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How Will China Create Growth?

China’s annual legislature session just wrapped up, and the members called for maintaining a high growth rate of around 7%. China wants to increase measures to regain the economic momentum and overcome weak demand from both businesses and consumers. The government is willing to increase deficit spending in hopes for reaching this 7% growth rate. Premier Li Keqiang noted the downturn of the economy, but speculated that China has plenty of ideas in their pocket on how to pick up momentum.

The recent implements of cutting interest rates and other measures, in hopes to create lending from banks, have not done much to reverse the downturn in the $10 trillion economy. Last year the Chinese economy grew by about 7.4%, but this year the economy has seen a slow start due to corporate debt, a weak global economy, and a huge housing glut. Companies are not looking to borrow and invest as of right now. Adam Slater, an economist with Oxford Economics, debates how much control the government has over this type of process. The weakness in the external demand and within the property sector makes one contemplate if the government can control the process of getting the economy back on track. Clearly they want to present to the public that they have a firm grasp over the economy, but this may be a façade.

Many economists believe that China needs to let go of the state control economy, encourage smaller businesses to borrow, and likewise get consumers to spend more. These are vital if they want to reach that 7% goal, but these goals are less about action and more dependent on time. The real interest rates are too high and credit demand is falling. The problem can be attributed to the overcapacity and the weak demand. It has been noted that when investment falls consumption follows the same track, which is the current situation in China. In the past China would simply ease credit and infrastructure spending to increase growth, but now it has to resist due to concerns that the money would flow straight into the big state companies that are within the industries that suffer from overcapacity.

China's Demand Slips

The government reduced the government approvals needed to create a business and has increased investments to help generate new jobs. Just in the past year China created over 13 million jobs. Even with this increase of employment consumption has not increased. During the Lunar New Year, the largest migration in China, retail and catering sales grew at the slowest pace since the financial crisis. Premier Li and the government are keeping a watchful eye to see if the growth slows to the lower limits of their target, really watching the impact on employment and income. If necessary the government will reduce taxes on businesses and improve conditions for private companies.

Mr. Le did not speak of a specific support for the housing sector of the economy. Sales have fallen dramatically during the first two months of this year, 16.7% the largest drop in three year. Mr. Li discussed that more people are moving from the country to the city, and “China’s house demand is here to stay.” Exports infrastructure, and investment are now ineffective ways for China to produce economic growth. China is now looking towards innovation and entrepreneurship to create the growth those sectors used to generate. Mr. Li said that Beijing will continue to reduce regulatory measure in hopes to create incentives to borrow and spend. The government is looking at the steps required create a new venture, which has been known to increase cost and shrink enthusiasm for startups. Mr. Li did not speak on reforming state-owned companies, which economists have viewed as essential to keep the growth rate steady.

One Comment

  1. Obviously you did not attend any of the classes or the public lecture by Leland Miller, our executive in residence earlier this month. (And it’s too late to take my China class. Good as it is, I want you to graduate rather than stick around to take it in the fall.)

    Why is 7% growth desirable? How do we as junior macroeconomists — how does the Fed — evaluate whether in a particular economy growth is too low or too high? There is a lot of very sloppy thinking when it comes to China, otherwise sensible analysts stop asking such basic questions, sometimes because their job exists on the premise that China will continue to grow at break-neck speed. Policymakers in China may be understandably more realistic, and prefer a sane rate of growth to breaking their necks.

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