Bumpy ride ahead in China but long-term direction is up

WHEN I returned to Beijing last week, I could not help but look for signs of the much-vaunted slowdown in the Chinese economy that has been the subject of such intense media speculation recently.

Global fallout from the euro-area crisis and softer first-quarter gross domestic product (GDP) growth numbers, along with the Bo Xilai debacle, the Chen Guangcheng crisis, rising tension with neighbours in the South China Sea and downward revisions in projected second-quarter GDP growth had the makings of a perfect storm, leading many analysts to predict a so-called hard landing for the world’s second-largest economy.

So how bad is it really? On the ground at least, it appeared to be business as usual — the number of inbound and outbound domestic and international travellers at Beijing Capital International Airport looked good, while the drive into the city delivered more than its usual share of gridlock. Tables were fully booked at my favourite local restaurant, while shopping at my neighbourhood mall was the usual busy experience — eager shoppers were out in numbers, and not for window shopping either.

On the surface, at least, Beijing life was buzzing ahead.

But looks can be deceiving. Despite these superficial impressions there is strong and undeniable evidence of a significant slowdown. Recent trade data, manufacturing indicators, bank lending and retail spending illustrate this convincingly for this month and last. Also, widespread property price reductions and lower car sales growth hint at a level of aggregate demand that is probably consistent with GDP growth for the second quarter of below 7,5%, versus 8,1% in the first quarter.

So how then to reconcile the seemingly normal run of life in “my Beijing” with the reality of softer economic data on the national level? Well, the slowdown is severe, no doubt, from a high of 14% GDP growth in 2007, through 10,4% in 2010 and 9,2% last year, to likely about 8% for full-year 2012. To be sure, I could have gone to see mounting stockpiles of scrap, coal or iron ore at stockyards around the country’s ports; or large numbers of unsold vehicles at dealerships; or empty malls in certain parts of the country. China is large and complex and one must be wary of ignoring a piece of the jigsaw puzzle.

Yet while China is certainly slowing, especially in certain sectors and regions, it is also true that 7,5% in the second quarter, or close to 8% for the full year, is still world-beating for a large economy. This year China’s economy will grow by about $700bn, thereby adding another Turkey or Switzerland to global output. Moreover, Beijing views its economic future in a very different light from three to eight years ago. The future is one of more moderate but sustainable levels of growth — quality growth — as opposed to the breakneck growth of the past. This new growth path is aimed at shaping a new economic structure and with it a new set of rising industries and new areas of competitiveness.

Inevitably, this new growth model will see some sectors recede, even traditional ones that served as the battering ram to bring China onto the world stage with record-breaking exports. But this does not make the transformation less necessary, or avoidable. To leave the growth model unchanged now is not an option and excessive stimulation, as the economy slows, would be far more dangerous than seeing a rate of growth of below 7,5% or even 6%. The view that China needs 7%-8% growth to maintain social stability is an outdated and baseless article of faith; today’s China is already socially transformed to the point where it can remain stable and continue its long-term trajectory even if the growth rate dips to about 6%. Of course a protracted slowdown would be problematic, but the “bicycle view” — that China will fall over if it grows too slowly — does not hold in the manner it did in the past.

China watchers used to China’s lofty growth rates over the past 20-30 years will need to sit through the inevitable volatility of the next six to 12 months, but over the longer term China will remain a key market for hydrocarbons, metals and minerals, high-end manufacturing, services and technologies. As I look around me I see a society transforming at a brisk pace, and despite key challenges and a significant slowdown that is under way, China’s relentless ascent is not in question.