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China Struggles to Sustain GDP Growth

02.04.15

China Struggles to Sustain GDP Growth

02.04.15
XinhuaXinhua

By Margaux Schreurs for Global Risk Insights

Official data has shown that China’s GDP grew by 7.4 percent in 2014, a decrease from 7.7 percent in 2013, and the lowest growth figure the country has recorded in 24 years. At a time when the global economy is still recovering from the economic crisis, this may be a bigger issue than it seems, regardless of the attitude taken by Chinese government officials. For them, lowering GDP is part of a “new normal” and sustainable development.

In line with the publication of 2014 GDP figures, the Mayor of Shanghai announced that the city would start to focus on qualitative goals instead of quantitative goals. It did not provide a predicted growth rate for 2015, after 2014 predicted rates were all off the mark. On top of that, reports coming out of China say that businesses are struggling and strikes are becoming increasingly common. For example, taxi strikes spread through the country last week. Partly this is due to issues with demand, but also due to slowing wage growth.

Demand is slowing, and the first industries to notice are the coal, copper, iron and steel industries. Steel output, for example, has slowed, as a result of dropping demand. People working in this sector in China’s rural provinces will be hit hard as demand slows. Heavy burdens are also being felt by the real estate sector, where housing prices are cooling down, and by companies and local governments who are suffering from high debts.

This is caused by a decrease in investment. China has invested a lot in the past five years, and many argue that it was actually too much empty investment. Right now, the time may be right for China to wait and see returns coming in from all this investment.

However, China’s political elite are describing this as a “new normal” for China, a positive phase in its development. This “new normal” was first introduced by Chinese President Xi Jinping during the APEC CEO Summit in Beijing last November. Within this theory, growth is to be made more sustainable rather than as high as possible. With this comes a lower real growth rate, as well as increasing attention to China’s natural environment.

Forecasters remain positive as China has a high savings rate, over 50 percent, which will allow the country to stimulate the economy, even with lower GDP growth. Besides a high savings rate, China still has a lot of investment opportunities. Justin Yifu Lin, professor at Peking University, confirmed this, and said that China will continue to be important for growth throughout the entire world.

Predictions are that growth will keep slowing down in China, regardless of economic stimuli. The IMF has predicted 6.8 percent GDP growth for 2015. This, of course, is still a high growth rate. But it does signify the end of an era for China.

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