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CommentInsight & Opinion

China's economy faces a rough ride in the next few years

G. Bin Zhao says China's economy faces a rough ride in the next few years as the new leadership introduces major changes but the nation will emerge as a global powerhouse in two decades

PUBLISHED : Monday, 27 May, 2013, 12:00am
UPDATED : Monday, 27 May, 2013, 5:00am

The world couldn't hide its disappointment when China's first-quarter GDP growth dropped to 7.7 per cent, slightly lower than market expectations. Unfortunately, this might just be the start; worse news could be just around the corner. Indeed, there are a number of reasons why the Chinese economy faces a downturn over the next few years. So, just how bad can it get?

First, the current leadership transition is an issue. It is clear the new Chinese leaders will introduce many changes, because they understand there is absolutely no alternative to secure China's long-term growth. Without major policy adjustments, any notion of turning the nation into a real superpower over the next few decades will just be an unrealistic dream. Certainly, the transition process will lead to social pain, particularly for the economy. In the meantime, the world needs to be aware of this so that another severe slide in China's gross domestic product will not come as a big blow to the global economy.

The new government has no choice other than to provide progressive measures to deflate the property bubble

Second, economic growth is no longer the top priority on the Chinese agenda. Since the growth target is set at 7.5 per cent, the market should not expect any stimulus plan when it fluctuates to around seven per cent, or goes lower. As President Xi Jinping recently emphasised, the days of "ultra-high-speed" growth in China are over. Thus, policymakers will tolerate further economic decline.

China no longer needs double-digit growth. Other issues, such as environmental protection, industrial upgrading and economic restructuring, have become more prominent. As a government policy-driven economy, it is important not to underestimate the negative effect this will have on overall growth. In the worst case, China may experience a brief deadlock.

Third, the therapy for the real-estate tumour might be painful. Over the past decade, the property market has inadvertently acted as a major driver of China's hypergrowth, which has created deep-rooted systematic problems for sustainable development in the future.

The new government has no choice other than to provide progressive measures to deflate the property bubble. This will affect many industries, not only in China, but internationally; for instance, weakening Chinese demand will probably mean the end of the bullish global commodity market.

Fourth, the new leadership seems very serious about dealing with corruption. Fighting corruption is a brutal and complicated long-term commitment, and this initiative is very likely to last for the decade of Xi's term in power. The fact is that some people will eventually lose some or all of their economic interests.

It will be astonishing if there is no resistance, and this could lead to some short-term instability. As a result of these domestic struggles, China could face a temporary political predicament at home.

Fifth, there are growing concerns about the outbreak of territorial disputes in the near future, given the new leaders' focus on a slightly "stronger" foreign policy. The South China Sea and Diaoyu Islands are potential areas of hazard for China, while the perennial troublemaker, North Korea, might also stir regional unrest.

These issues will be more difficult to solve than any of China's domestic problems, especially given the stalemate in the conflict with Japan over the Diaoyus. Confrontations in the vicinity of the islands have become routine since last year, and the possibility of an accidental outbreak of hostilities in the East China Sea will increase significantly if the situation continues. China and Japan should consider working towards a sincere resolution before it is too late.

Clearly, under any one of the above scenarios, China faces the possibility of a transition crisis that would interrupt economic growth, albeit temporarily.

However, I still believe China is on track to become a global powerhouse in 20 years even though the harsh realities it faces in the next few years cannot be ignored.

Still, we should not forget that the Chinese word for "crisis", weiji, is composed of the characters for "danger" and "opportunity". The transition might be painful, but for the sake of a brighter future, China needs to undergo many more major transformations.

The world looks forward to a better China, as do its 1.3 billion people.

G. Bin Zhao is an economist and co-founder of Gateway International Group, a global China consulting firm, and executive editor at China's Economy & Policy

