China’s economy grew 7.4 percent in 2014, its slowest rate in a quarter century and below the government’s growth target, Chinese authorities said on Tuesday.
The announcement from China’s National Bureau of Statistics lays bare the challenges China’s policymakers face in restructuring the country’s economy, even as they promise this ‘new normal’ of slowing growth is a blessing disguised. The reported growth figure represents a decline from 7.7% growth in 2013 and China’s slowest growth since 1990, when the country grappled with inflation and international sanctions precipitated by the massacre by the army of pro-democracy protesters in Tiananmen Square. The government’s growth target for 2014 was 7.5%.
China overtook the United States as the world’s largest economy last year by some measures, and its economic health will have a tangible effect on a dizzying swath of the world’s population, from Brazilian farmers to African entrepreneurs and Australian exporters.
Yet the ruling Communist Party’s top priority is to maintain control and stability in the country. For senior officials, the recession highlights several hidden threats and challenges: massive piles of local government debt; fall in real estate prices; and widespread overcapacity, as local authorities continue to pump funds into investment projects – roads, luxury apartments, stadiums – that ultimately sit idle.
“China overinvested from 2009 to 2014 without the demand to make the investment profitable. So it really needs to consolidate,” said Andy Xie, an independent economist in Shanghai. “The financial system is controlled by the government, so I don’t think the government will allow too many bankruptcies. The good thing is that it makes the economy stable. But the problem is that it can go on forever.
For years, Chinese officials have pushed to shift the country’s main economic drivers from investment and manufacturing to consumption and services – to transform China from the factory of the world into the trading center of the world. The statistics office presented its 2014 economic indicators as proof that change is happening.
Consumer spending and retail sales continued to grow. China’s economy “has been operating steadily under the new normal, showing good momentum of stable growth, optimized structure, improved quality and enhanced livelihoods,” the bureau said in a report.
Chinese President Xi Jinping began using the term “the new normal” in May, implying that officials would prioritize the quality of China’s growth over growth for its own sake. Xi urged the public to “keep a cool head as the brakes continue,” Xinhua, the state newswire, reported. Three decades of meteoric economic growth “have resulted in stifling air pollution and the exhaustive exploitation of natural resources”, he added. It was a recognition that environmental degradation now poses a greater risk to the country’s future than economic uncertainty.
The question remains, however, whether the government will be able to make the necessary sacrifices to achieve its objectives. Analysts say a more dramatic downturn could lead to job losses and, in the worst-case scenario, public outrage – a nightmare for a regime obsessed with maintaining its grip on power.
“I think if the growth rate drops below seven, there may be social problems,” said Cao Heping, an economics professor at Peking University. Local governments are still seeking cash injections to complete long-stalled infrastructure projects, hampering systemic reform efforts. The authorities are expected to lower the growth target to 7% in 2015, giving them much-needed leeway for a positive effect.
The World Bank’s semi-annual reports on the global economic outlook for 2015 indicated that the Chinese economy would grow by 7.1% in 2015, a rate low enough to worsen the slowdown, but not to pose a significant threat to global financial health. . Other institutions were less optimistic: the International Monetary Fund revised its Chinese growth projection for 2015 down to 6.8%, and Oxford Economics predicted 6.5%.
Experts say some of the country’s biggest economic challenges are beyond the purview of even the most powerful policymakers. The country’s workforce has been shrinking since 2012, squeezed by an aging population and three decades of a draconian family planning policy. Authorities say the country could lose 67 million workers between 2010 and 2030. Although the controversial one-child policy was liberalized last year, the effects of the revision are far below expectations.
“The labor market has been very tight when the economy is slowing down,” said Mark Williams, chief Asia economist at London-based Capital Economics. “What that tells us is that you can’t beat the slowdown in the Chinese economy because it’s a structural slowdown, it’s not one that would be reversed by policy easing.”