Beijing finally admits days of double digit growth are over
On Sunday Premier Wen Jiabao disclosed a major U-turn in Beijing's economic policy.
According to Xinhua, 'during an on-line chat with the public' Wen said that the government will target an average annual growth rate over the next five years of 7 per cent.
Now 7 per cent is pretty quick. Nevertheless, for China, which has averaged stunning growth of 10.5 per cent a year over the last 20 years (see the first chart below), Wen's disclosure represents a big downshift in official expectations.
For the last couple of decades, rapid growth has been the overriding aim of Beijing's economic policies, with annual growth rates in excess of 8 per cent regarded as absolutely essential to placate China's vast population and maintain the political legitimacy of the ruling Communist Party.
Beijing has achieved its aims in spectacular fashion with a suite of policies that have encouraged massive capital-intensive investments in property, infrastructure, state-owned heavy industries, and the export sector.
For example, when export-led growth looked like grinding to a halt in late 2008, Beijing ordered a huge debt-funded expansion of infrastructure investment in order to maintain growth above its 8 per cent target rate.
As a result, China's gross domestic product has more than doubled since 2003. Yet impressive though China's economic growth has been, it has exacted a terrible cost on the country and its environment.
Now even China's senior leadership realises the economy can no longer continue along the same trajectory.
'We will never seek a high economic growth rate and size at the price of the environment,' Wen declared on Sunday. 'That would result in unsustainable growth with industrial over-capacity and intensive resource consumption.'
Yet although Wen's admission is encouraging, it is no more than a recognition of what many observers both inside and outside China have been saying for years.
Now those same observers worry that the government's apparent policy shift may have come too late in the day to prevent a much more severe slowdown in growth than Wen now envisages.
The trouble is that much of the investment that has powered China's super-heated growth has been desperately inefficient.
Over the last few years around half of China's economic output has consisted of investment. That's far higher than the rate considered sustainable for an economy at China's stage of development, which according to Diana Choyleva at independent economic consultancy Lombard Street Research, is around 35 per cent of annual GDP.
As a result, stories abound of brand new office complexes sitting empty, of just completed aluminium plants with no customers, and eight-lane highways being built parallel to the new roads constructed in the last round of investment.
This is the over-capacity and inflationary resource consumption that Wen is warning about, and it will have to be paid for sooner or later, either through accelerating price rises (see the second chart below) or through a slowdown in economic growth.
But China's problems aren't limited simply to over-investment. Many recent investment projects have not only cost considerably more than the economic returns that they will ever generate. They have also carried a grievous price in terms of the pollution they have emitted and the environmental destruction they have caused.
Putting a figure on that price is tricky, but recent estimates reckon that if China wanted to repair the environmental damage inflicted on the country over recent decades, the clean-up would cost between 2 and 4 per cent of GDP per year for the foreseeable future.
Of course, Beijing can continue to avoid shouldering the clean-up costs, at least in the short term. But again, the environmental damage will still have to be paid for in the long term, most likely through a reduction in China's future potential economic output.
As Wen clearly recognises, the bottom line is that China's growth rates will have to slow over coming years.
But they may have to slow a great deal more even than he envisages. Choyleva at Lombard Street warns that 'China's output growth could well slow to 5 per cent a year on average at best in this decade.'
Either way, China's era of double digit growth will soon be coming to an end.