China's Economic Slowdown May Become Normal

Working hard in China. Economics At the turn of the transition, a small but growing number of Chinese economists have begun to predict that annual growth will drop sharply to 6%-7% in the next few years. However, the revised algorithm shows that the growth rate may be even lower, perhaps only half of what they predicted.

Over the past few decades, China's economic growth has been based on a large increase in government led investment. As a result, there must be a huge trade surplus to digest the manufacturing surplus caused by large-scale investment.

This situation can no longer go on. Investment Waste is becoming more and more serious, especially in infrastructure and real estate investment. The demand for Chinese exports will stagnate when Europe is in crisis and Japan and the United States are struggling to deal with debt.

Can China's economy achieve transformation and shift the main engine of economic growth from investment to domestic demand? Yes, but there are great difficulties ahead. China's household consumption accounts for only about 35% of gross domestic product (GDP), which is only a little higher than half of the global average, far below any other country. Such a huge domestic imbalance is unprecedented.

Some officials in Beijing understand how much China has been developing. Out-off-balance 。 Therefore, policymakers say that in the next 10 years, they will strive to increase domestic demand, making it GDP share of 50%. Even so, the proportion is also low; at such a level, China will be at the bottom of the low consumption East Asian countries.

However, achieving this goal is difficult because it requires a 4 percentage point increase in household consumption growth than GDP growth. Over the past 10 years, the annual growth rate of household consumption in China has been 7%-8%, while the GDP growth rate has reached an astonishing 10%-11%. If China's GDP is expected to grow by 6%-7%, China's household consumption will have to grow by 10%-11%.

Such consumption growth is unlikely to be achieved due to strong structural constraints. China's growth mode transfers household income to enterprises, which relies mainly on artificially low interest rates. This greatly reduces the borrowing costs of state-owned enterprises, which invest these easy funds in large investment projects. This easy financing also improves the profitability of banks so that they can easily solve bad loans.

The cost of cheap borrowing is sacrificed. Depositor Interests. Lower deposit earnings force them to sacrifice their consumption and save more. This led to a sharp decline in consumption share of GDP. If China wants to replace consumption with consumption as the engine of economic growth, this process of financial repression must change. In the overall economic growth, the proportion of family sector must rise.

This change is inevitable, but it is hard to come by. The waste of investment and excess capacity are transformed into more and more bank debts, which means that the continued transfer of wealth is necessary for the banking system to continue functioning. But if households continue to pay the bills in the next few years, China will fall into the same growth mode.

The precedent of debt accumulation in history is worrying. In modern history, every country that has achieved "miraculous" growth for many years will eventually encounter the problem of over investment and subsequent debt overhang. Just look at Japan. Simply solving the debt problem has made it difficult to achieve domestic rebalancing. This process takes time even longer than the most pessimistic forecast.

Nevertheless, we need to consider postponing this change. cost 。 Even if consumption continues to grow at the speed of the past 10 years (the Chinese market and the global situation are optimistic in the past 10 years, the debt level is much lower). If China wants to achieve rebalancing, China's economic growth rate must be reduced to 3% to 4%. In other words, this is to reduce the impact of investment, which will be sudden and intense.

If the worst case occurs, the consumption growth rate will not reach the level of the past 10 years (which may be the result of the decline in GDP growth), so rebalancing will become more difficult. The only way to speed up the rebalancing process is to adjust the capital structure of banks with state-owned assets.

If China wants to adjust its economic growth pattern and no longer rely on investment, China must make some painful decisions. All possible situations require China's economic growth to be slower than before. The Chinese government and the world will need to get used to this.