Is China’s Growth Slowing to 7%?

28 Feb

Yesterday Chinese Premier Wen Jiabao went online to answer questions posed to him by the public.

He stressed a number of themes in his answers:

  • Firstly, and perhaps of concern for some readers, he set China’s growth projection for the period of its 12th 5-year plan (2011-2015) at 7%. We will come back to this point shortly.
  • Interesting for the current climate in the Middle-East, he stressed that he understands that the combination of inflation and corruption leads to social unrest. He specifically mentioned that institutional reform is the long-term answer, and acknowledged that the cause of much unrest is the concentration and unchecked nature of power. Interesting.
  • The Premier stressed that the stabilization of consumer prices were top on his list of priorities. He also mentioned that he expects household income growth to equal GDP growth, and wage growth to match labor productivity. In addition, he mentioned plans to raise wages for low earners, limit the top end of wages, protect legal incomes, and curb illegal incomes.
  • He promised to bring the property market under control. One thing he stressed was the supply side of the problem. The Government plans to build 36 million social housing units over the coming 5 years, of which 10 million will be started in 2011 alone. I’ve written about my skepticism of the curbing real estate in previous blog entries.
  • Personal income tax thresholds are to increase.
  • Premier Wen said he will enact currency exchange reform, and plans to move towards a more flexible managed floating rate against a basket of currencies.

So he appeared to say the right things. His message was balanced and socially aware. But what about this 7% projection? Are we to believe that the heyday growth is behind us?! Is this a sign of impending tightening measures? The short answer is no, and here’s why:

  • Firstly, the projection associated with the previous 5-year plan was… take a guess…7.5%! Over the previous 5 years growth was actually 11.1%. So the downward revision of 0.5% is actually small, and should be put in context.
  • Secondly, this is a projection, not a target, which makes it non-binding. Beijing does not make targets!
  • Beijing historically sets low projections to avoid disappointment.
  • Beijing often sets low projections as a minimum to reduce both excessive competition on the local level, and to minimize data manipulation.
  • In addition, we should not be shocked by this. Although 7% had never been announced as an official projection, the figure had been previously leaked in conjunction with the 12th 5-year plan.

Obviously the authorities are aware that the potential growth rate will gradually decline. Not only is the base for comparison getting tougher, but there are labor, resource and environment constraints too. So while I do believe growth over the coming 5 years will be above 7%, I have no doubt it will be below 11.1%. Perhaps 8.5% to 9.5% is a more reasonable expectation.

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