Slower growth must for shedding China flab

China is home to half the world’s shopping malls under construction, with a 15 per cent year-on-year growth. The number of malls will exceed 7,000 by 2025, from around 2,800 as of now - and that’s about as much China can absorb.

Over-construction, overcapacity and overheating - China realises it has to fight its excess flab, slow down and rebalance. Other economies, especially resource-based ones like Australia, Canada, Brazil and Russia, which have become addicted to China’s unsustainable hyper-growth appetite, must now adapt to its slower pace. So far, financial markets, as well as growth-starved developed economies, have reacted with trepidation as China posts slower growth. However, 7.7 per cent GDP growth in the first quarter, hardly merits doomsday prophecies. China sceptics around the globe have made alarmist claims, even warning of the dreaded double dip.

Economists in China, on the other hand, remain more than smug, convinced that the government will step in and take measures if the slowdown grinds out of control. They say, it is highly unlikely that the government will allow growth to fall below 7 per cent as maintaining a stable industrial pace and employment remain the chief preoccupation of policymakers. It is thus impossible that China will suffer a recession in the coming months.

Danger signals

But first, the danger signals. Much has been written about the need to shift from export and investment led growth to boosting domestic private consumption. This, however, is not happening at the desired pace. The transition period is turning out to be harder than envisaged.

In the first quarter, the recovery of fixed investments was largely driven by urbanization and much of the investment dominated by government projects. Private enterprises showed little enterprise or willingness to invest in purely non-governmental projects. The slump in manufacturing and private investment shows that autogenous growth is still weak. The decrease in the long-term average rate of profit in manufacturing has also badly affected investment confidence. Moreover, inventory levels remain uncomfortably high. Currently, there are around 30 to 40 per cent of manufacturing enterprises whose rate of capacity utilization is lower than 75 per cent. Such severe over-capacity exists not only in traditional industries like steel, cement and textile, but in emerging sectors like wind power equipment and solar power.

Service saviour

In this climate of overcapacity and weak investment appetite, a slower growth rate is actually good for China, provided it is accompanied by a much-needed structural transformation.

A services-led growth is, in many ways, the antidote to the “unstable, unbalanced, uncoordinated, and unsustainable” growth model which was being pursued over three decades. Services offer more than just a labour-intensive growth path. Compared to manufacturing, they have much smaller resource and carbon footprint. China’s services sector requires about 35 per cent more jobs per unit of GDP than do manufacturing and construction - the primary drivers of the old model. This number has potentially huge implications, because it means that China could grow at an annual rate of 7 to 8 per cent and still achieve its objectives with respect to employment and poverty reduction. In the old model, policymakers were hard-pressed to achieve nearly 10 per cent growth so as to generate enough jobs per unit output. But as restructuring of outmoded industries and automation takes place, the country struggled to provide adequate number of industrial jobs.

The old manufacturing model, which fuelled an unprecedented 20-fold increase in per capita income compared to the 1990s, also resulted in excessive resource consumption and environmental degradation. A rebalanced China can afford to grow healthily only by building up a services-led consumer demand model that requires a more labour-intensive growth recipe.

The services sector is expanding at what would be an annual rate of 8.3 per cent in the first quarter of this year. Salary increases are also outpacing consumer price inflation. The implications of rising wages are huge. Higher incomes will help China move closer to its goal of becoming a domestic consumption-driven economy. The thousands of shopping malls may not be reduced to ghost towns and Chinese economists may still have the last laugh.

— The writer is a freelance journalist based in China.