Slowdown: A Blessing In disguise?

By+deng+Yaqing

Chinas economy grew at a rate of 7.4 percent in 2014 amidst its painstaking efforts to carry out structural reform， cut outdated production capacity and promote innovation.

“China has surmounted tremendous pressures and challenges to realize the goal of maintaining its growth rate around the 7.5-percent target，” said Ma Jiantang， Commissioner of the National Bureau of Statistics （NBS）， noting that such a growth rate is quite hard-won against the nations massive economic aggregate—63.6 trillion yuan （$10.4 trillion）.

Although the economy has shifted into low gear compared with the double-digit growth of previous years， Chinese people have benefited from the low price level and efficient job creation， said Ma. According to statistics from the NBS and the Ministry of Human Resources and Social Security， Chinas consumer price index （CPI） rose 2 percent in 2014， and a total of 13.22 million urban jobs were created， far exceeding the target of 10 million.

“The economic environment will remain complicated in 2015. Externally， some developed economies are experiencing a recovery. Domestically， uncertainties and contradictions are interwoven，” said Ma.“However， there are still many favorable conditions for China to maintain medium-tohigh growth in 2015.”

Industrialization， informatization， urbanization and agricultural modernization have laid a solid foundation for the steady growth of Chinas economy in 2015. As millions of people surge into urban areas， the efficiency of resource allocation will improve， hopefully creating greater market demand， said Ma.

Opening up and reform will continue to stimulate inexhaustible entrepreneurial enthusiasm， which is the main engine of stable growth. Reducing government intervention and relaxing market access will mobilize the 900 million labor and scientific and technical personnel to innovate and start businesses， said Ma.

Enhanced quality

Despite a slowdown in growth speed， a focus has been laid on elevating the quality and efficiency of economic growth.

Annual labor productivity reached 72，313 yuan （$11，647） per capita， up 7 percent from the previous year. Energy consumption per unit of GDP was reduced by 4.8 percent， according to Ma.

“As economic structural reform advances， and growth model and resources allocation continuously improve， the slowdown seems inevitable，” said Yu Yongding， an expert with the Chinese Academy of Social Sciences.

yu offered an example. More than 20 percent of Chinas total steel production capacity is laid idle， and in Hebei Province alone， there are more than 300 steel mills. Shutting down these factories would lead to GDP growth decline， but it doesnt mean green GDP would drop.

yus point of view echoes that of Liu Kegu， former Deputy Governor of China Development Bank， who believes GDP growth at around 7 percent is what it originally ought to be， because China used to excessively fix its eyes on growth speed rather than quality and peoples livelihood.“Part of the investment in jacking up GDP growth should have gone toward eliminating environmental pollution， improving peoples living standards， securing employment， or promoting health care and education，” said Liu.

Chinas economic growth has gradually broken its excessive dependence on real estate investment， said Qu Hongbin， chief economist of HSBC in the Greater China region. The construction area of newly built homes dropped 10.7 percent in 2014 and land purchases made by real estate developers fell by 14 percent from the previous year， according to statistics from the NBS.

Improved structure

The expanding proportion of the service industry indicates that the service industry is replacing the manufacturing industry to become the main engine of Chinas economy， said Ma.

The added-value of the service industry accounted for 48.2 percent of the total GDP in 2014， up 1.3 percentage points and 5.6 percentage points higher than the manufacturing industry； the added-value of the service industry grew 8.1 percent， faster than the 7.3-percent growth registered by the manufacturing industry and the 4.1-percent growth registered by the primary industry， according to statistics from the NBS.

Qu stated that since the service industry best creates jobs， such an adjustment in industrial structure will stabilize employment and facilitate ongoing economic reforms.

While traditional industries， heavy chemical and bulk raw materials industries struggled with endless difficulties in 2014， emerging industries like mobile Internet gained momentum， implying that Chinas economy is aggressively edging up along the value chain， said Ma.

“The service industry as well as Internetrelated emerging industries and hi-tech industries are growing， while high energyconsuming industries are also growing—just at a slower pace，” said Ma.

According to statistics from the NBS， the hi-tech manufacturing industry expanded 12.3 percent in 2014， 4 percentage points faster than the growth of value-added output of industrial enterprises； meanwhile， the equipment manufacturing industry grew 10.5 percent， 2.2 percentage points faster than the growth of value-added output of industrial enterprises. In addition， online retail sales increased by 49.7 percent， and the volume of express delivery increased by a whopping 51.9 percent.

While the development of hi-tech industries outpaced that of traditional industries， exports of hi-tech products such as highspeed rails also shot up last year， said Li Kang， chief economist of xiangcai Securities Co. Ltd.

In sustaining the structural adjustment， Ma argued that enterprises need to constantly improve their product structure and renovate their technologies， the market should be further freed up to play a decisive role in allocating resources and the government should resort to structural and industrial policies as well as macro-control policies. “The inexhaustible impetus of stable growth consists in entrepreneurial innovation，” said Ma.

Roadblocks ahead

Chinas GDP hit $10.4 trillion in 2014， almost twice that of Japan， making it the second country with GDP surpassing $10 trillion. “Despite that， the per-capita GDP was roughly $7，400， ranking around 80th among all the countries on the globe，” said Lin Caiyi， chief economist of Guotai Junan Securities Co. Ltd.

China is still a middle-income country and has to overcome the so-called “middle-income trap”—an economic development situation wherein a country that attains a certain income gets stuck at that level. As such， it should stimulate market vigor through innovation， transformation and opening up to the outside world， said Lin.

Zhang Qizuo， Deputy Secretary General of Globalization Cooperation Forum， held that the economy cannot sustain over-investment in manufacturing， real estate and infrastructure construction， which would only aggravate overcapacity， housing bubbles， local government debt and financial risks.

Due to the adjustment of the real estate market and the reduction of overcapacity in the manufacturing industry in recent years， the growth of fixed assets investment has been slowing down. Last year， it only registered 15.1 percent. Since investment in the manufacturing industry accounted for over 30 percent of the total， eliminating overcapacity and curbing overlapping investment will inevitably result in lower growth of fixed assets investment， said Ma， who admitted that Chinas economy faces great downward pressures in 2014 and 2015. When adjusting economic structure and dealing with excess production capacity， traditional manufacturing enterprises are more likely to suffer capital chain ruptures， which will activate default risks and generate bad loans， said Lin.“Generally speaking， when economic growth slows down， the leverage ratio will ascend. Surging leverage ratio reflects enterprisesdwindling capacity to pay off debts，”said yu. As an important economic parameter， Chinas CPI grew a mere 2 percent in 2014. By the end of last December， the producer price index（PPI） had seen negative growth for 34 consecutive months， according to statistics from the NBS.

Lian Ping， chief economist of the Bank of Communications， noted that the consecutive negative PPI growth has constrained the expansion of the manufacturing industry and undermined the development of the macroeconomy.

The decline of CPI and PPI mirrors weak domestic demand， and the risk of deflation will stretch the endurance of Chinas economy， said Qu.

“Since the second half of 2014， the prices of international bulk commodities like crude oil have plunged， which will further increase the possibility of deflation，” said Qu.