Following decades of rapid economic growth and urbanization, China’s economy is beginning to slow. At their annual parliamentary meeting, Li Keqiang, the premier of China, announced Beijing’s new growth target of 7%. In her article, China breaks the economic bad news gently, Celia Hatton demonstrates that while for most economies a growth rate of 7% would be a positive figure, for a country that has experienced sustained double-digit growth rates, it is a let down.
However, while ostensibly economic slow-down is a bad thing, it may represent a move to, “a more mature, balanced economy.” As Leland Miller outlined in his visit to W&L, this slow-down was inevitable, and a fall to a sustainable “new normal” is preferable to the “hard landing” that many saw coming. As Mr. Li moved through his speech at the parliamentary meeting, he addressed the fact that changes must be made going forward. He acknowledged that corruption is a problem that needs fixing, that price controls need to be reduced, and that the current opaque tax system needs restructuring.
None of these policy changes are new or unexpected; however, they all fall in line with a necessary restructuring of the economy as the services sector continues to grow. As I discussed in a previous post on China’s declining growth rate, Felipe et al. illustrate that it is through this structural transformation of the economy that the natural growth rate should fall to the desired 7% level. It seems that Mr. Li recognizes that the last 40 years of extremely high growth represent an exception rather than a rule, and it is only through a continued commitment to reform that China can develop an economy that can maintain a sustainable growth rate in the years to come.
Considering Tom Miller’s outlook in China’s Urban Billion, Mr. Li’s reforms will have to include reforms to the hukou system as well. Without successful integration of China’s rural migrants it will be difficult for the economy to shift from decreasing investment to increasing consumption (centered on the urban population). According to Miller, the success of failure of these reforms will determine whether the transformation of the Chinese economy is successful.
Image: Li Keqiang addresses the Chinese parliament: http://www.scmp.com/sites/default/files/styles/980w/public/2015/03/16/likeqiang-ss-net.jpg?itok=pPlJnJN1
Miller, Tom. China’s Urban Billion. New York, NY: Zed Books Ltd., 2012. Print.
Felipe, Jesus, Lanzafame, Matteo, & Zhuang Juzhong (2014). The People’s Republic of China’s Potential Growth Rate: The Long-Run Constraints. Asian Development Bank. Working Paper No. 418.