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Economic Slowdown Challenge to China's Leadership

  • VOA News

Laborers work on scaffolding at a residential construction site in Hefei, Anhui province, China.
Recent economic data from China indicate that exports, real estate and investment, traditionally the bulk of China's growth, have slowed down considerably, putting pressure on the country to come up with ways to steer its economy toward more sustainable growth levels.

After decades of double digit growth, the World Bank lowered China's economic growth in 2012 to 8.2 percent. While the rate is higher than the government target of 7.5 percent, it is one percent lower than the 2011 figure.

“This kind of slowdown in China is not really a bad thing,” says Andrew Batson, research director at economic consultancy GK Dragonomics in Beijing. “It [the slowdown] is mainly a consequence of the success China has had in developing its economy so far,” he adds.

“What is complicating the picture in the short term,” Batson says, “is that China is also going through a cyclical downturn.”

April's statistics showed that China's many economic indicators were lower than what economists had expected. Sluggish American and European demand for exports, combined with a substantial cooling of the Chinese real estate sector, weighed on industrial production, investment and exports.

The World Bank has warned of the risk of a slump. It has advised policymakers in Beijing on how to "sustain growth through a soft landing," and how to shift the economy from dependency on exports to one driven by domestic demand.

“Fiscal measures to support consumption, such as targeted tax cuts, social welfare spending and other social expenditures, should be viewed as the first priority,” the World Bank report said last week.

Michael Pettis, a finance professor at Peking University, doubts that domestic consumption is going to make up for the loss in exports. “So far, the only thing that China can do to replace exports' demand is to increase investment,” he says.

April's data also showed a severe downtrend in the Chinese property sector, which in 2011 accounted for 13 percent of the total GDP. Following more than two years of government policies to curb speculation, new homes' prices fell more than one percent compared to the same period last year.

Yi Xianrong, a researcher with the Institute of Finance and Banking under the Chinese Academy of Social Sciences, calls such price adjustment “an inevitable trend.”

Yi believes that years of speculation have transformed the real estate market into a mechanism of unequal wealth distribution, with many Chinese people unable to afford apartments. “If the property bubble can be squeezed out, then I believe we can have the basis for a stable economy,” Yi says.

Chinese leaders, who have based much of their domestic legitimacy on the delivery of economic prosperity, are well aware of the social risks should the benefits of economic growth continue to exclude large segments of the population.

China's Premier Wen Jiabao has repeatedly said that after a decade of double digit growth, China's economy needs to slow down. But, in the face of the weak quarterly economic data, he stressed the need to maintain growth.

“It is a rather tricky balance to strike,” says GK Dragonomics' Andrew Batson, adding that “it will be challenging for many businesses in China to adapt to this slower-growth era."