China’s GDP growth will slow to less than 5% a year by 2016, according to three out of every five of the more than 1,000 global investors, analysts and traders who responded to a Bloomberg poll. More than one in eight thought that would happen within a year, and nearly half thought that such a slowdown would occur in two to five years. Potential property bubbles, bad bank debt, persistent inflation and extended weak demand in US and European export markets were the cause of the pessimism.
This Bystander is tempted to recall the Japanese political saying that an inch in front of your nose is darkness. The economic forecasting goggles that can clearly see five years out are yet to be invented, let alone the night-vision version. Few in 2006 thought the world would look in 2011 as it does. We don’t doubt that China’s economic growth is more likely than not to slow from the double-digit growth rates it has averaged over the past three decades. The natural arc of development and demographics all but ensure it. Yet, a fall to 5% annual GDP growth would constitute “a hard landing” in our book, even allowing for the mitigating effects of variables like the speed of the deceleration, the impact on jobs and the composition of the economy at that point.
The new five-year plan, to 2015, assumes an annual average of 7% growth over its life, which might, arithmetically, mean there will have to be some 5% growth rates towards its end to balance out the current 9%+ growth. Yet we have always taken the official 7% figure to be unrealistically modest, signaling domestically that growth would inevitably slow, but giving the Party plenty of room to gloriously overdeliver on its underpromise.
A 5% growth rate in China would have serious consequences for the global economy as well as domestic stability. We accept that all the reasons to be bearish cited by respondents to the Bloomberg poll are legitimate risks to growth. As we have noted before, progress on economic reform is going to be slow for some years, which will make the necessary changes to the structure of the economy harder to bring about. The sheer size of the economy also makes sustaining percentage increases harder each year. A $6 trillion economy growing at 7% a year needs to add $420 billion of GDP in the first year but $550 billion in year five. Plus the Party’s reliance on infrastructure spending to carry the economy through rough spots, is going to run its course at some point. The growth in the debt outpaces the growth in the ability to repay it. Yet, these are challenges, not inevitabilities. If the global conventional wisdom about China is as gloomy as the Bloomberg poll suggests, we are only reinforced in our view that there is a case for greater optimism.