"Everyone is talking about China’s economic slowdown. Last year, Chinese GDP growth reached a 13-year low, and no upturn is in sight. But, as Premier Li Keqiang seems to recognize, this trend could actually be beneficial, spurring the structural reforms that China needs to achieve its longer-term goal of more balanced and stable GDP growth.
The World Bank cut its 2013 economic growth forecast for China from 8.4% to 7.7%. Moreover,latest data show that Chinese banks increased their lending by only about ¥667 billion ($108 billion) in May – a roughly ¥125 billion decline from the same period last year.
But simply lending more would not improve the situation. Given that outstanding loans already amount to nearly double China’s GDP – a result of the country’s massive stimulus since 2008 – new loans are largely being used to pay off old debts, rather than for investment in the real economy
But the willingness of China’s new leadership to initiate another round of growth-securing stimulus depends on what rate of GDP growth Li can tolerate. With China’s leaders having offered no indication that they will change current monetary policy, some economists have estimated that Li will not act until GDP growth falls below 7%
The reason for Li’s inaction emerged in early June, when Chinese President Xi Jinping told his American counterpart, Barack Obama, that China had deliberately revised its growth target downward, to 7.5%, in order to pursue structural reforms aimed at supporting stable and sustained economic development.
By Zhang Jun
Professor of Economics and Director of the China Center for Economic Studies at Fudan University, Shanghai.
The World Bank cut its 2013 economic growth forecast for China from 8.4% to 7.7%. Moreover,latest data show that Chinese banks increased their lending by only about ¥667 billion ($108 billion) in May – a roughly ¥125 billion decline from the same period last year.
But simply lending more would not improve the situation. Given that outstanding loans already amount to nearly double China’s GDP – a result of the country’s massive stimulus since 2008 – new loans are largely being used to pay off old debts, rather than for investment in the real economy
But the willingness of China’s new leadership to initiate another round of growth-securing stimulus depends on what rate of GDP growth Li can tolerate. With China’s leaders having offered no indication that they will change current monetary policy, some economists have estimated that Li will not act until GDP growth falls below 7%
The reason for Li’s inaction emerged in early June, when Chinese President Xi Jinping told his American counterpart, Barack Obama, that China had deliberately revised its growth target downward, to 7.5%, in order to pursue structural reforms aimed at supporting stable and sustained economic development.
The view that Li will tolerate slower growth only above a particular threshold is based on the belief that GDP growth below 8% would hurt economic development more than it helped, and lead to social instability. And, indeed, if unemployment pressure had become as acute today as it was in the 1990’s, the prolonged economic slowdown would undoubtedly have precipitated government intervention.
But, over the last decade, structural changes to China’s economy have caused unemployment pressure to decline significantly – a trend that can be corroborated by across-the-board wage increases. Now, the setting is very favorable to build the stronger, more stable economy that Li wants – and that China needs".
By Zhang Jun
Professor of Economics and Director of the China Center for Economic Studies at Fudan University, Shanghai.
