China walks a tightrope

The Chinese economy grew by 7.7% in 2013, the same rate as in 2012 and the lowest since 1990. To put that into perspective, this increase still represents an amount slightly larger than the entire GDP of Turkey.

But it adds to signs that China’s rampant growth days are behind it – in the fourth quarter of 2013, growth eased to an annual pace of 7.7% from 7.8% during the previous three months.

What the commentators said

Expect the slowdown to continue, said Capital Economics, with growth of around 7% in 2014. Industrial output, fixed investment and retail spending all weakened in December. The “mini-rebound” of mid-2013, spurred by another bout of credit-fuelled infrastructure investment, has faded as the authorities have reined in lending.

Beijing may have “eked out another year of on-target economic performance”, said Alex Frangos in The Wall Street Journal. Yet “what lies beneath is a different matter”.

Beijing’s aim is to wean the economy off credit-fuelled investment and towards a more consumption-driven model. But it has made scant progress. Disposable income growth has slid to 7%, and retail sales grew by just 13.1% in 2013, the slowest pace since 2005.

Don’t hold your breath, said Richard Ho of Athenee. The key to a big jump in consumption is reform, to create “a more vibrant private sector… a level playing field for private and state-owned businesses”. That will boost employment and wage growth.

But such changes will take time. “For the next three to five years” the authorities have little choice but to juice investment to buoy growth.

But the state faces a tricky balancing act. With credit across the economy having soared to 215% of GDP from 125% in 2008, the banking system is riddled with bad loans. After a multi-year credit splurge, saturation point is near; each new injection of credit gives growth less of a jolt. The government will also have to focus on implementing “painful [structural] reforms” to improve the long-term outlook, said Jamil Anderlini in the FT.

The upshot? If China can grow fast enough to avoid defaults on its debt pile, it will probably only do so by racking up more debt, making the final reckoning even more painful.

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