China - so 6.9% GDP growth rate is bad?
This week W&D saw for the nth time the Butch Cassidy movie and delighted in the oft repeated line (as Robert Redford and Paul Newman were chased across the wilds of Colorado by a posse of unknowns), "Who are those guys?"
Well, this is the Chinese. At a national level, essentially an unknown, but you know where they're headed. So what do we know about the 6.9% GDP growth figure that was released on Tuesday. A figure that, bizarrely, was met with a most childlike response from the media; e.g. 'China's worst GDP growth in 25 years.' Combined with the decline in the price of oil, the share-market had conniptions. Don't these media people know anything?
Consider the following:
1. High growth falls as an economy develops
Although the economy will continue to face downward pressure in 2016, it is important to understand that China is at a historical developmental stage of transition, shifting from rapid to moderate growth. During this transition, surprise events will inevitably occur e.g. the recent stock market fiasco. Many who are pessimistic about the future of the Chinese economy do not fully understand the laws of economic growth during periods of adjustment, nor are they aware of the bigger trends.
Readers should expect that double-digit growth will become a thing of the past, given that, for instance, large-scale infrastructure construction has matured, the real estate market is saturated and even oversupplied, and the economy has entered an era of post-industrialisation. A slowdown in growth rates is an inevitable part of the development process.
2. China no longer needs 10%+ growth
China is no longer in need of double-digit growth; the almost 40 years of sustained, high-speed economic development since the reform period has led it to where it is due for a transformation. Dare W&B observe that in the past few years economic development has been too fast, overheating the general economy and bringing about great challenges such as serious environmental degradation and increasing social conflict.
At the same time, the country's environment, resources, labour and land cannot continue to bear the weight of such a massive and crude expansion. Thus, an economic transformation and upgrade is unavoidable.
3. Government policy drives outcomes
Historical experience and the laws of development have determined that the Chinese economy must slow down. More importantly, the central government clearly understands these laws and uses them to its advantage when outlining relevant policies and regulations, so it is almost certain that the economy will enter a 'new normal' situation.
In a policy-oriented economy, government actions are powerful forces for growth. The official growth target was set at no lower than 6.5%, which not only has symbolic meaning but is a scale that measures the development level across all industries.
The Chinese economy as a whole is likely to continue last year's trend during 2016, although a pessimistic forecast estimated that the GDP growth rate would more likely be lower than that of 2015. In fact, Beijing recently announced that the next five-year growth target would be no lower than 6.5%; in 2015, the lowest growth rate was 6.9%, in the third quarter.
If you are worried about China's GDP growth rate: Go to Bunnings. Buy some timber. Build a bridge. And get over it.
Sure, things are messy in China. And opaque. But the current adjustments will lay a solid foundation for future long-term sustainable development. The most pleasing detail of the China GDP growth story was the escalation of consumption growth over industrial growth - a sign of the mature transition of an economy.