No pain no gain

China’s president on the slowing economy: We meant to do that

September 4, 2013
September 4, 2013

The Chinese economy has hit some speed bumps this year as exports sputtered and domestic consumption failed to pick up the slack. Concerns are mounting about China’s high levels of local government debt, rising wages that have eroded its competitive labor advantage, and a property bubble, among other economic maladies.

Not to worry, President Xi Jinping said Tuesday, the government has everything under control. In fact, it made a conscious decision to slow the growth rate down in order to begin tackling some fundamental problems that are hindering China’s long-term economic prospects.

“The growth rate could have been higher had we continued with the past development model. However, we have chosen to implement a macro economic policy under which we will press ahead with the adjustment of economic structure in order to transform and upgrade the economy,” Xi said in an interview with journalists from Russia and other former Soviet countries on Tuesday night. “We would rather bring down the growth rate to a certain extent in order to solve the fundamental problems hindering our economic development in the long run.”

The theory that China was engineering its own slowdown has been frequently floated by economists and analysts in recent months, but this is the first time that Xi has said so publicly.

Xi cited local government debt and overcapacity in some industries as particular problems on Tuesday, but those are only the beginning of China’s structural challenges. The three pillars of Likinomics—named after China’s premier, Li Keqiang, and the foundation of China’s engineered slowdown—all carry long-term benefits but short term costs:

1) Ending fiscal stimulus by diminishing state-led investment.

2) De-leveraging in order to slash debt.

3) Structural reform, including relaxing controls on utility prices and liberalizing interest rates.

As Quartz reported earlier this year, each of those reforms is problematic—local governments and state-owned enterprises are addicted to low-cost loans, and Chinese banks are unprepared for liberalized interest rates that will make them much less profitable. Smaller-scale moves like a crack-down on fake trade invoicing and a credit squeeze aimed at the huge “shadow banking” sector caused huge swings in reported trade data and market volatility.

Xi’s frank talk about the economy’s difficulties just happens to come at a time when the outlook is brightening. Manufacturing growth and domestic demand have picked up since July, and some analysts have upgraded their GDP forecasts to 7.7% in the third quarter. Li said on Tuesday that the government is confident of meeting its economic goals, which include full-year GDP growth of 7.5%.

Still, Xi’s remarks are a reminder that even China’s top officials are aware that China’s economy is badly in need of reform, and fixing it will not be painless.

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