24 October 2016
If China can make real progress in slashing its overcapacity, the economy may pick up steam again in one or two years. Photo: Bloomberg
If China can make real progress in slashing its overcapacity, the economy may pick up steam again in one or two years. Photo: Bloomberg

When will China economy bottom out?

China’s economic growth has started to slow down markedly since 2012. And the long-awaited bottoming sign has proved illusive over the past few years.

According to a new forecast made in a China Daily article, the growth slowdown could come to an end in one or two years. But it remains to be seen if the prediction proves correct. 

It’s widely believed that China’s slowdown since 2012 is mainly a result of the aftershock of the 2008 global financial crisis and the backfiring of the nation’s policy response.

Beijing promptly rolled out a 4-trillion-yuan stimulus package back then to counter the crisis. The scheme appeared to work as GDP growth reached 9.6 percent, 9.1 percent, 10.4 percent and 9.3 percent respectively between 2008 and 2011.

However, serious side effects began to surface in 2012.

The monetary stimulus artificially boosted infrastructure and investment, which brought short-term economic growth but also led to excessive capacity and high leverage.

The problems started to drag the economy. GDP growth rate decelerated to 7.8 percent in 2012, and slowed further to 7.7 percent, 7.4 percent and 6.9 percent respectively in 2013, 2014 and 2015. In the first half of this year, the growth eased further to 6.7 percent.

When will things turn around?

Top policymakers, in fact, are divided over the answer. In March, Premier Li Keqiang said the economy had a good start this year. Vice Premier Zhang Gaoli soon made similar remarks.

Yet two months later, the People’s Daily published an interview with an unidentified “authoritative person”, who described the economy as just being steady and warned against getting carried away by certain positive economic indicators.

On Monday, the state mouthpiece carried an article written by Liu Shijin, deputy head of the China Development Research Foundation.

In the article, Liu outlined three conditions for the economy to bottom out: the end of excessively high investments; significant progress in the elimination of overcapacity; and formation of new growth engine.

Liu said China’s economy is very close to bottoming out and is probably in the phase of experiencing its toughest moment as well as seeing the light at the end of tunnel. Specifically, it may take another one to two years for the economy to come out of the woods.

Judging from recent data, the criteria laid down by Liu are not fulfilled yet.

Government investment soared 23.5 percent while private sector investment only expanded by 2.8 percent in the first six months of this year from previous year. It suggests that state-led investment continues to act as the main driver and that a new growth engine is nowhere to be seen yet.

The private sector is reluctant to invest, largely because there is still too much production capacity around.

In the near term, underpinned by government-led infrastructure investment, China is likely to maintain growth rate close to 7 percent.

The economic downturn cycle usually lasts five to seven years. With some luck, China’s efforts to reengineer its economic structure may eventually work and the growth pace could pick up again in 2019, or perhaps even as early as next year.

This article appeared in the Hong Kong Economic Journal on Aug. 16.

Translation by Julie zhu with additional reporting

[Chinese version 中文版]

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Hong Kong Economic Journal columnist

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