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China: Where Slower
Growth Is Part of the Plan

By Jens Erik Gould
The Financialist

The new numbers are out, and the trend remains in place: In the first quarter of 2015, China’s economy grew 7 percent – the slowest quarterly pace since 2009. The data comes on the heels of 7.4 percent growth in 2014, a figure that missed the Chinese government’s target and was the slowest annual tally since 1990. The most fearful of economic observers still see a possible hard landing in the future. But the optimists see China’s economy changing according to plan.

For some years now, China has been in deliberate transition to an economic model as reliant on domestic consumption as it is on exports, as well as one that is less driven by public investment. In the process, the country’s economic targets have expanded beyond its historical single-minded focus on GDP growth to include things like healthy employment numbers, income growth and social well-being. The 7 percent growth rate isn’t even really a surprise; rather, China’s current Five-Year Plan, which expires this year, included a target of 7 percent growth in 2015. Indeed, that growth rate is what Premier Li Keqiang was referring to last month when he said the economy had entered a “new phase of slower and better-balanced growth”

In 2010, China aimed to keep urban unemployment under 5 percent through 2015, and it has averaged 4.1 percent over the past five years. There’s been plenty of job creation in the cities – 51 million new urban jobs in the past four years. China has also successfully boosted income in the countryside, reducing the income gap between urban and rural workers. Overall, income has risen by 67 percent in rural areas and 51 percent in urban areas. “This is one of the important objectives of the government in order to promote inclusive and balanced growth,” Credit Suisse analysts Amlan Roy, Anais Boussie and Mengyuan Yuan write in a recent report detailing China’s progress on its Five Year Plan.

In order to bolster income growth and thereby consumption, the government has also sought to provide its citizens with better social welfare. The government plans to increase the retirement age in order to ease the government fiscal pressure imposed by an aging population. The state has also increased subsidies for health services: more than 1.3 billion people are covered by the country’s basic medical insurance, a coverage ratio of more than 95 percent. And then there’s infrastructure. China’s railway network is already over 100,000 kilometers, and it’s getting longer: in 2015, more than $128 billion will be invested and more than 8,000 new kilometers of railways will be built.   The Chinese government has also started governance reforms. The party is carrying out an unprecedented anti-corruption campaign across all levels of government, while also trying to improve transparency and accountability to the general public. This could help the global perception of China on many non-economic qualitative indicators.

This is a profound structural change, of course, and the transition continues to be anything but easy. The Chinese economy could slow even further, especially as China deals with increasing labor costs, oversupply in the housing market and weak demand from Europe. “It’s difficult to confront slower growth and make structural adjustments at the same time,” Roy, Boussie and Yuan write. “Policy makers have to seek a delicate balance between sometimes conflicting objectives.” To this point, however, they appear to be finding that balance.

Source: From The Financialist – Presented by Credit Suisse,

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