Tag Archives: Wen Jiabao

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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Fighting Words

15 Mar

“I don’t think the renminbi is undervalued.  We oppose countries pointing fingers at each other and even forcing a country to appreciate its currency.”  Strong words from Chinese Premier Wen Jiabao yesterday at the end of China’s annual parliamentary meetings.

His words came as a response to US lawmakers, including Senator Charles Shumer, who are proposing that China be hit with stronger tariffs to compensate for what they claim to be an undervalued Chinese currency.

Paul Krugman, the US economist even went as far as to suggest that global growth could be boosted by as much as 1.5% this year if the Chinese allowed their currency to appreciate.  In response to Jiabao, Krugman even suggested a 25% tariff on the import of Chinese goods.

In a sign that there will not be a one off valuation, Jiabao said that the yuan (Chinese currency) will remain “basically stable”.

I wonder why this argument is happening now – it does not seem to make economic sense.  Firstly, US exports to China amount to only 10% of total US exports.  So any revaluation is not going to dramatically aid US manufacturing.  In addition, the US deficit is funded to the tune of roughly US$900bn by the Chinese.  A trade war is likely to result in the Chinese reducing their purchases of US debt, which would lead to a fall in US debt prices, and increased yields.  This would require the US to increase interest rates, which would clearly have a damaging affect on its recovery.

Granted in this situation China would also be a loser, but the US would be shooting itself in the foot to precipitate this course of events.

Many people I speak to are certain that the future is in the East.  “All empires eventually fall” are words I hear often in relation to the USA.  Yet, very few of those who utter these words to me are doing anything to actually get on that Eastern-bandwagon.  I do believe in the continuing growth and influence of China, enough to be learning Mandarin, and absorbing everything China related – from the Story of the Stone and Liang Zhu through to Peter Hessler and Yasheng Huang – in attempt to educate myself.  I don’t say this to show off, but to set my credentials as a Sino-phile so my next comments can be put in context.

With a common belief amongst others that “the US is over”, the Chinese are winning some sort of propaganda war.  I do not believe for one minute that the US is over.  Perhaps its total dominance in a uni-polar world is ending, but this is a country with a human spirit, entrepreneurial spirit, individual rights, property protection, strong institutions, relatively strong social cohesion, and a liberal economy – all necessary for fostering sustained prosperity and strength.  In fact, I believe that in the coming months we will all be happily surprised by the reductions in US unemployment.  The US economy is multiples larger than the Chinese economy, as is its military clout, and as such I believe the US could do a lot more to wield its soft power internationally in terms of garnering belief in the American nation.  However, this current spat just seems counterproductive – it’s misplaced politics.

PS – Check out a previous post on Chinese entrepreneurialism: https://ravendragon.wordpress.com/2009/07/23/hello-world/