by Shujie Yao.

Slow GDP growth in the second quarter of 2012 has attracted serious debates in and outside China. Premier WEN Jiabao visited the south western provinces of the country, telling local officials that they have to be prepared for a hard time in the second half of the year and beyond.

In fact, the rest of the world is also slowing down. The phrase ‘hard time’ may not be an appropriate description of the real situation in China today. Slow growth is an inevitable reality, not a hard time. If it were a hard time, it would imply that after a while, break-neck high growth would come back again.

However, the chance that China will go back to its past level of near two-digit level of growth is close to zero. In other words, slow growth is not temporal; it is permanent because a structural break has taken place.

People in China have been used to a near or even over two-digit level of growth for more than 30 years under economic reforms, particularly after its accession to the WTO, when China expanded its world trade volume, foreign exchange reserves and trade surplus at a phenomenal pace.

No country, including China, can be expected to continue such a break-neck growth without a pause, or a recession. Whether it is Europe, the US, or Japan, economic booms have always been accompanied with busts. The current financial crisis is no exception. It has merely followed a prolonged period of economic prosperity in virtually all parts of the world.

Economic boom and bust cycles are inevitable outcomes of a market economic system. Even though China has been capable of using a strong government hand to guide its socialist-style market economy, it is not unreasonable for China to experience a boom-bust cycle as well.

In fact, China has been very lucky compared to any other country in the world over the last three decades. The Chinese economy appears to have grown strongly and positively in every single quarter since economic reforms began in 1978, led by the late leader, Deng Xiaoping. This unbroken and rapid economic growth is termed as the China economic miracle in the literature, a miracle that no other country can match with such a large population.

Now that the world financial crisis is deepening and China’s domestic growth constraints have emerged, it is not unreasonable for a slowdown of growth. This slowing down process is probably a structural break, implying that once coming down from 10% to less than 8% per annum, it may not come back to its original level again. This structural break, in my view, is permanent. The Chinese government and people have to be prepared for the harsh reality and come up with a new development strategy, instead of trying to do short-term fixing activities that may lead to more long term complication and difficulty.

Heavy environmental pollution and extensive consumption of oil, coal and iron ores implies that China should not really continue with its past growth trajectory. Moreover, rising labour costs and structural shortage, relocation of manufacturing facilities westward from the coastal areas, all call for a slower growth of the economy.

Most people in China have not come to terms with this harsh reality and still dream in the world of 2-digit level of growth. Consequently, once they see the economy growing at less than 8% per year, they think it is a disaster for the country.

Slow growth can be a disaster only if it causes a rapid rise in unemployment. However, slow growth needs not be a disaster if every single new project can be re-designed to attract more labour and become more resource efficient. In that way, China can still manage a high level of employment with a much lower level of growth.

The biggest challenge that China faces is not slow growth, but its ability to improve income distribution, to reduce pollution, to eradicate poverty and to control corruption. If the government is fully aware of all these problems and take appropriate actions, people will become happier without rapid economic expansion.

Technology upgrading is important, too, but innovation and new products require time and patience to take place. As a result, more efforts should be focused on improving the country’s research and education systems so that industries will be equipped with better human resources and technologies to become more competitive in the world.

Japan, South Korea and Taiwan are excellent examples for China’s future development and growth. Japan’s population is one-tenth of China’s. Korea’s population is less than one-twentieth of China’s. However, Japan and Korea have some of the world’s most admirable brand names such as Toyota, Sony, Sharp, Hyundai and Samsung.

What does China have? It has Petro-China and ICBC, which are two of the world’s largest companies by market value, but both of them have a Chinese nick-name called Wan Ren Keng, a tomb that buries tens of thousands of people. This nick-name implies that large Chinese firms have benefited from powerful natural monopoly at the expenses of shareholders, non-state-owned small and medium sized enterprises, savers and consumers.

To create world-class brand names, China has to break down the monopoly power of its largest state-owned enterprises, subjecting them to tougher market competition and enabling other enterprises for easier market access with fair competition.

In the short term, China may still try to slow down the declining rate of growth through further cutting interest rate and reducing the bank deposit/reserves ratio. However, this kind of looser monetary policy can only have a limited short term effect at a price of creating more long term troubles.

Gradually, the government will realise that patience and better policies are needed to prevent China from a large crisis by accepting a much lower level of economic growth. Attention will then be focused on social justice and creation of a knowledge and technology-based economy.

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.

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