Does China have the nerve to tackle its greatest challenge?

By Peter Drysdale

With a GDP growth rate that has slipped below the average 10 per cent at which the economy barrelled along for more than three decades, China faces more and more questions about how its leadership and policymaking authorities should manage the next phase of the country’s economic development.

The growing consensus among the experts, as Huang suggests, is that China’s current growth potential lies somewhere between 7 per cent and 7. 75 per cent, possibly lower than the lower bound, depending on what can be assumed about the speed of putting in place productivity-enhancing reforms.

It’s estimated, for example, that reform of the one-child policy and the hukou system of household registration, combined with improvement in human capital, could raise China’s future growth by 1 to 2 percentage points and that more complete financial reforms could lift growth by 1. 4 percentage points.

As one of the top analysts of the Chinese economy, Yiping Huang, points out in this week’s lead essay, a central question is whether the current deceleration in growth is cyclical or structural in character.

China’s contribution to global trade and output growth has been far bigger than that of any other economy over recent decades.

The official government growth target was set at around 7. 5 per cent this year.  But, when growth slowed to 7. 4 per cent during the first quarter, as Huang reports it, "the government almost panicked".

This year too, though it’s a smaller economy, it is likely to contribute a larger share to global output growth than the United States.

There is still a bunch of China growth-deniers entrenched in centres of strategic analysis in Japan, for example, who want to downplay China’s colossal growth achievement over these years as they hanker after the golden days of Japan’s own remarkable growth achievement and regional dominance.

Or has the real potential rate of growth of the economy been trimmed as aggregate labour supply has begun to shrink and real wages have begun to climb?

Policymakers feared that there could be major problems with unemployment, financial risk (with the bursting of real estate bubbles in some major centres) and investor confidence should growth slip below 7. 2 per cent, although the evidence on which these fears were based is weak.

The International Monetary Fund finds that a comprehensive reform program, rigorously implemented, might see Chinese growth fall by 0. 2 percentage points in the near term but increase by 2 percentage points by 2020.

China’s growth outlook is the focus of analysts and economic policymakers all around the world.

But there is no wishing away China’s remarkable growth and the substantial, positive benefits it has brought to hundreds of millions of ordinary Chinese people.

Read more here: Business Spectator


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