by Shujie Yao.

The National Bureau of Statistics just published its latest figures this morning, suggesting a sharp decline in China’s gross domestic product (GDP) growth.

Dropping by another 0.5 percentage points in the second quarter from the first this year, a rate of growth at 7.6% is still high by international standards, but it represents the lowest quarterly growth for the last three years in China.

Efforts to contain high price inflation is blamed for this reduced rate of growth, but most commentators within China may have failed to realise that a wide spread economic slowdown has not only taken place in China, but also in many other countries.

India, China’s closest competitor, has experienced even worse results. Its GDP rose only 5.3% in the first five months of the year. Other BRICS economies, including Russia and Brazil, have faced a similar problem.

Slowdown of economic growth in China and elsewhere in the newly industrialised world is a consequence of Europe’s debts crisis and a sluggish recovery in the US economy. UK’s GDP contracted by 0.3% in the last quarter of 2011 and another 0.2% in the first quarter of 2012, pushing the country into a double-dip recession within 4 years of the crisis. The economic conditions in Greece, Spain, Italy, and now Cyprus, have been much worse than in the UK.

Europe’s trouble is more than the Euro crisis. It is also about whether it is able to maintain its current generous welfare system without suffering from more serious consequences. In my view, without reforming the current rigid labour laws and welfare system, the UK and other European countries will be unable to recover fully from the current financial crisis and enter a sustained growth path again.

This is because the world competition order has been fundamentally changed due to China’s ruthless re-emergence as a world economy superpower and the world financial crisis. Rapid growth in India, Russia, Brazil and other emerging economies has re-enforced the transformation process of world order.

China has become an integral part of the world economy since its accession to the WTO. The deepening of crisis in the US, EU and Japan, has affected China badly. The thought that China could have been decoupled from the crisis has proved naïve.

The slowdown of China’s economic growth has actually started from the second half of 2008. When its GDP growth touched its lowest point for a decade in the first quarter of 2009 at 6.3%, the industrialised world was mostly suffering from a severe recession.  

To prevent China from entering into a similar recession, the Chinese government used a 4 trillion RMB stimulus package and another 30 trillion RMB of new bank credits to boost its economy. This huge injection of cash, however, has caused more trouble than it was intended to resolve. Consumer price index rocketed along with a huge housing bubble developing throughout the country.

Without containing consumer price and house price inflations, China would have been devastated by a potentially lethal damage to its economic, social and political stability. The sudden slowdown in infrastructure investment, export growth, and the failure to stimulate domestic consumption, implies that China has been forced to say goodbye to its past near two-digit level of growth.

Simultaneous worsening of both external and internal sentiments has been responsible for the accelerating slowdown of GDP growth, particularly in the first two quarters of 2012. However, 7.6% is not yet a disastrous outcome for China. The real challenge will still be in the second half of the year, and even into the next two years.    

Weakening of internal economic sentiment has been a result of rising labour costs, structural and geographical labour shortage, population aging, continuous currency appreciation, rising prices of imported commodities, and rising electricity/energy inefficiency.

China has to find a new way of growth, a way that will be supported not by traditional factors of cheap labour and easy pollution, but by technological upgrading and human resource development.

Other new development instruments may have to be applied, including provision of low-cost and adequate housing to facilitate urbanisation, more provision of public medical care and education, cutting state monopoly, improving competition and efficiency in banking and other financial services.

As a result of China’s slowdown, the rest of the world will suffer more. To break the vicious circle, a new world balance has to be found between the east and the west, so that both sides will reach a new equilibrium of their own growth trajectories.

Finally, whatever happens in China, its ambition to catch up with and overtake the US remains unchanged. The only side effect of slow growth is that China may need another five more years than initially thought to make its dream come true.

But, China’s dream, is probably not just to be number one of the world economy, it also wants to be a rich nation. However, without creating a more equal society and transforming its material- and energy-intensive industrial structure, the match for China to achieve its ambitious goal may become really long and painful.

Shujie Yao is Senior Fellow in the China Policy Institute, and professor and head of the School of Contemporary Chinese Studies at the University of Nottingham.

Opinions expressed in the CPI blog do not represent the views of the China Policy Institute or the School of Contemporary Chinese Studies at the University of Nottingham. They are the personal views of the bloggers/authors.

Comments

  1. Thanks for this piece Professor Yao. I agree that you have ‘hit the nail on the head’ as regards the welfare system and labour laws that have given too much favour to the employee over the entrepreneur/manager, arguably the greater economic agent. But I’d like to see your suggestions for reform. I think you also forget the prison system as many economists do. I’m not suggesting an abusive penal colony, or forced ‘hard labour’, but when prisons become a more attractive alternative economically to the ‘addict on the street’, surely the wrong message is being sent out somewhere. We’ve taken human rights and political correctness to the extreme and whilst I’m all for fairness and natural justice, as well as care for the infirm, even benefits for the unemployed, but too many people take advantage of the generosities, sometimes generation after generation and there is a big waste of resources. Perhaps ‘soft-authoritarianism’ can provide guidance on this matter. We must keep an open mind after all.

