China has constantly said that its growth rate target is based upon many features, but one core feature is a constant. That is that China needs to maintain a 7pc growth rate to find jobs for the new 10 million young people coming to the jobs market each year.
What an incredible number that is, but that is China, operating in numbers that dwarf the rest of the world. Some nations do compare on some measures but no nation has the huge numbers operating in so many.
It is why those who know China well have such a respect for the economic achievements of the Communist Party of China for achieving such an incredible economic progress over the last 37 years.
Because China has such big numbers in so many different directions, the Western China watchers can always find material to focus on as major challenges. They are usually right in their focus, but rarely in their conclusions, which usually frame the challenges within contexts of fundamental challenges to the Chinese economy.
I say that because the fact speaks for itself – despite constant predictions of dire results from “problems” China has maintained a very successful economy. And each time it enters a new era expressing itself determined to address challenges created by development, the doomsayers come out and focus on the problems raised by China.
Today that is pollution, growth rates, property prices, financial reforms, etc. But these are the problems focused on by the Chinese leaders and the ones they have plans to address.
Today China is in the process of huge change from urbanisation (from 200 million in the cities in 1978 to 850 million by 2020), transformation of agricultural production to large scale, and transformation of the economy to a socialist market economy.
Since the arguably excessive wage rises of 2005/6 where wages rose in the eastern industrial areas by 25pc or more, and the global recession and financial crisis coincided, China has been chasing growth. Until then China’s growth came from bursting into a WTO based global market, based upon low cost exports. It was hard to see ahead, but once we saw the real surges we could see how China had matched low costs with market opportunities.
But as China moved too quickly to raise prices and tries to move too fast to a domestic economy, and that external situation deteriorated, so China had to rein back the move away from exports and stimulate the domestic economy to accelerate infrastructure construction – all vital to China’s long term development – to maintain growth and, thereby, social stability.
It looks like China is still suffering from downward growth pressures, and this is well covered in the Western media, and is planning a new stimulus programme sometime soon.
It will not match the excessive size of that of 2008/9, which addressed the tsunami of global collapse that followed the financial crisis when growth fell in the first quarter of 2009 to 3-4pc. This time China’s growth rate is a respectable 7-7.5pc and infrastructure development in Central and Western China and urbanisation continue to underpin that number.
But the downward pressure is real due to global markets and the time it takes to build domestic consumption. It was always stated by us that domestic consumption take 15-20 years to develop, and domestic consumption based on debt is a destructive force in the long-term. It reduces people to worry and anxiety. So Chinese domestic consumption requires a more stable environment of healthcare and welfare, backed by workplace stability. That by definition will take through the 2020’s to achieve.
So in the meantime China must maintain exports to maintain employment – that is why the RMB rate is steadying around 6.20 instead of heading under 6.00. It must maintain needed infrastructure investment including creating sustainable cities, and must focus on rebuilding the agricultural sector.
We expect a stimulus programme to maintain growth around the 7.5pc level and that will benefit commodity prices, and the economies that depend on China’s sourcing of raw materials and food – Africa, Australia, and, perhaps, the U.S.A.
But the message is to watch out for a stimulus programme sometime soon, and see it as a management of the economy, and not a danger signal or desperation. It will be targeted and learn from the 2008 stimulus programme.
All economies need stimulus and cooling down as growth cannot be a straight line.
It’s just the numbers are so much bigger with China.
The very good news is that the Chinese market is going to open up in a much bigger way and in the next period.