It's all a matter of long-term survival

Three strands to the slowdown in china need to be looked at individually and together

'In the long run we are all dead." There are varying interpretations of the famous words, written by the economist John Maynard Keynes in a tract written almost 90 years ago. Some interpret them as meaning we must seize opportunities while we can because time and tide wait for no one. But I do not think Keynes meant the long term is useless. Rather, he was pointing out its relationship with the short term.

Chronic sickness in an economy is rarely fatal, but when such sickness is accompanied by short-term pain it often is. The Chinese economy may have entered its current bleak state as long-term and short-term dynamics coalesced.

The National Bureau of Statistics said that in the third quarter, GDP grew 7.4 percent, continuing its downward trend. The International Monetary Fund has lowered its forecast of growth for the year to 7.8 percent, and the World Bank had lowered its forecast to 7.7 percent. Little surprise then if China's GDP growth this year is below 8 percent.

That would be the slowest economic growth in China in the past 12 years. In 2009, even as the global economy was contracting 0.57 percent, China's economy grew 9.2 percent. This year the global economy is expected to grow 3.28 percent as China's growth drops below 8 percent, two percentage points lower than its average growth of 10.01 percent from 1980 to 2011.

There are three strands to this slowdown: structural, cyclical, and the two combined.

Reasons for the structural slowdown are numerous. Population growth and demographic changes are pushing China's demographic dividend to diminish or even disappear; As financial and other policy reforms have been successfully implemented, the systematic delivery of bonuses for growth has diminished; The rises in international prices of resources and in wages have weakened the cost advantage of long-term economic growth; The structural imbalance between investment and consumption, urban and rural, the real economy and the virtual economy has not been alleviated, it has in fact deepened.

The cyclical slowdown is the result of a lack of short-term demand, mainly caused by the following factors. First is the impact of the debt crisis on the real economy as China has faced great pressure to keep overseas demand going. The second is connected with progress in economic restructuring, in which China faces the pressure of growth in domestic demand.

The third factor is the cyclical decline of momentum piled on by long-term high growth of 10 percent. The need in China for its economy to slow down has become increasingly strong.

China needs to confront these complex circumstances by identifying a core strategy out of all the apparent contradictions and uncertainties and take steps that are at once concrete and balanced.

There is no such thing as a cure-all solution, and decision-makers need to give priority to certain things even as they let others go. If China cannot quickly resolve structural slowdowns and cyclical slowdowns simultaneously, it should focus on one. Structural slowdowns are caused by long-term structural imbalances, and a short-term response will not quickly change long-term risk. So at present we should focus on defusing the cyclical slowdown.

For the cyclical slowdown we must find a short-term breakthrough in consumption, investment and exports. Consumption cannot effectively be increased in the short term because it is difficult for China's savings rate to decline rapidly. It fluctuates but has been rising since 1980, and savings have accounted for more than half of China's GDP since 2006. The figure was 51.35 percent last year. Due to the prevalence of structural risk, it takes time for living standards to improve and traditional habits of consumption to change.

Exports are influenced by changes in comparative advantage and the evolution of national brand competitiveness in the long term and by external demand and the foreign exchange rate in the short term. The slow recovery of external demand caused by a weak global economy generates pressure for short-term expansion in exports, especially after a short period of depreciation, and the renminbi reverts to appreciation. The country then has to resort to investment to relieve the pressure of the cyclical slowdown.

An investment-led short-term economic recovery is controversial, but some points are worth making. Increasing investment is the best way to promote short-term recovery. Although that will generate pressure for structural change, it can also dampen the two slowdowns, something China's economy urgently needs.

There is still room to increase investment in China. The International Monetary Fund estimates that investment accounts for 47.78 percent of total GDP in 2012, still lower than the 50.09 percent savings rate in the same period. In addition, this year's budget deficit is estimated to account for 1.3 percent of GDP, and the debt ratio of China at 22.16 percent, both substantially lower than what internationally would be regarded as a cause for concern and the average level of developed countries. Despite the risk of local government debt, China's overall financial condition is still robust.

Boosting investment serves not only short-term needs, but also the long-term needs of continued urbanization and industrialization. There is nothing contradictory about increasing investment and structural slowdown with long-term sustainable development. The key is to adopt a variety of ways to promote a short-term and long-term balance.

To mitigate risks to achieve long-term sustainable development, the following should not be forgotten.

Private capital plays an important role in boosting investment.

The structural adjustment within investment. Increasing investment in the short term should increase the long-term support of key emerging industries to promote structural transition.

The government needs to pay attention to improving people's livelihoods and welfare while boosting investment in the short term. The investment should speed up the construction of affordable housing and improve urban infrastructure.

The country should emphasize the proper coordination of fiscal, monetary and other macro-control policies while boosting investment in the short term.

Financial reform should be extended to boost short-term investment.

The country should further open up public service sectors, resources, healthcare and education to lay the foundation for the long-term development of the market economy.

In short, now that the structural slowdown and cyclical slowdown coexist, the Chinese economy needs a short-term breakout. Surviving in the short is the key to escaping death in the long term.

The author is a researcher at ICBC City Finance Research Institute in Beijing. The views do not necessarily reflect those of China Daily.

(China Daily 11/02/2012 page10)