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China's Economy Braced for a Rough Patch

G. Bin Zhao

Chinese city scape

Geopoliticalmonitor.com

The world couldn’t hide its disappointment when China’s first-quarter GDP growth dropped to 7.7 per cent, slightly lower than market expectations. Unfortunately, this might just be the start; worse news could be just around the corner. Indeed, there are a number of reasons why the Chinese economy faces a downturn over the next few years. So, just how bad can it get?

First, the current leadership transition is an issue. It is clear the new Chinese leaders will introduce many changes, because they understand there is absolutely no alternative to secure China’s long-term growth. Without major policy adjustments, any notion of turning the country into a real superpower over the next few decades will just be an unrealistic dream. Certainly, the transition process will lead to social pain, particularly for the economy. In the meantime, the world needs to be aware of this so that another severe slide in China’s gross domestic product will not come as a big blow to the global economy.

Second, economic growth is no longer the top priority on the Chinese agenda. Since the growth target is set at 7.5 per cent, the market should not expect any stimulus plan when GDP fluctuates to around seven per cent or even lower. As President Xi Jinping recently emphasized, the days of “ultra-high-speed” growth in China are over. Thus, policymakers will tolerate further economic decline.

China no longer needs double-digit growth. Other issues, such as environmental protection, industrial upgrading and economic restructuring, have become more prominent. As a government policy-driven economy, it is important not to underestimate the negative effect this will have on overall growth. In the worst case, China may experience a brief deadlock.

Third, the therapy for the real-estate tumor might be painful. Over the past decade, the property market has inadvertently acted as a major driver of China’s hyper-growth, which has created deep-rooted systematic problems for sustainable development in the future.

The new government has no choice other than to provide progressive measures to deflate the property bubble. This will affect many industries, not only in China, but internationally; for instance, weakening Chinese demand will probably mean the end of the bullish global commodity market.

Fourth, the new leadership seems very serious about dealing with corruption. Fighting corruption is a brutal and complicated long-term commitment, and this initiative is very likely to last for the decade of Xi’s term in power. The fact is that some people will eventually lose some or all of their economic interests.

It will be astonishing if there is no resistance, and this could lead to some short-term instability. As a result of these domestic struggles, China could face a temporary political predicament at home.

Fifth, there are growing concerns about the outbreak of territorial disputes in the near future, given the new leaders’ focus on a slightly “stronger” foreign policy. The South China Sea and Diaoyu Islands are potential areas of hazard for China, while the perennial troublemaker, North Korea, might also stir regional unrest.

These issues will be more difficult to solve than any of China’s domestic problems, especially given the stalemate in the conflict with Japan over the Diaoyus. Confrontations in the vicinity of the islands have become routine since last year, and the possibility of an accidental outbreak of hostilities in the East China Sea will increase significantly if the situation continues. China and Japan should consider working towards a sincere resolution before it is too late.

Clearly, under any one of the above scenarios, China faces the possibility of a transition crisis that would interrupt economic growth, albeit temporarily.

However, I still believe China is on track to become a global powerhouse in 20 years even though the harsh realities it faces in the next few years cannot be ignored.

Still, we should not forget that the Chinese word for “crisis”, weiji, is composed of the characters for “danger” and “opportunity.” The transition might be painful, but for the sake of a brighter future, China needs to undergo many more major transformations.

The world looks forward to a better China, as do its 1.3 billion people.

G. Bin Zhao is an economist and co-founder of Gateway International Group, a global China consulting firm, and executive editor at China’s Economy & Policy

This article first appeared in the South China Morning Post print edition on May 27, 2013 as Growing Pains. 

 

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