Not that the argument ever really went away, but there have been a lot of headlines in the past week or so saying that China is heading for a fall and that when it hits, the landing will indeed be hard.
However, there is a growing sense that slower growth is in some way inevitable and that, after years of double-digit growth, the economy is able to do very well with lower growth, especially as it moves to combat issues such as “shadow banking” and tries to deal with a move to a domestic consumer-led economy.
Data for the first quarter of this year shows that Chinese gross domestic product (GDP) growth has fallen below 8 per cent for four consecutive quarters for the first time in 20 years.
Second-quarter GDP data released later this month is expected to provide little relief, and while China's economy is expected to grow by 7.6 per cent in the second half of 2013, it faces rising risks including bad local-government loans, slowing growth of central-government revenue and diminished export competitiveness, the official China Securities Journal reported.
Economists have been cutting their forecasts for the world’s second-largest economy after a string of weak data recently, with some of them predicting that the government will not be able to meet its full-year target of 7.5 per cent. China’s economy expanded by 7.8 per cent last year, which is the slowest pace in 13 years.
What is puzzling some commentators is that the growth slowdown of early 2013 has not been met by the kind of fiscal stimulus normally employed by the Chinese. Instead, the new leadership of president Xi Jinping and the premier Li Keqiang seems content with 7.5 to 8 per cent growth.
"The message from this new approach to Chinese macroeconomic stabilisation policy is clear: "Gone are the days of open-ended hyper growth," writes economist Stephen Roach on Yale Global Online.
He believes that the US-China Strategic and Economic Dialogue, taking place in Washington DC until July 12th, “provides a major opportunity for both nations to recast what could well be the most vital economic relationship of the 21st century”.
China is now focusing on a services-led growth dynamic, Roach says, as one of the pillars for a consumer-led Chinese economy, and this is consistent with a marked downshift in GDP growth.
“That’s because services generate about 30 per cent more jobs per unit of Chinese output than do manufacturing and construction – allowing China to hit its all-important labour absorption and social stability goals with economic growth in the 7 to 8 per cent range rather than 10 per cent as before,” he writes.
Among those cutting their forecasts is Barclays Bank, whose researchers have revised down their growth forecast for 2013, from 7.8 per cent to 7.4 per cent.
However, Kevin Gardiner, head of Investment Strategy EMEA for Barclays, remains a long-term China bull.
He believes that the broadly restrained reaction by the People’s Bank of China would seem to suggest that policymakers are relatively comfortable that, while growth will be slower than before, the economy is not about to decelerate uncontrollably. “China’s new policymakers appear to be taking the view that going ‘cold turkey’ is worth it if it means curing the economy of its addiction to credit, and rebalancing spending away from frothy fixed investment (including real estate) towards more subdued but solid consumption.
“We concur. It may be a bumpy ride, but China remains one of our favourite long-term emerging market investments,” he wrote.
“The next step for China’s growth will not come easy. Gone are the days when the world’s second-largest economy can clock double-digit growth in a seemingly effortless manner.
“The country must now face the realities of the trade-off between short-term growth and long-term sustainability,” said Gardiner.
