China’s Growth Slowdown Signifies Sustainability, Realism

Published on Author Asher

Chart Source: Center for Geoeconomic Studies, Data Source: IMF

The Chinese economy grew only 7.7% in 2013, the slowest rate since 1999 but still in excess of the government’s target of 7.5%. Despite the slowdown, foreign analysts remain optimistic about future growth, framing the slowdown primarily in terms of avoiding a “hard-landing” and, according to Reuters, transitioning to “better quality development.” Ryan Rutkowski (Peterson Institute) told Xinhua that the fact that China’s service sector outperformed industry for the first time in 2013 was a positive indicator of “economic readjustment.”

Yet Rutlowski, despite his optimism, remains concerned about China’s rising debt, which I noted as a threat to China’s growth potential in my previous post. In his statement, he warned that “growth needs to slow further in 2014 to tame credit growth and housing investment.” With regards to construction and housing developments (which, as Andrew noted in an earlier post, may be leading to a housing bubble), he chastened that “the central government should act on structural reforms to increase the returns from growth and diversify away from housing and infrastructure investment.”

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3 Responses to China’s Growth Slowdown Signifies Sustainability, Realism

  1. Diminishing returns means that like it or not the government can’t indefinitely keep growth high. But what are the underlying macroeconomic mechanisms by which the government can try to boost growth? Is it in fact employing these, or is growth largely a result of private sector investment and related consumption growth?
    At present such topics come at the end of the term.

  2. This slow down in growth could be a signal of a fundamental shift in the nature of the Chinese economy. With China widely seen as an industrial economy, major structural changes will have to take place to maintain full employment. However, the slowdown does not necessarily indicate that these changes are currently taking place. It could instead be a result of debt rising to an alarming percent of GDP.

    • Just under half the population stills lives on the farm – we need to be careful, the term “industrialization” reflects a shift in relative shares in an economy, not dominance by manufacturing. Furthermore, in all economies of which I have knowledge employment in services is as great or greater than that in “industry” once we acknowledge a hard-to-measure informal sector.
      Debt in itself does not slow growth – and remember that in China debt is not used for household consumption but for (semi)governmental investment. That produces jobs, but the longer run impact of [physical] capital accumulation faces diminishing returns. Now that there’s a national highway network, and in many cities subways, the next addition to transportation infrastructure is less valuable.