China’s Declining Growth Rate (cont.)

Published on Author paldinoj15

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:


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.

3 Responses to China’s Declining Growth Rate (cont.)

  1. Better to guide expectations in the hopes they change gradually than have a slowdown not expected by (non-economist) Chinese change expectations precipitously.

  2. Slowing growth poses a number of problems – but the style of growth China has experienced thus far might enhance the seriousness of the current situation. If the country had been experiencing organic growth up until now – we might sit back and say “Hey, 7% is still 7%.” However, because of the aggressive investment driven approach of the central government, slowing growth has the potential to spark deflationary pressures and more sizable future slowdowns.

  3. Reforming Hukou definitely has the potential to stabilize many of the population based issues that have arisen, such as the investment- consumption quandary mentioned above, however reforms also have the the potential to cause other problems. If Hukou were deregulated so to speak, the already unprecedented number of migrants would increase exponentially. This bodes ill for the often overlooked rural agriculture of China. If it becomes feasible for more Chinese people to move to the cities where the better economic opportunities are, the countrysides will be abandoned even more rapidly. And even though technology is allowing for those who stay to cope with lower labor inputs, the precipitous fall that would follow Hukou reform would further challenge China’s beleaguered agricultural sector. That said, agriculture in China is not yet in dire straights, however it is gradually being eclipsed by the desire for economic advancement. Therefore, if Hukou is a targeted source of change, China should tread lightly, despite the fact that Hukou itself is corrupt and unjust. Hukou, no matter how detrimental in appearance, does maintain some level of balance in China.