Slower growth is good for China
It says something about investors' faith in China as the global economic saviour that world markets are in retreat after Beijing cut the country's growth target to an eight-year low. That was not what they wanted to hear amid debt woes in Europe and mixed signals of recovery in the US, which surely have prompted China to lower expectations of its export-led economy. But such sentiment reflects a short-term view. The lower target comes with a pledge to boost domestic consumption, a reform long sought by economic partners and economists concerned about economic imbalances. Stronger consumption in such a huge market can only benefit the global economy.
Premier Wen Jiabao told the annual session of the National People's Congress that this year's growth target had been cut to 7.5 per cent in a bid to refocus the economy away from an unsustainable growth model. The government's first priority this year would be to boost consumer demand through reducing the income gap, and reduce reliance on external demand and capital investment. What is good for China in the long term will also be good for the world economy. Double-digit growth over 30 years may have made China the world's second-largest economy, but its people have paid a heavy social and environmental price. As the economic base has grown, it has become impossible for China to sustain it. A slowdown has put increasing pressure on job creation and social stability.
A reduced growth target that is sustainable is therefore not a bad thing. To maintain its rise, China needs to undertake drastic political and economic reforms. When the economy was booming, no one had any appetite for reform. A slowdown that results in overcapacity in resource-hungry, high-polluting industries, such as steel and cement, is a good opportunity for the government to force rationalisation.
Historically China's growth rates have been mainly powered by exports and government spending. Now, amid a fragile US economic recovery and with Europe casting a long shadow over future demand, China is in no position to launch more stimulus like the 4 trillion yuan (HK$4.54 trillion) package unleashed during the financial crisis. Hence the need for another engine of economic growth - domestic consumption. As Wen said, this is the key to sustainable growth. The necessary reforms, if China's leaders have the guts, could put the country on a healthier, more sustainable growth path. They will have to run the gauntlet of opposition from vested official and business interests, but with the mainland economy at a critical juncture there is no alternative to resolute political and economic restructuring.
The new growth target falls below the 8 per cent long said to be necessary to absorb the annual wave of new job seekers. That is about managing expectations. Since China's growth often exceeds official targets, it will not surprise if growth comes in at more than 8 per cent.