Is China Ready for an“L-shaped”Economy?

Against the backdrop of a slumping econo- my， the party-run Peoples Daily newspaper has once again sought answers from an unnamed “authority.”A “person in authority” told the paper in an interview published May 9 that Chinas economy is on an “L-shaped” trajectory for recovery.

The interviewees point was that neither a U-shaped nor a V-shaped line would appear on charts tracking the nations economic growth rate. Instead， the chart would reflect a drastic decline followed by slow yet stable growth. The message conveyed did not stray far from what analysts had previously agreed upon. Nevertheless， the interview generated a lot of discussion among economists over its timing and implications.

The interview， apparently aimed at dispelling market jitters over slow growth， triggered steep declines that day on the Shanghai and Shenzhen stock markets. Each bourses composite index closed the day down by nearly 3 percent. Equity market traders usually overreact to the Chinese economys ups and downs. But the early May sell-off was certainly indicative of the deep shock felt by investors who read the Peoples Daily projection.

Investor reactions thus underscored the challenges ahead as the nation adjusts expectations and rethinks the way the economy should be managed， even as the growth rate follows the trajectory described in the newspaper over the next year or two. In recent years， overseas analysts have offered sometimes contradictory explanations about the health of the Chinese economy. Some thought the economy would inevitably slow， and that a slow-growth economy would have a positive effect by spurring economic reform. Others tended to fuss when the economys growth accelerated a little quickly or abruptly slowed.

A look back at recent history may help clear the air and help analysts and economists at home and abroad understand what “L-shaped” economic growth in China is all about. Back in 1995， Chinas GDP was less than US$ 800 per capita. A decade later， it had risen to US$ 1，800. And last year， it was US$ 8，000.

The growth was no doubt impressive. But one day， that kind of growth will certainly reach its limit. What follows could be much more moderate growth， and perhaps a contraction. As internationally renowned economists such as Lawrence H. Summers have pointed out， a rapidly expanding economy is likely to see its growth rate eventually retreat to mirror the longterm， global average. Many academic researchers have similarly concluded that economies not only slow after enjoying years of brisk expansion but are likely to decelerate by a wide margin.

Anyone who agrees with these conclusions should not be surprised to see that Chinas economic growth has slowed in recent years. Of course， Chinas sheer size and impact on the global economy should raise concerns about a slowdown. Fluctuations in China can affect international trade and global finance. Therefore， it is understandable that economists have been anxiously watching China.

The nations GDP was less than one-tenth that of the United States in 1995 but reached 60 percent at the end of 2015. If the GDP of each country were measured according to purchasing power parity， the two economies would be almost the same size. The International Monetary Fund （IMF）， in a report based on its 2015 Article IV consultations with China， predicted that the economy would slow by half a percentage point in 2016 but could actually increase by one percentage point in 2020 if the nation carries through with a pledge to further market-oriented reforms.