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john.lone.75
China economic grew and success at the expense at ASEAN, India, and others. It is perfect for china economy to crash and burn for the economic in Asia will restore its equilibrium. It is very unhealthy for china economy keep an unsutainable rated. ASEAN, Japan, and India must embrace TPP with America lead and not RCP.
Sharron
Thank you so much for sending the article and it is excellent!
But even though China may go through a small slow period. I believe that China is now a global powerhouse and will be even stronger in 20 years time. The new President's policy of stopping the 'high-speed growth' in China is going to strengthen the economy long term. Often, people, companies and countries need to take a step back and make changes to the way they do things in order to sustain their development and grow. The companies and countries that don't make changes, do not grow and begin to slide behind the rest of the world. The people who don't like change only resist because they don't understand the benefits that change will bring about. So the new Chinese leadership is doing the right thing by implementing new policies for change and long term growth.
I see both North Korea and Japan's dispute over the islands, as threats to the stability of the region. It would be wonderful if the North Korea's leadership would embrace change and work with the Chinese government to improve their own economic growth. Japan should be concentrating on their economy instead of arguing over the Islands. Conflicts only create pain and economic hardship for everyone.
Thank you and I enjoy reading your articles.
Warm regards,
Sharron : )
rahighfield
To return to foreign policy, I think China's support for N. Korea as a buffer against the America-leaning S Korea has been a major mistake. Not only have they helped create a mad dog on their doorstep that could as easily bite them as anyone else, but the very existence of N. Korea acts as a justification for American presence, in strength, on the peninsula, and unites Japan and S Korea with them. To a lesser degree, China's claim to virtually the whole of the South China Sea is encouraging SE Asian nations to form closer ties with the US and triggered the latter's more Asia-centric military posture.
The fact that all of China's claims are founded on grounds not generally accepted as valid world-wide simply makes them look like a military bully. The first humans to sight these regions were the ancestors of Micronesians, Melanesians and Polynesians on their diaspora Eastwards, except for the Southern areas where it was the ancestors of the Australian Aborigines. Does Taiwan belong to Micronesia? The first modern humans to discover Saudi Arabia were from Ethiopia. Do Ethiopians own all that oil?
Compare this with the actions of the Americans, who returned the Ogasawara Islands to Japan after the war despite Americans having discovered them and that Americans lived there for almost 50 years before the Japanese even knew they existed.
rahighfield
Thank you for article on China's economy. For once, a local writer is stating the truth about the Mainland's prospects, not least the difficult decisions that will have to be faced if they are to avoid the traps that other nations have fallen into at this stage of their move into 1st world status.
However, you could have gone further into specifics. For example, the foreign policy adventures in the region which clearly, whatever the rights and wrongs, have been given a higher profile so as to divert attention from internal issues.
Too large a part of the economy is dependent on large corporations owned by the State or its supporters, not least the PLA. They are extremely inefficient compared with their foreign equivalents, and since the low hanging fruit has been picked already, will act as a drag on the economy unless they are reformed or allowed to fail. And here is the nub of the problem; Upsetting nouveau riche property owners is one thing, but these companies represent powerful interests in the party.
Another problem of a one-party state is that their only legitimacy is if they are truly working for the good of the people. Corruption, especially at the levels in China, directly undermines that legitimacy, as does state support for their supporters' businesses.
To achieve a genuine move into the sort of prosperity seen in the USA may require much lower growth, maybe even a recession, to even out the imbalances in the economy. How can any government survive that?
lucifer
Lots of wishful thinking and braod assumptions. It took the US nearly 100 years to become a consumption driven economy. Since people spending habits cannoyt be directed with though state policy, this is going to take a very long time. Social safety nets, and other social welfare needs to be firmly established. The 7.0% growht figure is the number indictaed that Chian needs to acheive in order to absord the young graduates and laborers into the workforce.Urbanization will fail if people don't feel secure and have lots of out of pocket costs related to their status. I am sorry, but this is not going to work.
johnyuan
“Third, the therapy for the real-estate tumour might be painful. Over the past decade, the property market has inadvertently acted as a major driver of China's hypergrowth, which has created deep-rooted systematic problems for sustainable development in the future.” China’s property development is modeled after Hong Kong whereby government gets its revenue mainly by selling land to developers etc. which likewise both places are inflicted with the same ‘real-estate tumor that creates deep-rooted systematic problems for sustainable growth. It is regrettable that Hong Kong invented such taxation model and actually exported to mainland China in the eighties. The parallel developments between Hong Kong and mainland as I can find in this article also extend to the political front which it said about policy changes that, “It will be astonishing if there is no resistance, and this could lead to some short-term instability. As a result of these domestic struggles, China could face a temporary political predicament at home.’ Hong Kong should be in a less predicament since 7 millions could turn around much easier than 1.3 billions people. Still it relies much on CY Leung and his administration of their ability to overcome the resistance put up by the local economic gatekeepers; few but powerful and unscrupulously wrought in self-interests. .
caractacus
There are still too many "local economic gatekeepers" on the inside of government. Look at the tycoons on Exco. Others might call them a squalid parcel of self-interested advantage seekers who don't give a damn about HK or its people. We saw them all change horses in the run up to 1997 kowtowing up to Beijing professing their new found 'patriotism'. No matter how low or disreputable, Beijing accepted them all.
Their only real loyalty is to themselves, their like minded friends and their money.
johnyuan
Are these self-interested advantage seekers who don't give a damn about HK or its people who actually are locals having a mental problem? That sinking a ship by sucking dry of Hong Kong and settling elsewhere is right and bright? I really can’t help to be a bit cynical or more like suspicious. But, how about the rest? Mostly see, hear and speak no evil? Let the house makes its last call?
 
 
 
 
 

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