China should not sacrifice long-term growth for short-term gain

May 12, 2016 15:52
China's economy has to take some pain in the next two years before it can enjoy solid, long-term growth. Photo: Bloomberg

An L-shaped growth for China, as predicted by an "authoritative figure", is not necessarily a bad thing.

The forecast calls for a sharp fall in economic growth and a slump lasting more than two years.

The argument is that China's economy is underpinned by a record expansion in credit which will create more problems in the long run.

Policymakers should accept moderate growth in the short term and restructure the economy toward resilience and sustainability.

It's unclear whether the economy is still in free fall or if it has begun to level off.

If the economy has stabilized, GDP growth will hover around 6 percent in the coming years.

Monetary policy will be relatively stable, which is good news for investors.

Experience tells us that stock markets in developed economies take off during medium to high GDP growth under a moderate monetary policy.

The US posted annual GDP growth of nearly 7 percent in the 1980s before the rate fell to 5 percent in the 1990s and stabilized.

The US stock market went through a bull cycle for a decade under a relatively accommodative monetary policy.

The Dow Jones industrial average surged more than threefold to 11,000 points in 2000 from 2,600 in 1990.

By contrast, the index was up two times between 1980 and 1990 despite robust GDP growth.

What is more worrying is that China’s economy has yet to bottom out.

“The Chinese economy has great potential, resilience and room to maneuver. The speed won’t drop drastically, even without stimulus,” the authoritative person said in an article in the official People's Daily.

Let’s wait and see.

The article, which ran to more than 11,000 words, said China should not rely on investment-driven and leveraged growth which might lead to greater economic risks.

It said the government should continue supply-side reform and give way to market forces, even if it means sacrificing short-term growth.

The economy has to take some pain in the next two years before it can enjoy solid, long-term growth.

Many economists and analysts at home and abroad agree with these views. 

However, much hinges on details and execution.

Rising unemployment, falling livelihood opportunities and economic slowdown pose a grave challenge to policymakers.

This article appeared in the Hong Kong Economic Journal on May 12.

Translation by Julie Zhu

[Chinese version 中文版]

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Hong Kong Economic Journal columnist