China’s GDP growth will increase this year to 8.2% from 2012’s 7.8%, the Asian Development Bank says in its latest annual Development Outlook (full text of China chapter). But growth will moderate to 8% next year as the government has to deal with pressures on the environment and to narrow income gaps.
“They will face a difficult task in managing risks and keeping the economy on an even keel,” the Bank says, “while shepherding through the complex reforms needed to deliver more inclusive growth.”
The new leadership will have to walk a fine line between keeping the nascent recovery going with old-school fixed asset investment supported by large-scale public projects and private consumption enabled by rising wages and pensions. The challenge will be to get right the timing of tempering that with planned fiscal and financial reforms needed for rebalancing, and more stringent environmental targets for business needed for social stability. The cost of both will cause growth to level off next year.
Policymakers also need to ensure minimum wages do not outpace productivity growth. The country’s declining labor competitiveness, exacerbated by a strong exchange rate, is already seeing low-cost and labor-intensive manufacturing jobs move off shore. The World Economic Forum’s most recent ranking of global competitiveness saw China’s ranking slip for the first time in 7 years (down three places to 29th). One implication of this is that narrowing the income gap would best be tackled by social transfers to poorer households rather than through higher wages.