China's rebalancing act
015 was a watershed year for China. For the first time in more than two decades its growth rate dipped below the psychological mark of 7%. This was no mere temporary blip. It was a harbinger of an era of lower growth. Top Chinese officials made this a talking point much before the data became official. "It was anticipated," they said. It was an inevitable consequence of a large base. China is now a 10 trillion dollar plus economy, so double-digit growth is surely a thing of the past. Added to this are tepid global prospects, which is bad news for an export-dependent economy.
The lower growth scenario got a stamp of approval this month as the National Peoples' Congress passed the 13th Five-Year Plan. The plan aims for 6.5% growth for the next five years. China has moved to a permanently lower orbit. Does this mean that the China sceptics are being vindicated? Is the juggernaut stalling? Is a hard landing round the corner? No, such a prognosis is not supported by current data. If China grows at 6.5%, it will reach $15 trillion in 2020. That is spectacular compared to near-zero growth in the euro zone or stagnation in Japan. Even fellow BRIC members Brazil and Russia are struggling with recession and negative numbers. Note that China is still adding jobs in big numbers. It added 64 million jobs during the 12th Plan, at a time when its own labour force is plateauing. The housing market is still healthy, even if somewhat frothy. Housing prices are a reliable gauge of household sentiment and the pace of urbanization.
All this is not to deny that China's economy is undergoing a fundamental change. The 13th Plan is thus a turning point. The development strategy will shift away from the course of export-led growth of the past three decades. Even before President Xi Jinping's regime, there was talk of "Harmonious Society" and more inclusive growth. There was talk of correcting the various imbalances in the economy and reducing inequality.
There are basically five dimensions along which the rebalancing and growth will occur. The first is a shift of emphasis from foreign to domestic. The slowing world economy has caused global trade to fall sharply. So China's early and extraordinary dependence on exports will have to diminish. The dependence on domestic drivers will increase and include both consumption and investment. The second rebalancing is from investment to consumption. China's investment to gross domestic product ratio at 45% is still too high. No other large economy has had such a big share of investment for such a long time. As a result, the share of consumption spending has fallen from around 55% to less than 40% in the past two decades. The return on capital invested has fallen from around 16% to less than 3% now. Excessive investment means waste of capital, and hence needs to fall. Increasing consumption will need tax reform and a less coercive regime for savings.
The third rebalancing is from urban to rural. The latter includes development of tier 2, 3 and 4 cities and towns as well. This rebalancing also means moving development to more backward regions like the provinces of the northwest. It calls for reducing regional inequality. China's urbanization is around 54%, and the 13th Plan aims to reach 60%. This is still below developed economy stan- dards. But the pace of urbanization needs to slow down. The fourth rebalancing is between the old and new economy. China has an overhang of excess capacity in a variety of sectors. During the 13th Plan, coal production capacity will be cut by 500 million tonnes and steel capacity by 150 million tonnes. More than 1.8 million workers are expected to lose their jobs in these two sectors alone.
During 2015, China witnessed 2,700 strikes and protests, double that of the previous year, as per China Labour Bulletin. This is a symptom of disruption and dislocation that will come out of the rebalancing away from old-economy industrial sectors to new-economy consumption-oriented sectors. This is already manifesting in a severe slowdown and rising unemployment in the rust- belt provinces of the northeast, Jilin, Liaoning and Heilongjiang. This reorientation calls for worker retraining and reskilling. Thus the job creation during 13th Plan will require catering both to new workers as well as those displaced by the rebalancing between old and new sectors. The last rebalancing is between current and future generations. This basically calls for greener and more sustainable growth, thereby leaving a better world for tomorrow. China's energy intensity, i.e., energy use per unit of GDP fell by 18% during the 12th plan. The 13th Plan aims to reduce this further by 15%. China's energy intensity is however still far more than developed economies'-5.4 times that of Japan, for instance.