China manages soft end to slowdown
By Michael Lelyveld
China's economy began 2013 with the challenge of engineering a soft landing. As the year closes, the government faces new questions about the pace of promised reforms.
With the country experiencing gross domestic product growth below 8% for the second year in a row, China's new leaders have promoted sustainable development as a model, making a virtue out of slower growth rates.
Resisting pressure for a major economic stimulus package, incoming Premier Li Keqiang stressed the quality of growth over a faster pace in March.
"If we do not take the initiative to upgrade, steady growth will be
hard to achieve and harder to sustain," said Li at an economic work conference nearly nine months ago.
In November, the government outlined sweeping reforms in its Third Party Plenum communique. But it has also taken care to meet its official target of 7.5% GDP growth, posting quarterly results of 7.7%, 7.5% and 7.8% through the third quarter of this year. Most forecasts call for a slight dip in the fourth quarter to 7.6%, bringing growth down to the edge of the government's comfort zone.
"As to the question of engineering a soft landing, the conclusion is not there yet," said economist Yukon Huang, a senior associate at the Carnegie Endowment for International Peace in Washington.
Despite the ambitious reform agenda for the future, the economy is still being pumped up by previous practices of relatively easy credit and wasteful infrastructure projects at the local level.
"Some of this growth, in my view, is still artificial," said Huang. "So, if you ask me ... what is the intrinsic or sustainable growth rate at this point in time, I would say it's closer to 6.5%."
That estimate raises the question of whether GDP growth will sink that low and what the new leadership under President Xi Jinping will do if it does.
In July, Li set strict policy guidelines for the economy in comments reported by the Beijing News, citing the need for stability in jobs and consumer prices.
"The bottom line for economic growth is 7%, and this bottom line must not be crossed," Li said. "As long as the economic growth rate, employment and other indicators don't slip below our lower limit and inflation doesn't exceed our upper limit, we'll focus on restructuring and pushing reforms," he said, according to Britain's The Telegraph.
Consumer prices rose at a 3% annual rate in November, suggesting that 2013 will come in below the government's target limit of 3.5%.
Other official indicators suggest moderation. Industrial production in November rose 10% from a year earlier, down 0.3% from the October pace, the National Bureau of Statistics (NBS) said.
Stronger-than-expected exports in November raised hopes for meeting the government's goal of 8% trade growth. China missed a 10% target by a wide margin last year.
State media appeared divided in its reviews of the November numbers, as the Xinhua news agency called them "a good report card" on the economy. The official English-language China Daily called them "mixed".
Li has not said clearly whether the government would revert to stimulus spending in case of GDP growth below 7%, or what items on its 65-point reform outline would be put on hold.
Huang said the government could speed up some expansionist features of its reform plan rather than revert to old-fashioned stimulus, which would be unlikely to produce the same GDP boost as in 2009-2010.
But other critical features like cuts in industrial overcapacity might be delayed. In any case, the reform plan lacks details and deadlines even if GDP stays within bounds.
Huang sees the reform plan as impressive. But he adds, "It's not operationalized. It doesn't have the details, or the sequencing, or the actions to make it work."
Gary Hufbauer, senior fellow at the Peterson Institute for International Economics, sees positive trends in the reform plan and efforts to boost consumption's share in the economy. But the positive signs are mixed with concerns about high debt ratios, failure to rein in property prices and runaway investment in second homes.
"Are we setting up for a financial bust? That's probably the biggest worry," Hufbauer said.
A sudden plunge in housing prices due to overbuilding of unaffordable homes would burst the property bubble and ripple through the economy, perhaps pulling it down below Li's floor level for growth.
Hufbauer believes it is still too soon to declare success in engineering a soft landing. "That's very much a work in progress," he said.
Much will depend on making a smooth transition from investment-driven GDP to a consumption-led economy, while maintaining the same level of 7.5% growth. "You can count me as a skeptic on that, but they might manage," Hufbauer said.
Derek Scissors, resident scholar at the American Enterprise Institute, said there is little to be gained from following small variations in official GDP reports.
"Nobody should take that seriously, and the fact that they do reflects very poorly on discussions of the Chinese economy," Scissors said.
Actual GDP growth this year is probably in the low 5% range, well below Li's floor level, said Scissors. The official lower limit means little beyond raising local hopes for support if the economy slows.
"I think he's signaling to everybody that you aren't supposed to report growth below this rate publicly," Scissors said, arguing that household income is a better measure of the economy than official GDP.
But he agrees that the government has at least stabilized the economy in the past year from its earlier slowdown.
"It looks like they've arrested the decline from 2011 and 2012, for the moment. I don't think they can arrest it for very long without actual reform, but for the moment, it looks like they have," Scissors said.