ZHANG CHENGLIANG / CHINA DAILY
Web-driven economy is the biggest positive sign for China to maintain growth
The Paris-based Organization for Economic Cooperation and Development projected China's GDP growth rate for 2014 at 8.9 percent in its most recent China survey, published in March 2013. Today, the actual annual Chinese GDP growth rate is running about 1.5 percent lower than the OECD projection. The outcome for the full year may turn out to be closer to 7 percent. China's slowdown surprised all of the major foreign commentators, and the OECD was not alone in overestimating China's GDP growth. The International Monetary Fund fell into the same trap, as did most of the economists working for investment banks like Goldman Sachs, Morgan Stanley and China's own China International Capital Corp.
Part of the reason for this collective error is that it is hard to spot a step-change in economic growth, either up or down. Another reason is that the economic slowdown since 2013 in China has followed from a shift in government policy, which became evident toward the end of last year as the new Chinese leadership headed by President Xi Jinping started focusing on the quality rather than the quantity of growth.
China's economic slowdown has been greeted by an across-the-board downgrading in economic forecasts, which now threaten to overshoot on the downside. US economists Larry Summers and Lant Pritchett have recently restated their thesis that no economy can outperform significantly over the longer term, and all, including China, must eventually revert to the annual GDP growth mean of between 2 percent and 3 percent, as their population growth and labor productivity decline. China has grown at an average rate of around 9 percent since 1980. Summers and Pritchett infer that it must be time for "mean reversion" to take effect.
But the Chinese government is betting against a collapse, or "mean reversion" of the annual Chinese growth rate, at least in the medium term. Recently, Premier Li Keqiang said he believed that economic reforms could provide the stimulus necessary to maintain the economy's forward momentum, at around 6 or 7 percent, and that crude growth-oriented measures, which included substantial amounts of direct fiscal and monetary stimulus, were not going to be necessary. This statement was quickly followed up by news from Shanghai that the free trade zone would be accelerated, and would form the pattern for similar FTZs all over China as a prelude to full currency convertibility and further opening-up, and that many existing restrictions on foreign capital entering certain industries would be removed.
Who is correct The US economists who predict the mean reversion of China's annual growth rate to general norms, or China's reforming government The answer, as so often in matters of economics, is that it depends.
First of all, it depends on the ability of the Chinese government to overcome the inertia and resistance to change within the bureaucratic and business systems in China. Structural change within an economy, if well done, does generate new growth, because by encouraging competition, it increases choice and lowers prices. Demand increases as a result. But structural change is always hard to do, everywhere, which is why there is not enough of it. This is not the first time that the Chinese government has tried to remove excess capacity in sectors like steel and auto production. Structural change will remain very difficult to achieve without reforming the finances of local governments, which is a huge task.
Although more competition, greater efficiency and more consumer choice will benefit the vast majority of Chinese, many people in important positions today do not welcome change because it appears to threaten them. Which companies within an industrial sector really prefer to have more competition Particularly if they are unaccustomed to it, as many Chinese State-owned enterprises are. Te world was impressed with The Decision that emerged at the famous Third Plenum in November 2013. But "saying" is one thing and "doing" is another. We are still waiting for most of the reform intentions to become reality. And there is a time lag of months, even years, between structural changes occurring, and the appearance of economic benefits.
It depends also on the external environment. The big positive here is that the US (still easily the world's largest economy, if measured at market exchange rates) appears to be well on the road to economic recovery. With the recovery comes a belief that US monetary policy will start to tighten. This has stimulated a big rally in the value of the dollar, which is good news for major exporters into the US market, of which China is the biggest. But because the Chinese renminbi tends to follow the dollar, the renminbi is strengthening against the other two global currencies: the euro by 7.8 percent since the beginning of 2013, and the Japanese yen by more than 10 percent.
However, US' economic recovery and strengthening currency should be enough to outweigh weakness in demand elsewhere for Chinese exports. China's economic growth in 2015 should get a little help from the external sector.
The main reason for believing that China can maintain a 6-7 percent annual growth rate, as it restructures, lies in China's new Internet-driven economy. Chinese online shopping volume grew by 54 percent in 2013 and has grown a further 43 percent in the first half of 2014. Recently listed Alibaba, which currently dominates Chinese e-commerce through its online shopping portals Taobao and Tmall, has just announced a 49 percent increase in year-on-year sales. The number of active mobile users of Alibaba's e-commerce sites rose to 217 million at the end of September, from 91 million a year earlier, and Alibaba's revenue from mobile shopping was 3.7 billion yuan ($605 million) for the three months ending Sept 30, against only 332 million yuan the year before. Online shopping, using the mobile Internet, really has arrived in China. With it, the whole Chinese retail scene is set to change dramatically, and for the better. Online shopping, with next-day delivery almost anywhere, means that much of China's population have now become consumers. A portion of these new consumers may not be frequent or large buyers, but as incomes rise and as online commerce becomes more available, convenient and interesting to buyers, Chinese retail consumption will become stronger. By next year, the Ministry of Commerce estimates that online sales will account for 10 percent of total Chinese retail sales.
The e-commerce success of Alibaba has spread to online finance, with Yu'ebao capturing a significant share of Chinese savings since its launch in 2013. Elsewhere in the mobile Internet world, Tencent, another major consumer-focused Chinese Internet company, announced in August that sales for the first six months of 2014 increased by 37 percent year-on-year to 38 billion yuan. These numbers indicate that we are in the early stages of an Internet-driven revolution in consumer and business behavior in China. The impact of the Internet on industrial processes, and the Internet of Things will bring additional new growth.
A combination of new economy Internetbased growth and successful old-economy restructuring can, in theory, fill the Chinese growth gap left by the early stages of rebalancing. Whether China can in fact restructure its economy without a recession depends on the government's will to stay with its difficult course. To date, the indications are positive.
The author is a visiting professor at Guanghua School of Management, Peking University. The views do not necessarily reflect those of China Daily.
Posted on 15-Dec-2014