China’s GDP totaled $9.4 trillion in 2013, an increase of 7.7%; in absolute terms, the equivalent to the GDP of Turkey. Although the rate stood above government estimates and consensus, it is the softest rate since 1999 and far from the double digit growth of just ten years ago. Many analysts have raised alarm to this downfall trend.
However, this slower growth was expected, logical, and, to some extent, desirable as it mainly is not due to a drop in economic activity but a shift towards equilibrium in the broader reform process in which the country is shipped from the late seventies.
In March 2011, I detailed the new priorities of Chinese government and the results to expect in the short and medium term. In that article, I stressed how the growth model of China since it joined the WTO in 2001, heavily dependent on a high investment rate and equally high exports, was partially depleted and, therefore, China should you undertake reforms to correct the serious macro imbalances that the country was accumulating internally (income disparity and geographical distribution of growth) and also with the rest of the world.
To this point, former President Hu Jintao proclaimed that the new priority of the Asian giant was “harmonious” development –very Confucian concept, to be sure–, above all cost growth that had characterized the previous decade.
Last November, Xi Jinping and Li Keiquiang took over where it is the fifth generation of leaders within the Communist Party, de factothe new dynasty of China. The new ruling tandem set up the guide principles on the same line and, as noted Augusto Soto expert in China, established two main priorities: (1) fight against corruption (essential to ensure the legitimacy of the political structures and the governance of the Empire); and (2) reaffirm the commitment of the Party with pro-market reforms.
All this was to develop a framework that seeks to modernize Chinese society through a more balanced model where domestic demand growth is winning prominence to foreign demand and investment. In this regard, government officials have already developed different policy packages and social reforms to knit one, although minimal, Social Security network that allows transforming the high savings rate of Chinese into consumption pushing internal demand. Moreover, it is encouraging the development of related services industries as well as the reforms have started their way also in regions and provinces –basically rural and inner– that at the beginning of the opening were furthest from the reformist focus of Beijing.
Let us make a brief stop along the way for those who are not familiar with China’s economy to highlight a milestone that we should keep in mind when doing any analysis on the country. Since 1978, coinciding with the rise of Deng Xiaoping as paramount leader of China (undoubtedly one of the most preeminent figures of the twentieth century), the People’s Republic is engaged in which probably the most ambitious political project in the history of the humanity: never before have so many people had proposed change so much in so little time.
Deng led the first generation of Chinese reformers who sought to change a planned, gated and agricultural economy to a market, open and industrial one. In the last two decades, the world has witnessed how China stunned recovered two lost centuries and soon converged rapidly towards Western standards, completely reshaping the global stage. The change has been overwhelming, but much remains to be done.
Today, China’s economy is far from the ideal capitalist system –if it is the case that this ideal exists somewhere–. But its economy has been opened to the world, markets have been progressively liberalized and its political and social freedoms, while clearly imperfect, had substantially improved over the time of the Cultural Revolution when the Asian giant resembled the Stalinist regime that exists today in North Korea. Today, the reality of both countries has nothing to do.
An important part of media and independent analysts interpreted the lower growth of China as very negative and disturbing: ‘the giant deflated’ have called some. In my opinion, the headline ‘giant balances’ is more correct and truthful. China has come to experience growth rates of 15% a year, clearly unsustainable in the long run. A moderation in growth was not only expected, with the new model change policies, but necessary to correct the macroeconomic imbalances that drags the global economy since the last credit-growth period.
For the next decade, China has proposed to develop its domestic market and grow supported by increases in productivity, as in the developed economies. However, this change is not something that happens in a day but takes time, political skill, and necessarily implies a lower growth rate during the adjustment: not all regions are equally prepared for this change and require the same recipe for development, which increases even more the great political challenge of the new mandarins.
I insist on the depth of the changes and the magnitude of the Chinese phenomenon because it is a big mistake to evaluate the Chinese phenomenon by comparison to any other country of our environment. It is true that credit expansion, controlled by a public banking system has increased almost fourfold since 2009; but equally true is the high point of Chinese savings rate, the minor public spending in the economy, or the very low and moderate fiscal policies and total debt when compared with western economies. So want to compare China with the situation of Spain in 2007, as I have come to read, it is folly and completely misleading.
We are witnessing first hand a structural process of historic proportions. For that we need to use wide angle lenses as well as to develop special sensitivity in order to grasp the uniqueness of the object of analysis for assessing the Chinese situation in a proper way.
In addition, after years of economic integration in the industrial sector, Government’s new priority is to prepare the country for future modernization and liberalization of financial and capital markets, today still widely operated by Beijing. In addition, the liberalization of the financial sphere is one of the key elements to increase the disposable income of Chinese workers, and also prerequisite for growing domestic demand. The development of the capital market and banking reform are Chinese ‘make or break’ for the next decade.
Finally, I want to stress the fact that the People’s Republic faces a major political challenge prior to any economic-type discussion that wants to be done. In fact, since coming to power, the first priority of Xi Jinping, and with relatively great success –as is been proving with the most recent news (Chinaleaks)–, has been the fight against corruption (and abuses of power in its broadest sense), endemic and real cancer within the Chinese political institutions that looms as a dangerous shadow over the legitimacy of the Party.
Ensuring confidence and legitimacy in the power structures is essential to maintain the governance of the empire and to continue reforms piece: rudderless, it will be difficult turnaround. In addition, a generalized loss of confidence in institutions would be a serious threat to the security and prosperity not only of China but of the entire region.
In short, behind the moderation of Chinese growth a major model change is hidden within an even broader economic reform in just over a generation has become a country that was poorer than Cameroon in the second world power process world, with a GDP per capita has grown from a paltry $250 to about $9,000, having fallen by more than 600 million the number of poor. The generation of prosperity and well-being more important in the history of man, as remarked some time ago The Economist.