China's Economy and the Outlook for Growth
The following is an edited version of an address by Liu Shijin,former vice president of the Development Research Center of the State Council,at the China Finance Annual Forum in October.
China's economy has been stuck in a continuing downturn over the past six years after some three decades of rapid growth. The economy still seems to display signs of downward pressure. Opinions vary considerably on the causes of this situation as well as prospects for growth in the future.
There are three distinct schools of thought on this. One is that China - like other countries - has its economic ups and downs,and we are currently in an extended down period. An upturn can be expected at some point. But this fails to explain why the economy has been unable to bottom out.
Another group of economists has insisted that China,as a late starter in its development,has a long way to go to catch up with other economies. These economists insist that China has great potential for development and can maintain an 8% expansion for 20 or 30 years to come. However,it is quite obvious that such a claim is way off the mark.
Meanwhile,a third group maintains that China is undergoing structural reforms resulting in a change from rapid growth of about 10% to a more moderate growth rate. Such a conclusion was put forth by my research team at the Development Research Center of the State Council in 2010.At the time we were studying the experience of other economies,particularly those in East Asia such as Japan,South Korea,Taiwan,Hong Kong and Singapore. All of these economies without exception have seen a significant slowdown in growth after rapid expansion in the past. We concluded that China had shifted to a lower gear as of 2013 and that going forward the economy could be expected to maintain moderate growth.
We later did a theoretical analysis,taking into account the slower growth of the labor force. This was an important factor in our calculations. We could see that demand for most products had already peaked. In terms of the historical development of industrialization and urbanization,production and demand had reached a peak,there would be slow growth after their peak of the production. Once these peaks had been reached we could expect to see growth entering a structural transformation period.
We concluded that over this six-year period there was a shift from a high growth rate of 10% to a moderate one. At times measures were taken to deal with economic fluctuations and these seemed to restore economic stability in the short term. But this sometimes led to unjustified comments that the economy was regaining momentum and that faster growth was around the corner. But before long the economy would soon lose steam again. I think we are close to a stabilizing point because of the adjustments made over the past six years.
On the demand side,in the past,the high growth rate of China's economy depended mainly on high levels of investment,with 20%-25% of that in infrastructure investment,25%-30% property investment and over 30% manufacturing investment. The high investment in manufacturing was a reflection of infrastructure spending,property investment and exports. I believe that we have just about hit bottom in all three of these areas.
As for the property sector,the peak was about 12 million to 13 million new units reached in 2014,and we have now reached a turning point. First-tier cities and some second-tier cities saw stronger property prices after the first quarter of this year,and in some cases there were dramatic increases in prices. This was due to a trend towards greater urbanization but at very different rates. It is my personal belief,however,that this rising price trend will not continue much longer. Investment in the property sector is fairly tepid now and the growth rate is likely to remain modest or even flat for some time. Demand has largely hit bottom.
While the three sources of demand are weakening,there is also a decline in supply,though it has been gradual. There has also been a fairly severe problem with surplus production and this has led to negative growth patterns. One is that the producer price index (which measures factory prices) had suffered negative year-on-year growth for more than 50 consecutive months with the sharpest decline reaching 5.9%. Additionally,profits of industrial enterprises had been weakening due to the continuing downward trend in prices. Since August 2014,there was negative growth in industrial profits and heavy industry suffered the most. However,more recently there has been some more favorable developments,with the PPI showing positive growth and the profits of industrial enterprises looking relatively healthy in recent months. Furthermore,some of the stronger companies in industries whe