Is 7% the New Normal?

Published on Author Christian von Hassell

Chinese Premier Li Keqiang recently suggested a lower growth target for the nation, revising the previous 7.5% figure down to 7% percent. Compared to the growth rates of developed nations, that might not seem too big of a deal. “Its still 7%!” some might think.

Nonetheless, the downward revision arrives on the heels of a number of substantive issues for China’s economy. Slowing growth on the heels of a long investment period can lead to capacity utilization issues and deflationary pressures. Indeed, Li took a stern tone in outlining the current situation: “The difficulties we are to encounter in the year ahead may be even more formidable than those of last year. China’s economic growth model remains inefficient: our capacity for innovation is insufficient, overcapacity is a pronounced problem, and the foundation of agriculture is weak.”   That said, Li’s firm critique could temper unreasonable expectations. It also builds credibility – if only marginally – in government economic reporting and its commitment to real growth in the future. China needs real structural change at the moment – not just aggressive, blind investment.

2 Responses to Is 7% the New Normal?

  1. Recognizing the need for real structural change rather than aggressive, blind investment, the government announced new policies that aim to trigger consumer spending. The problem with the investment-led growth approached by China resides in wealth distribution: households compromised their pockets because their wealth was being transferred to the government, forcing the fall of consumer spending.
    Because China wants to avoid being overwhelmed by the debt incurred during the last years, triggering consumer spending will be key, something the government will try to do through the newly announced policies.

  2. As per Mr. Miller, and Sam Wilson’s post on poor data, we need to be careful about focusing on a single headline number.

    Now the level of output is in the long run a function of the level of inputs, Y=f(tech,K,L). We know that working age population growth is negative while migration will slow as rural China depopulates, and assuming that those more likely to be successful migrate first, faces diminishing returns. Investment faces diminishing returns. Catch-up faces diminishing returns. So the real question is not growth targets, but how this slowing process will operate and what it may entail at the sectoral level.

    We’ve used agriculture as an exemplar: as the pace of dietary change slows, as land productivity rises less rapidly (and in environmentally stressed regions falls), what happens to farmers? This won’t be the only sector to shrink!