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With analysts divided on China’s economic potential, Beijing should seek as high a growth rate as possible amid reforms
- When setting growth targets, a too-conservative estimate could have serious consequences for China’s economy and its people
- Beijing should therefore seek as much expansion as possible, focusing in particular on infrastructure investment, while making the necessary structural changes
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Why you can trust SCMP
After a disappointing performance in 2018, China’s economy appears to be stabilising. In the first quarter of 2019, GDP growth, at 6.4 per cent year on year, matched that of the previous quarter. But growth in industrial production exceeded expectations, expanding by 6.5 per cent year on year (and by 8.5 per cent in March). Even exports growth was positive, albeit weak, despite the ongoing trade war with the United States.
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Moreover, fixed-asset investment grew by 6.3 per cent – 0.2 percentage points higher than in the previous quarter. Investment in real estate grew the fastest (11.8 per cent), followed by manufacturing (4.6 per cent) and infrastructure (4.4 per cent). Growth in both real-estate and infrastructure investment was stronger not only sequentially, but also year on year. As usual, consumption growth was stable. All of this has inspired confidence that the Chinese economy can reach its indicative growth target of 6-6.5 per cent for 2019.
Most Chinese economists seem quite comfortable with this targeted range. One explanation is that China’s potential growth rate is 6-6.5 per cent, and a target should be set accordingly. Another is that a lower growth rate would give the economy more room for structural adjustment.
From 1978 to 2008, China averaged an impressive 9.5 per cent annual growth rate. Then the global financial crisis struck, causing growth to plummet from 9.7 per cent in the third quarter of 2008 to 6.6 per cent in the second quarter of 2009. A 4 trillion yuan (US$640 billion) stimulus package, introduced in November 2008, soon brought about a powerful rebound, with GDP growth reaching 12.1 per cent in the first quarter of 2010.
But, since then, China’s economy has been on a continuous downward slide, partly because the government withdrew its stimulus. Last year, China’s GDP grew by 6.6 per cent. Nevertheless, it is difficult to separate cyclical elements and external shocks from the long-term trend and to conclude that China’s potential growth rate really is between 6 and 6.5 per cent.
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Many Chinese economists cite long-term supply-side structural factors – such as demographic ageing, environmental degradation and a lack of progress on reform – to argue that China has simply entered a new stage of development, characterised by significantly lower potential growth rates.
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