Why China is so worried about 7 percent growth

Most countries would welcome that. But China fears unrest if the economy slows much more.

Eugene Hoshiko/AP
Workers cut enoki mushroom into equal lengths at a mushroom processing factory in Shanghai, China, Monday, July 29. China's manufacturing activity has fallen to an 11-month low, a disappointing performance that puts pressure on Chinese leaders to reverse a deepening slowdown in the world's second-largest economy.

For the second time in two days a top official has pledged to keep Chinese growth rates at a respectable level, despite ominous signs that factories around the country are slowing down. Yesterday it was President Xi Jinping himself making the promise, and that means Beijing means it.

The government’s target, 7.5 percent this year, would sound good almost anywhere else in the world. For China, it would be the slowest rate in two decades. And if growth falls below 7 percent, the official thinking goes, that could lead to rising unemployment and social unrest – which is what the ruling Communist Party fears most.

The trouble is, Beijing does not have many options. China’s extraordinary economic growth until now has been driven by exports and by massive investments in roads, railways, and industrial infrastructure, along with the debt incurred to fund all that construction.

But export growth is falling as the rest of the world struggles to pull itself out of the 2008 economic and financial crisis. And the government is clearly worried that its debt burden – anywhere from 46 percent to 78 percent of GDP, depending on whose estimates you believe – is becoming unmanageable.

Prime Minister Li Keqiang, the man in charge of the economy, has said his government will not take the easy way out in the face of slowing growth, as it did in 2008 when the authorities came up with a stimulus package worth nearly $600 billion.

Those debts are coming home to roost now. And auditors are fanning out across the country to inspect local governments’ books, to get an accurate picture of how much money local authorities have borrowed in recent years behind Beijing’s back.

The idea is that China will “rebalance” its economy away from traditional drivers and toward more domestic consumption, which means raising citizens’ disposable income.

That is good news for the rest of the world, and for any foreign company making things that Chinese consumers might want to buy. The Chinese market is already huge; if Chinese shoppers had more money to spend it would be even more attractive.

But this plan will take time to work – assuming that it does work. And until it does, tighter credit and less reliable export growth are bound to mean slower GDP growth.

Many economists say that even 7.5 percent a year is unrealistic and that China’s leaders will have to find a way to live with 5 percent or 6 percent – and with whatever implications that has for joblessness.

But one thing is sure, in a country where economic data are often opaque and the government controls all the information. If Xi Jinping promises 7.5 percent growth, that is what the end of year figures will say, whatever the underlying reality. The president cannot be wrong. 

As Reuters reported:

China will meet its economic growth target of 7.5 percent this year as authorities will continue to implement prudent monetary policy and keep market liquidity relatively ample, the chief of the top economic planning agency said on Wednesday.

Xu Shaoshi, chairman of the National Development and Reform Commission, also said in a live webcast that the government will unveil an urbanization plan in the second half of 2013 and will push ahead with housing registration and land reforms.

Xu's comments are the latest from top officials to affirm China's plans to transform its economy and reassure markets it is on track to meet its goals. On Tuesday the politburo, China's top decision making body, vowed to keep growth steady while pressing on with reforms.

"We are confident, and have the necessary means and the ability to achieve this year's economic growth target of around 7.5 percent. But we also need to make arduous efforts," Xu said in the webcast on the central government's website.

Top leaders have made clear they will accept a slowdown in growth as they restructure the economy away from dependence for growth on exports and manufacturing, and towards one driven by consumption and services.

However, they have indicated that annual growth should not be allowed to slip below 7 percent.

Getting rural workers to move to the cities is part of the transformation effort as the government sees it as boosting consumption, which it wants to make the main engine of growth.

"We will push forward reforms on household registration system, land, fiscal and financial areas, social security and so on while improving the quality of urbanization," Xu said.

(Reuters reporting by Aileen Wang, Xiaoyi Shao and Jonathan Standing; Editing by John Mair)

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