Is China's growth slowing?

Remember Churchill's description of China? He said that China is 'a riddle wrapped in an enigma'. What an apt characterisation which has indeed withstood the test of time. Developments in China are not easily understood yet there remains profound interest in that country from all corners of the world. China, moreover, has been a big player over centuries. Its products, its inventions, its unique culture has impacted the world. Only in the recent past in its history when some western powers came to its shores and when the Chinese emperor lost to these powers has there been a hiatus in its growth. But by 1949 when it regained its suzerainty China bounced back. Yet China's story is merely unfolding. The country over the past thirty years has again forged its economic and military leadership in the world.

But news from China in the past year has not been as optimistic as predicted. The annual rate of economic growth is slowing down. This has elated many in the West who were envious of China's 10 percent annual growth in the past years. Doomsayers have seen China's growth plummet to 7+ percent in 2014. This is understood to go down further to 6+ percent in the coming years. Is China, therefore, facing recession or is it in serious trouble?

Not really. China's growth in the last 35 years was basically a 'catch up' growth supported by its state infrastructure, political system, availability of cheap labour and credit availability from state owned banks. The economy was also banking on export of cheap supplies to the rest of the world. It thus became the export hub of the world. Yet the pace of growth in 2014 was only 7 percent and is sliding down further in 2015. There are several reasons for this.  

Firstly, analysts believe that economic weakness in the US and Europe is the cause of China's slowdown. Everyone knows that China's growth was fuelled by exports to the US and Europe. But with recession in many parts of the world, consumption levels had come down. Thus Chinese exports declined.

Next, China's growth which was supported by availability of cheap labour now seems finite. People worked for long hours on low wages under state control. But China's one child policy has added to a shrinking supply of cheap labour. Thus China's pool of cheap labour is falling dramatically.

China's domestic consumption has also gone down in the past years. As more and more people joined the industrial workforce in the past 30 years, wages remained low but consumption levels continued to climb. But the flow of cheap labour is reaching saturation point.

A major reason for China's spectacular growth was the country's strong investment in housing and transport infrastructure. It was meant to fill up the gap in these sectors. But as time passed demand fell and in many cases economic bubbles were created. Poor returns have now started to emerge. Today, there is low demand for building materials like cement, steel and housing fixtures.

But in these three and a half decades of near double digit growth, China graduated from a poor and rural society to the second largest economy in the world. It has now accumulated $3.5 trillion in foreign exchange and has boosted its military expenditures manifold. But certain uncertainties in the Chinese economy prevail. Firstly, how much stimulus will the Chinese government provide in the future to maintain or manage the growth rate? Chinese leadership knows that a high rate of GDP growth is the key to political stability. Major infrastructure projects in China such as the completion of a high speed rail system and diverting the waters of the Yangtze River to north China has put Chinese leaders in a dilemma. They are working on these projects at a slow pace.

Despite projections of lower growth, the slowdown is unlikely to lead to a crisis even though the outlook for the world economy may seem dull. China is transitioning from an era of super charged but unsustainable growth that pushed demand for anything and everything, from Australian iron ore to European luxury goods. But this is about to end. For some countries, the Chinese economy slowdown will hurt. Countries like Australia and Malaysia that rely heavily on the Chinese market will be affected. So will commodity exporting countries in Africa, South America and even India.

The slowdown of the Chinese economy is definitely intentional. The country is moving away from super fast growth based on often wasted investment in factories and real estate. President Xi Jinping of China has described this economic downturn as a 'new normal'. Chinese manufacturers are now pledging to produce new products with better quality at lower prices. The Chinese know that such actions will decrease their profits but the Chinese economy will survive. For instance, in 2016, China will grow at 6.7 percent yet it would likely generate 10 million jobs which will keep the unemployment rate at 4-5 percent.

China today is going through a major restructuring of its economy. By cutting down on expansion, the Chinese economy can be more efficient. China indeed seems to be treading a path of sustainable growth which will define clearly Churchill's reflection on China.

The writer is former Ambassador to China and columnist at The Daily Star. E-mail: ashfaque303@gmail.com