Beyond the pessimism: Why sustained, healthy development will be the new normal for China’s economy
G. Bin Zhao says with the stock market woes and fears of a slowdown in growth, the economic outlook may appear less than rosy right now, but we should see it as an inevitable part of China’s transition
First, although the economy will continue to face downward pressure in 2016, it is important to understand that it is at a historical developmental stage of transition, shifting from rapid to moderate growth. During this transition, unusual events will inevitably occur. Many who are pessimistic about the future of the Chinese economy do not fully understand the laws of economic growth during periods of adjustment, nor are they aware of the bigger trends.
It should be expected that double-digit growth will become a thing of the past, given that, for instance, large-scale infrastructure construction has matured, the real estate market is saturated and even oversupplied, and the economy has entered an era of post-industrialisation. A slowdown in growth rates is an inevitable part of the development process.
At the same time, the country’s environment, resources, labour and land cannot continue to bear the weight of such a massive and crude expansion. Thus, an economic transformation and upgrade is unavoidable.
Third, historical experience and the laws of development have determined that the Chinese economy must slow down; more importantly, the central government clearly understands these laws and uses them to its advantage when outlining relevant policies and regulations, so it is almost certain that the economy will enter a “new normal” situation.
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In a policy-oriented economy, government actions are powerful forces for growth. The official growth target was set at no lower than 6.5 per cent, which not only has symbolic meaning but is a scale which measures the development level across all industries.
The Chinese economy as a whole is likely to continue last year’s trend during 2016, although a pessimistic forecast estimated that the GDP growth rate would more likely be lower than that of 2015. In fact, Beijing recently announced that the next five-year growth target would be no lower than 6.5 per cent; in 2015, the lowest growth rate was 6.9 per cent, in the third quarter, so there is still a certain amount of room to manoeuvre.
Although the economy is slowing , I firmly believe it will transform to a situation in which the overall trend of sustained, stable and healthy development over the next few years will be the new normal. The current adjustments will lay a solid foundation for future long-term sustainable development. For example, a number of reforms have been initiated to promote a more market-oriented economy, more transparent governance, fairer law enforcement and a more equitable society.
These measures will correct the bold and sometimes even barbaric style of economic and social expansion that took place in the past few decades.
Based on reports from the Central Economic Work Conference last month, growth in 2016 will probably be higher than many data-based predictions, given the big policy changes that may well be on the way. The conference identified five major policy goals – cutting industrial capacity, lowering corporate costs, reducing property inventories, deleveraging, and improving weak links.
Among these, lowering corporate costs should see more proactive fiscal policies taking effect, and the government will incur some deficits to cut taxes for businesses. The goal of reducing property inventories may see a relaxation of the real estate regulations which have lasted for several years, to help reduce the glut.
I believe that since the majority of market participants think China’s economic slowdown and the continued depreciation of the renminbi are now the trend, the central bank will only need to guard against financial risks that will cause exchange rate fluctuations, and it will gradually or very soon allow the market to decide the actual exchange rate; in this way, it can also promote the renminbi market-oriented exchange rate formation mechanism.
Undoubtedly, many people, including investors, continue to dwell on the past of double-digit growth, a mental state that causes them to mistakenly think that 6.5 per cent represents an era of economic depression.
At 3,000 points, the Shanghai Composite Index has distorted the value of many companies, and far-sighted investors should chuckle, since the beginning of 2016 has seen opportunities unfold everywhere.
G. Bin Zhao is co-founder of Gateway International Group, a global China consulting firm, and executive editor at China’s Economy & Policy