Despite still growing at a very respectful rate in an international context, China’s GDP is projected to rise by 7.6% in 2013, a number below the standard that investors have got used to over the last decade.
One of the main uncertainties at the moment is the potential policy response of the new leadership in China to the current economic slowdown. In the past, deceleration in growth was usually followed by massive stimulus. Since taking office in March this year however, Beijing’s new policymakers have demonstrated a willingness to tolerate slower growth for better quality long-term growth achieved through structural reforms. On the one hand, as demonstrated by investors’ reaction to talks of ‘tapering’ the quantitative easing programme by the US Federal Reserve, major shifts in policymakers’ stance are usually accompanied by short term volatility. In addition, a key factor for the success of any structural reforms is their correct implementation. At the same time, however, the massive stimulus programme post the 2008-09 financial crisis has created excess capacity in some industries, which together with rising labour costs, challenge the competitiveness of certain sectors in a global context.
Shifting the focus to structural reforms would allow the new leaders in China to address some of the excesses of the past and also achieve high mid to long-term GDP growth potential. Last but not least, it should be stressed that Beijing is unlikely to accept a dramatic slowdown in the short term. Premier Li Keqiang has recently suggested that growth should not decelerate below a minimum (unspecified) rate that is required to maintain labour market stability.
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