Quality of growth is what counts in China now
China's economic growth in each of the past two years - 7.7 per cent - is the lowest since 1999. Last year it may have been just above Beijing's official target of 7.5 per cent, but the slowdown is causing concerns, prompting reflex calls for economic stimulus through government-led investment that has boosted growth in the past. However, the slowdown reflects policy management, rather than a sign that China is heading for a sharp correction. Ever since China's new leadership came to power it has repeatedly, and rightly, made clear a reluctance to adopt the old ways of stimulating growth. Indiscriminate pumping of money into infrastructure without due regard for economic benefit or balanced development has long since ceased to be a sustainable approach. Evidence is to be seen in pollution, crushing local government debt and the undisciplined growth of shadow banking.
The economy may tend to slow amid rebalancing towards new drivers of growth. That poses a challenge for the leadership. Pressure is rising to intervene once more with investment-driven policies to maintain employment and income growth. But sooner rather than later China must push ahead with structural reform. If it can no longer depend on government spending and exports are slowing, domestic consumption is the key to sustainable growth. On the face of it, in this respect, the government is doing worse than a year ago, with the contribution to growth from consumption falling while that of investment has risen. But that may mask underlying rebalancing, as shown by a recent acceleration of the service sector's share of GDP to overtake that of industry.
To sustain a superior growth rate through domestic consumption amid fluctuating global demand, industry must raise efficiency and wages and the government must create 10 to 12 million new jobs a year. Urban migration is already lifting productivity from an ageing, contracting workforce. The best way to ensure continued growth is through smarter spending on infrastructure and urbanisation. China needs more hospitals and schools rather than another steel mill or aluminium plant, and balanced urban development focused more on centres away from the coast. From now on, as the country's leaders have been signalling, the quality of growth counts for more than absolute numbers.
Now is the time to push ahead with restructuring. It is a harder idea to sell during boom times.