 23:07

Based on the transparently falsified GDP numbers, I'd say very little.

Gaurav Tripathi
July 19, 2013 at 18:22

It completely depends on China's political leadership to rebalance its economy.  The current situation of the of its economy must be handled with proper "care" , as anything in its economy will have drastic effects on other world's economies. The leadership in China is worried about elites, but it thinks it can handle social unrest with its anti-riot police. Well,its a tough situation building in the country, the leadership must have contingency plan. 

migrant
July 19, 2013 at 11:57

Migrant laborers who work in construction are conspicuously absent from this analysis.

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