China's Growth Slowdown

Why in news?

The growth of gross domestic product (GDP) in the People’s Republic of China (PRC) has slowed to 6.6% in 2018.

Why is it a concern?

Fourth-quarter growth (year-on-year) was 6.4%, indicating that the economy was decelerating.
A $12 trillion economy growing at over 6% is still a powerhouse.
But by far the biggest contributor to global growth, the latest numbers are a cause for concern.
It is remarkably low for that country and is the lowest that GDP growth has been since as long ago as 1990.

What is the cause?

The growth slowdown is less cyclical and more structural.
Three decades of super-charged growth in mainland China was delivered by a very specific investment- and export-driven model.
Financial savings and foreign investment were routed to large, capital-intensive projects and export-focused manufacturing.
This allowed employment and incomes to grow significantly.
Eventually, the PRC became the world’s factory, running large trade surpluses with most countries.
After the global financial crisis of 2008, the government made the choice to multiply on this model.
It took advantage of the cheap credit to various capital-intensive sectors.
But, while growth remained robust, the productivity of capital declined severely.
In the past year, three-fourths of growth has come from consumption.
This indicates that the consumption-focused sectors of the economy have now become the engines of progress, signalling an imbalance.

What should China do now?

Beijing is well aware of the above structural problem.
There has been talk of “rebalancing” the economy away from exports and an investment obsession towards innovation and consumption.
To move from upper-middle income to high-income status (to avoid the “middle income trap”), China would have to raise productivity.
This has to come from moving up the value chain and embedding greater innovation in all its processes.

What are the challenges therein?

The rebalancing process would naturally lower growth during the transition.
So implementing the changes is harder given the political pressures to ensure that growth remains high and incomes keep on rising.
Thus, the credit flow to unproductive sectors of the economy cannot be stopped entirely.
Furthermore, empowering the private sector, which is a necessary next step in the rebalancing, is contradictory to China's recent policy.
Also, with enough resources being spent on research, integrating the products thereon into final output has been much harder.
Given these challenges, the trade tensions with the U.S. may actually help in China's attempt to de-emphasise exports’ importance.

What does this mean for India?

For India, the question is how much this structural slowdown will affect its own growth trajectory.
An opportunity has opened up to insert India further into global supply chains.
But, it is also essential to ensure that there are substantive domestic reforms to take advantage of the above.

Source: Business Standard