Challenges for China’s“New Normal” Economy

by+Zi+Mo

Chinas economic growth slowed to 7.4 percent in 2014， downshifting to a level not seen in 24 years， according to figures released by the countrys National Bureau of Statistics on January 20， 2015. After three decades of sizzling double-digit expansion， the growth rate of Chinas economy dropped below 8 percent in 2012， reflecting the shift to“new normal.” Some wonder whether the worlds second largest economy has run out of steam. “China is the second-largest economy in the world，” remarked Paul Sheard， chief global economist at Standard & Poors Ratings Services. “So when it slows， the rest of the world is impacted.”

Economic Restructuring

Over the past three decades， Chinas economic growth has primarily been driven by investment and exports. Such a mode is responsible for Chinas past economic miracles， but has also become increasingly unsustainable due to accompanying problems such as pollution. In this context， Chinese policymakers decided to seek“long-term gains” at the expense of “short-term pain” and shift the countrys economy from quantity to quality through reform.

Of course， even more challenges await as China restructures economically. According to Gu Shengzu， an economist and vice director of the Financial and Economic Committee of the National Peoples Congress， Chinas economy now faces four major challenges： manufacturing overcapacity， financial deleveraging， a property bubble and environmental pollution. He believes the key is realizing innovation-driven growth.

As a result of industrial overcapacity in some sectors such as the steel industry and the cool down of the real estate market in the last two years， Chinas investment growth slowed， leaving a gap too big to be filled by the modest increase in domestic consumption. Meanwhile， the surge in labor and production costs， as well as stronger RMB， has hurt the international competitiveness of Chinas exports. Despite the fact that the U.S. economy seems on its way to recovery， the possibility of a repeat of the euro crisis remains high， which casts a cloud on external demand for Chinesemade commodities.

Chinas economy needs to overcome many difficulties in 2015， one of which is the heavy debt burdens on local governments. Statistics show that local governments raised funds for development primarily by mortgaging land， and 80 percent of their debts are held by development banks， commercial banks and even shadow banking system. Once the real estate bubble bursts， land prices will see a sharp drop and the ripple effects could cause financial turmoil on par with the U.S. subprime mortgage crisis.

“Financial risk is the most dangerous threat facing Chinas economy in 2015，” opines Xiang Songzuo， chief economist of the Agricultural Bank of China. “Bad debt arising from industrial overcapacity and the downturn of the property market could cause substantial risk for the countrys financial system.”

In recent years， Chinas rapid urbanization created strong impetus for economic growth， became a solution for rural problems and encouraged consumption. However， blind urbanization ignoring local residents demands in some areas has created many“ghost towns.” Healthy urbanization should be people-oriented.

Reform of state-owned enterprises is also widely being discussed. According to Zhang Yi， head of the State-owned Assets Supervision and Administration Commission of the State Council， many state-owned companies now suffer industrial overcapacity and poor sales， and some are even on the brink of bankruptcy. He adds that the key for state-owned enterprises to adapt to the “new normal” of Chinas economy is accelerating industrial upgrade.

Structural Reform

The World Bank recently downgraded its estimation for Chinas economic growth in 2015 from 7.5 to 7.1 percent. The coun-trys GDP growth will likely further drop this year， but Chinese policymakers have now become increasingly tolerant of economic slowdowns.

Chinese President Xi Jinping pointed out that the “new normal” of Chinas economy had emerged as it shifted from the previous high speed to medium-to-high speed growth. In a speech at the Asia-Pacific Economic Cooperation （APEC） CEO Summit in Beijing last November， he declared that such a situation is “not that formidable.” In fact， even Chinas 7.4-percent growth last year remained impressive. That figure is more than twice the pace of the overall world and about three times as fast as the U.S. economy.

Today， China represents a massive economy surpassing US$ 10 trillion. It will grow by more than US$ 700 billion each year even at a pace of 7 percent， and that sum is greater than the increasing value of Chinas economy five years ago at a rate of 10 percent.

For China， the top priority should be accelerating economic restructuring to achieve sustainable growth. Chinas economy must grow in a balanced manner. In addition to letting consumption play a more important role in economic growth， China needs to shift its investment-driven development to growth based on total factor productivity and seek more driving forces. Along with technologi- cal innovation， structural reform is also important. Chinas further growth will be more reliant on “reform dividend” as the country has entered a “new normal” era.

At the 2015 World Economic Forum （WEF） Annual Meeting， Chinese Premier Li Keqiang admitted that Chinas economy faces continued downward pressure this year， but asserted that it would not see a “hard landing.”

“With the economy performing within the reasonable range and the speed of growth no longer taken as the sole yardstick， the strained supply-demand relationship will be eased， pressure on resources and the environment will be lowered， and greater time and energy will be devoted to pushing structural reform. That means the economy will enter a more advanced stage of development with more sophisticated division of labor and a more optimized structure，” Premier Li remarked in his keynote speech. “If the Chinese economy could be compared to a moving train， its not losing speed or momentum. It is being fitted with a stronger engine with greater reliability， bringing new opportunities and higher quality momentum.”

In the future， Chinas economic performance will not only be measured by GDP alone， but also by other indices including standard of living， employment rate， and inflation.