Few statistics are more closely watched by policymakers, economists and businessmen from New York to Tokyo than China’s economic growth rate. What happens in the world’s second largest economy, after all, influences the market for everything from iron ore to automobiles to Prada bags, and companies from General Motors to Starbucks are counting on China to generate more and more of their future profits.
That’s why Monday’s announcement of yet another lackluster economic performance struck investors hard. China’s GDP grew 7.7% in 2013, roughly matching the pace in 2012. To Western eyes, where growth of 2% is considered an achievement these days, China’s numbers may still inspire awe and envy. But consider that China has routinely topped 10% growth a year since the 1980s. The recent patch of growth is the slowest the nation has experienced since the late 1990s. On the surface, that may appear a bad thing. China’s steady growth through the Great Recession helped prevent the entire global economy from slipping into an even more destructive downturn.
But in fact, we should all welcome a slower China. The fact is that the economy was starting to resemble a breakaway train, chugging toward that unfinished bridge just over the horizon. Debt has been piling up to dangerous levels, industry is burdened by excess capacity, and the financial sector has been taking on bigger risks as a result. The country’s growth model, led by heavy doses of investment in stuff like factories, roads and buildings, has begun to run out of steam, able to produce eye-popping growth rates only with greater and greater infusions of credit. Fears have been mounting that China could suffer a financial crisis like the one that tanked Wall Street in 2008. That would threaten the stability of the entire global economy.
China has to slow down — for its own good, and ours. To his immense credit, President Xi Jinping and his team have realized this. He has resisted the temptation to use the machinery of the state to pump up growth, as his predecessors had done. Instead, Xi has embarked on a renewed, forward-looking effort to liberalize China’s economy. In a bold reform package unveiled in November, Xi has committed the government to opening up financial markets, improving the management of inefficient state-owned enterprises and expanding the power of the private sector. If he holds to his promises, the Chinese economy could emerge (over time) healthier and more market-driven, which would lay the foundation for further growth.
Yet in the near to medium term, China’s growth rates are likely to remain muted. Xi’s reforms will cause a drastic change in the way the economy works, forcing the state’s banks and enterprises to become more commercially oriented and contend with greater competition. The economy will also undergo a process of “rebalancing,” reducing its reliance on investment for growth and shifting to a more consumption-driven model. All of this could cause a slowdown in growth. And if Xi fails to reform quickly or deeply enough, China’s current growth system will continue to sputter.
Either way, the 10% growth that was once considered the norm now looks like a relic of the past. The International Monetary Fund expects GDP growth to slow further in 2014, to 7.3%. Rarely has bad news sounded so good.