China's Economy in the 'New Normal' Era

By Tracy Hall

For almost four decades China has been achieving historically unprecedented economic growth on the back of exports and investment. The old model has served the nation very well indeed. But all good things must come to an end eventually. We are now living in a much more competitive and much more global economy. On the whole this is a good thing but it does make it harder for Chinese to maintain their traditional competitive edge in certain sectors. This is particularly the case with manufacturing, whereby higher wages and production costs in China are allowing countries like India and Vietnam to compete against them. This is being compounded in part by the massive drop in external demand from the developed world. What's more, the increasing levels of public and private debt are making it riskier to promote investment-led growth.

The result of course is has been a sizable slowdown in GDP growth over the last few years. In 2014 the Chinese economy is estimated to have grown by about 7.5%. This year it is forecast to be around 7%. Economists are calling these rates of annual growth the 'new normal'. According to the World Bank's China 2030 report, which was published back in 2012, the best case scenario for the Chinese economy is a 6-7% average annual GDP growth over the next decade or so. During the annually held Nation People's Congress in March, Premier Li Keqiang acknowledged that China is entering a new stage in its socioeconomic development in which the sky-high GDP growth rates of yesteryear are unlikely to return. However, he and his government have made it very clear that they wish to pursue a higher quality of growth to offset the reduction in overall quantity. Going forward it is hoped that long term sustainability and a more balanced growth model that benefits society as a whole will replace the 'growth at all costs'.

In order to achieve this transformation Premier Li and President Xi Jinping have set out a very bold reform agenda. Broadly speaking, their aim to move the economy away from its traditional reliance on exports and infrastructural investment to fuel growth. Instead the economy will be driven much more by domestic, rather than external, consumption. Moreover, there have been strong indications that the government will seek to harness more private capital in order to reduce the burden on the public sector. This will include important areas of the economy such as construction projects and state-owned enterprises (SOEs). If policymakers implement these structural reforms successfully there will be some bumps in the road but it will certainly make the economy healthier and better prepared in the event of another major global financial crisis.

Another key aim of the Xi and Li administration is moving the Chinese economy further up the global value chain. For a long time now the country's mammoth manufacturing sector has been geared towards producing cheap manufactured goods for consumers around the world. With increasing competition from elsewhere it is time for China to create high end products and provide high value services. Obviously the key to this is innovation. That means directing some of the public sector investment away from things like building projects towards education. It also requires a policy framework that incentivises people to start businesses and allows existing companies to invest more of their revenue in R & D. That is why the current programme that President Xi enacted when he came into office is very welcomed indeed.

It is important to bear in mind that for this new model to work it is has to be about more than just promoting economic growth. Issues like the environment, income inequality, social mobility and corruption must also be confronted head on. Right now things are looking up. Over the last couple of years the government has made a series of moves to tackle the environmental issues, particularly in cities like Beijing and Tianjin. President Xi and his team are engaging what may well be the biggest and most ruthless anti-corruption drive in Chinese history. Reducing the income gap between rich and poor, urban and rural residents will take time; as will increasingly social mobility. But if everything else goes to plan then this should happen.

At first glance this 'new normal' may be a daunting prospect. Slower growth will have all kinds of knock on effects for businesses and individuals. The good news though is that if the government manages the slowdown well then this may well be one of those clouds that have a silver lining. We could see the birth of a new economy, a system there is fairer, more balanced and less volatile. In turn this will lead to the emergence of a rejuvenated society in which all of China's citizens can enjoy a higher degree of prosperity.

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