China’s economic growth passes its peak

China’s economic growth passes its peak

By Richard McGregor

Published: February 7 2008 17:34 | Last updated: February 7 2008 17:34

Behind the headline forecasts of decelerating Chinese output in 2008 lies a more significant trend that may mark a long-awaited turning point for the economy and its global impact.

Chinese and World Bank economists have significantly downgraded forecasts for China’s national growth in recent weeks – from 11.4 per cent in 2007 to maybe two percentage points lower this year.

But more importantly, the 11.4 per cent expansion in 2007 – the fifth consecutive year of double-digit increase – could represent the peak in headline growth for China for the foreseeable future.

In short, thanks to slowing global and US economies, China may never be able to grow as quickly again as it did last year.

“China’s 10 to 12 per cent growth of recent years has perhaps come to an end, along with the moderation in global growth,” said Qing Wang, an economist with Morgan Stanley in Hong Kong.

The turbo-charged economy of the past five years was built on investment, the biggest driver of growth, with a large boost from net exports from a swelling trade surplus built on buoyant global demand. Global and US demand, however, is now slowing, a trend already in evidence in the final quarter of 2007 when the pace of growth in imports outpaced exports for three months in a row.

“The only reason China’s been able to generate 11 per cent growth in the past few years is that the trade surplus was growing by $80bn [€55bn, £41bn] a year,” said Arthur Kroeber of Dragonomics, a consultancy, in Beijing. “They aren’t going to get that much growth [from net exports] in the next few years. Even if [the surplus] starts growing again, the increments will be much smaller relative to GDP.”

Ha Jiming, of China International Capital Corporation, the country’s largest investment bank, said China “should not grow [as fast as 2007] again”.

Growth would return to such heights, said Mr Ha, only if the economy was rebounding from a deep recession, or a crisis, as happened with some Asian economies after the 1997-98 financial meltdown.

The Chinese government, far from being alarmed at such a turnaround in growth, would largely welcome it.

The slowdown could dovetail with Beijing’s own aims to moderate the contentious trade surplus and, at the same time, recalibrate growth away from heavy industry in favour of consumption and services.

“If China is able to rebalance the economy, making it less intensive in resources and capital, cleaner and more widely shared, growth of 9-10 per cent a year for long periods would be the [outcome] developing countries across the world are looking for,” said Louis Kuijs of the World Bank in Beijing.

The surge of recent years in investment in heavy industry, such as steel, aluminium and cement, has strained energy resources, contributed hugely to greenhouse gas emissions and pollution and created few jobs.

Such a cocktail is anathema to Chinese leaders, who face pressure at home to create more jobs – especially with exports in relative decline – and from abroad to tackle carbon emissions.

“Five of the largest heavy industries account for over 40 per cent of the country’s energy demand yet, combined, they employ fewer people than the service sector in Guangdong province alone, and fewer people than they did a decade ago,” said Trevor Houser, a visiting fellow with the Washington-based Peterson Institute for International Economics.

A sharp slowdown this year, however, may impede reforms as local leaders pump up investment to take up the slack. The inauguration of a new government leadership team in March may have the same impact, as incoming officials have traditionally spent heavily at the beginning of their terms to entrench their positions.

“If the government has to choose between inflation and the environment and employment, I think they will not hesitate to choose employment,” said Mr Ha.

The 2007 growth of 11.4 per cent, although robust, is not as high as the peak of the 1980s and ’90s, when GDP growth in some years surpassed 15 per cent.

Jonathan Anderson of the investment bank UBS says China’s boom-bust cycles of those two decades are being wound back into a more sustainable pattern.

He points to three factors helping to smooth growth cycles: improved corporate management skills, the declining role of the state in the economy and better financial institutions after recent reforms.

“That explains why growth in the past three years has been 11 per cent and not 15,” said Mr Anderson. He added that the overcapacity of the past three years, which has fuelled the trade surplus, is now being squeezed out of the economy. The huge profits, which have funded investment, will also come back “to historical norms”.

A rebalanced China, growing at 8-10 per cent a year, would help buoy the global economy, especially at a time when US demand is faltering.

It would also keep China on track eventually to overtake the US as the world’s largest economy. China’s economy is now about the size of Germany’s.

“China could lose all of its net export growth contribution, and lose a bit extra in export-linked investment, but its contribution to the increase in global demand, in absolute [US dollar] terms, will continue to increase,” said Mr Kroeber of Dragonomics.