  2. Sam’s commentary is a sign of dangers ahead for our liberal democracy and way of life. I am concerned that the current economic crisis allows politicians to appeal to anti-democratic and populist sentiments (e.g. Tea party movement in the US, Front National in France, True Finns in Finland). What I find equally disheartening is the willingness among many academics to support authoritarian ideas. Calling for an “open mind” to embrace so-called “soft” authoritarianism is very cynical indeed.

  3. Andreas, as a member of the liberal democrat party myself, please note I am not sporting political opinions, but I am trying to open up a dialogue to facilitate better understanding. My comment is requesting to find out what the authoritarian stance would be to see whether or not there is at least something we can learn from the Chinese way of doing things. I am fully in agreement that we need robust measures of protecting our way of life from the influence in addition to monitoring the penetration of forces that have the potential to threaten our way of life and stamping out at the root systematic shortcomings stemming from the migration of such left-wing threats. By the nature of soft-authoritarianism, an open-mind is necessitated in order to hear the argument and see the picture clearly, not to embrace it, but to be able to give a rounded and critique based on all the evidence.

  4. When I talk to dangers to our way of life I am not talking about imaginative “shortcomings stemming from the migration of such left-wing threats” (what does that mean, btw?). The way of life I am talking about is a liberal democratic society where minority rights are constitutionally protected. It is also a society which is confident and robust enough to defend values such as a plural and tolerant society against the encroachment of illiberal ideas and ideologies, such as the ones you are proposing. For further reading I would suggest the recently published article “Liberalism and Permissible Suppression of Illiberal Ideas” by Kristian Skagen Ekeli in the journal Inquiry: An Interdisciplinary Journal of Philosophy. Please find below the abstract of the paper:

    “The purpose of this paper is to consider the following question: to what extent is it permissible for a liberal democratic state to suppress the spread of illiberal ideas (including anti-democratic ideas)? I will discuss two approaches to this question. The first can be termed the clear and imminent danger approach, and the second the preventive approach. The clear and imminent danger approach implies that it is permissible for liberal states to suppress the spread of illiberal doctrines and ideas only if they pose a clear and imminent danger to security and/or the stability of liberal democratic institutions. The preventive approach, which is the one that I will propose and defend, goes further than this: it implies that it can also be permissible for a liberal state to restrict the spread of illiberal doctrines and ideas in order to prevent certain extremist illiberal groups (which I will term offensive illiberal groups) from gaining increased popular and political support, and in order to prevent such groups from becoming significant and powerful political actors. However, the evaluation and choice of liberty-limiting suppressive measures should be guided and restricted by two principles or side-constraints: the significance principle and the least restrictive means principle.”

    http://www.tandfonline.com/doi/abs/10.1080/0020174X.2012.661581

  5. Hi Andreas,

    I agree with much of what you have said, however, I’m sure many of the Chinese readers will be thinking of your reply: “well, it is very easy for him to say.” Some may even be worried about getting into trouble by mere association.

    One matter, I find bizarre, even quite paranoid, is that because I am willing to have an open ear and mind on the Chinese position and that I advocate and support change for a more productive and better future for my country, that you think I am actually ‘proposing illiberal ideas or ideologies’.

    I still don’t know what a Chinese policy answer would be to some of the problems we have yet to solve in our country. I do not know what the ‘soft authoritarian’ position would be in order to solve the European and UK problems that so far have remained largely insoluble, if not malignant/metastatic.

    I continue to agree that the labour and welfare systems in this country are serious defects that require to be addressed in ways that continue to safeguard the rights of vulnerable others, at an appropriate level, not the level that requires a prison, for example, to provide a B+B and 23 hours per day of TV and playstation to a population consisting at least in part of adults capable of being well-functioning in spite of their incarceration.

    I’m not suggesting that we should take an authoritarian and beat them into hard labour or that we adopt undesirable aspects of soft-authoritarianism, I have made that absolutely clear, but I am suggesting that there may be wisdom to be gained from examining the Chinese position on such matters as how to solve the problem of the biggest trough in the business cycle I’ve seen in my lifetime.

    I am advocating that we explore what can be learned from some of the more benign approaches the Chinese government, in addition to those who oppose the Chinese government, but we (and many Chinese) know are in the ‘right’. Why should we close our minds and ears to what China has to say from all standpoints, not only the outspoken in China who appeal to one group of political agendas and not others? This would be as absurd as a religion that claims monopoly on God…I might have answered my own question there…

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