How Should China Respond to the Slowdown?

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China’s annual GDP growth slowed to 7.6% in the second quarterof 2012, down from 8.1% in the first quarter and the lowest growth rate sincethe second quarter of 2009. The newly released growth data may have dispelled fears of a hard landing for China, but have nonethelessprompted many to argue that Chinamust stimulate its economy further to guarantee 8% annual growth.

Since early 2010, in order to contain inflation and property bubbles, theChinese government has tightened monetary policy. As a result, inflation fellin June to 2.2%, a 29-month low, and house prices, for which the NationalBureau of Statistics unfortunately has stopped issuing official data, seem tobe stabilizing, and may even have fallen, albeit modestly.

The slowdown in China’sgrowth rate is, to a certain extent, a reflection of the success of thegovernment’s effort to rein in the real-estate bubble, as well as of otherofficial policies aimed at rebalancing the economy. The growth rate ofinvestment in real-estate development, which directly accounts for more than10% of GDP, plummeted by 16.3 percentagepoints year on year in the first half of 2012. That led to an investmentslowdown in many related industries, such as construction materials, furniture,and appliances, causing annual growth in fixed-asset investment to fall from25.6% to 20.4%.

The trend for household consumption is less clear. But many economistshave found evidence that growth in household consumption in the first half of2012 was stronger than official statistics have shown.

The slowdown of the economy in 2012 should have been anticipated in 2011by the government. In early 2012, in his speech to the annual People’sCongress, Premier Wen Jiabao, explaining why the government’s indicative target for economic growth in 2012 was7.5%, pointed out that the purpose was “to guide people in all sectors to focustheir work on accelerating the transformation ofthe pattern of economic development and making economic development moresustainable and efficient.”

In fact, in order to create adequate space for changing the GDP-centered growth pattern, China’s 12th Five-Year Plan set an indicative target of 7% annual average GDP growthin 2010-2015.

China’s investment rate is about 50% of GDP, while real-estateinvestment accounts for more than 10% of GDP. Given the prevalence of repetitive constructions and ubiquitous waste, investment efficiency isdeteriorating quickly. With an annual growth rate of 10%, an investment rate of50% implies a capital-output ratio of five, which is unusually high relative toother countries.

China’s consumption rate is 36%. If government statistics arenot entirely unreliable, this rate is simply too low. While huge amounts ofmoney have been poured into physical infrastructure, public expenditure onhuman capital and social security is below the world average. More resourcesshould be reallocated from physical capitalformation to human capital formation.

Thanks to persistent current-account and capital-account surpluses for twodecades, Chinahas accumulated $3.2 trillion in foreign-exchange reserves. But, as a countrywith huge net foreign assets, Chinaruns a deficit on the investment-income account. Since 2008, China’scurrent-account surplus as a proportion of GDP has fallen significantly. But Chinais still running twin surpluses, and thereis a lingering question about whether thefall is structural or cyclical.

Indeed, Chinaneeds to accelerate its economic adjustment, even at the expense of growth.Otherwise, it will have to pay an even higher adjustment cost later.

For many years, the government has maintained an implicit minimum growthtarget of 8% per year, which was considered necessary to create ten million newjobs annually. But demographic and other structural changes may have alteredlabor-market conditions: so far, despite below-8% growth, there seem to be fewsigns of distress.

The question now is whether the government will be unnerved by the poorest quarterly growth performance in threeyears and usher in a large stimulus package,with the consequences that Chinahas experienced whenever such a package is implemented.

Wen said recently that China“should continue to implement a proactive fiscal policy and a prudent monetarypolicy, while giving more priority to maintaining growth.” Moreover, in recentmonths, the government has approved some large steel and energy projects, andmore such approvals may come.

It is certainly appropriate for a government to respond to changingcircumstances in a timely fashion. But the slowdown to 7.8% annual growth inthe first half of 2012 does not warrant achange of policy direction. Chinamust choose between higher growth and faster structuraladjustment. It cannot have both at the same time. Faced with the currentslowdown, Chinacan afford to stay the course, at least forthe time being.

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关键词：Slowdown respond Should China Down China false

The newlyreleased growth data may have dispelledfears of a hard landing for China,but have nonetheless prompted many to argue that China must stimulate its economy furtherto guarantee 8% annual growth.
Since early 2010, in order to contain inflation andproperty bubbles, the Chinese government has tightened monetary policy. As aresult, inflation fell in June to 2.2% and house prices seem to be stabilizing, and may even have fallen,albeit modestly.

The slowdown in China’s growth rate is, to acertain extent, a reflection of the success of the government’s effort to reinin the real-estate bubble, as well as of other official policies aimed atrebalancing the economy.China’sinvestment rate is about 50% of GDP, while real-estate investment accounts formore than 10% of GDP. Given the prevalence of repetitiveconstructions and ubiquitous waste,investment efficiency is deteriorating quickly.so the slowdown of the investment on the property market will redcue the growth infixed-asset investment on the one side and increase the efficiency of investment on the other side.Decline of the investment on the property market led to aninvestment slowdown in many related industries, such as construction materials,furniture, and appliances, causing annual growth in fixed-asset investment tofall from 25.6% to 20.4%.

China’sconsumption rate is 36%.While huge amounts of money have been poured intophysical infrastructure, public expenditure on human capital and socialsecurity is below the world average. More resources should be reallocated from physical capital formation to human capitalformation to increase the comsumption rate. But trend for household consumption is less clear.

Since 2008, China’scurrent-account surplus as a proportion of GDP has fallen significantly. But Chinais still running twin surpluses, and thereis a lingering question about whether thefall is structural or cyclical.what' more , as a countrywith huge net foreign assets, Chinaruns a deficit on the investment-income account.

Wen said recently that China “should continue to implementa proactive fiscal policy and a prudent monetary policy, while giving morepriority to maintaining growth.” Moreover, in recent months, the government hasapproved some large steel and energy projects, and more such approvals maycome.

For many years, the government has maintained an implicitminimum growth target of 8% per year, which was considered necessary to createten million new jobs annually. But demographic and other structural changes mayhave altered labor-market conditions: so far, despite below-8% growth, thereseem to be few signs of distress. Faced with thecurrent slowdown, Chinacan afford to stay the course, at least forthe time being.