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2020.01.08

China's growth rate will fall below 6%, but experts watch calmly as leaders give priority to pushing reforms - Representatives of Japanese firms in China are fed up with the biased pessimism of head offices in Japan

The article was originally posted on JBpress on Novermber 19, 2019

  • Kiyoyuki SEGUCHI
  • Research Director
    Kiyoyuki SEGUCHI
  • [Expertise]
    Chinese Economy and Relations among Japan/China and the United States

1.The next several years represent the final phase of rapid economic growth

On October 18, China's National Bureau of Statistics announced that the real GDP growth rate for the third quarter (July to September) had been 6.0% compared to the previous year, accounting for the lowest growth rate since 1992 when quarterly data first began to be published.

After China adopted its reform and open-door policy in 1978, its annual growth rate has only fallen below 6% three times---in 1981 (+5.1%), 1989 (+4.2%), and 1990 (+3.9%).

In addition, in 1989 and 1990, there were special circumstances under which the Chinese economy stagnated for political reasons attributed to the Tiananmen Square incident.

This year, as the quarters passed, GDP growth rate has continued to decline, at 6.4% in the first quarter, 6.2% in the second, and 6.0% in the third. For the whole year, it is expected to remain between 6.1% and 6.2% (In the fourth quarter, it is projected that China will maintain the same growth rate of 6.0% as in the preceding quarter).

Many experts predict that this slowdown will continue into next year as well, with the annual growth rate ranging from 5.8% to 6.0%.

As described above, the Chinese economy is entering the final phase of rapid economic growth, which has continued for more than 40 years since 1978, and it is expected that growth will continue to gradually slow down each year.

When, during my business trip to Beijing and Shanghai in late October, I asked Chinese government officials concerned with economic policy and economists in the private sector about long-term prospects for the Chinese economy, they almost all agreed that the average growth rate for the period from 2021 to 2025 would be 5.0-5.5% and growth rate during the second half of the 2020s would be between 3 and 5%.

In other words, in the second half of the 2020s, the Chinese economy is projected to see its growth rate fall below 5%, shifting to the period of stable growth. This means that the period of rapid economic growth will come to an end in the next several years.


2.GDP growth would have fallen below 6.0%, but experts watch calmly

As mentioned above, the Chinese economy is continuing to slow down in the long run, and this view is already shared among experts such as Chinese government officials involved in macroeconomic policy and economists in the private sector.

Even when the growth rate of 6.0% was publicly announced on October 18, it was not surprising.

In Beijing and Shanghai, I asked many government officials and private economists how they took the announcement immediately after it was made, and they talked about their impression, saying unanimously that it was as they had expected or even slightly more bullish than they had expected.

The reason for such impressions was that since the economic indicators for July and August remained more sluggish than they had expected, they had projected that the growth rate would fail to reach 6% in the whole third quarter, remaining at 5.9%, if the indicators were similarly weak in September.

For this reason, when they heard the announcement, not a few of them felt relieved that the GDP growth rate had actually reached 6.0% and that other economic indicators had tended to recover slightly in early September.


3.Placing greater emphasis on pushing reforms than stimulating the economy

On the day that the GDP growth rate was announced publicly, stock prices immediately rose on the Shanghai stock market in response. The reason was market expectations that the Chinese government would take some additional measures to boost the economy.

The government however showed no signs of taking such measures, causing stock prices to fall within the day to a level lower than that of the previous day as market watchers realized this reality.

In fact, it was already obvious among both government officials involved in economic policy and economists in the private sector that the Chinese government did not intend to move to stimulate the economy.

In July, it was clear that the prospects for growth rates at the beginning of this year needed to be revised downward. Nonetheless, the Chinese government did not show any intention to take additional measures to stimulate the economy.

Early this year, in China, it was considered as a matter of time that the trade disputes between China and the United States would calm down. Therefore, the optimistic view prevailed that as the quarters were on, the growth rate would show an increasing tendency, reaching 6.1-6.2% in the first half of this year and 6.3-6.4% in the second, averaging 6.2-6.3% for the whole year.

It was considered as almost certain that next year, as the growth rate similarly continued, the Chinese government would achieve the national goal of doubling its 2010 real GDP level in 2020.

But in May of this year and thereafter, the U.S.-China trade disputes became fiercer than had been expected, and in addition, the recovery of automobile sales was slower than had been expected, leading, along with other reasons, to worsened business sentiment.

In July, the prospects for growth rates were revised downward to 6.1-6.2% for this year and around 6.0% for next year.

If the growth rate continued as forecast above, it became almost clear that the national goal of doubling real GDP in 2020 would be unachievable.

Formerly, the Chinese government would have naturally moved without fail to achieve the goal by taking additional measures to stimulate the economy.

But the current Chinese government is different. Although economic prospects were revised downward and the goal of doubling real GDP in 2020 was found impossible to achieve, the government did not move to boost the economy. This surprised me, too.

When, during my business trip in late July, I confirmed this with many reliable government officials and private economists in Beijing and Shanghai, almost all of them agreed that the government would not move.

The biggest reason for this was that China's policy of implementing economic policy was drastically reviewed at the 19th National Congress of the Communist Party in the autumn of 2017, shifting economic policy from the previous emphasis on quantitative expansion to one on qualitative improvement.

The policy required to improve the quality of the economy consists of three major reforms: prevention of financial risks (regional fiscal reforms aimed at reducing regional debt and tighter controls over shadow banking and Internet financing to prevent a bubble economy), reduction of disparities between the rich and poor, and environmental improvement.

It is clear that advancing these reforms has negative effects on infrastructure development investments, private capital investments, corporate earnings, and so forth, and in fact, the economic slowdown in the second half of 2018 and thereafter was one side effect of the reforms carried out.

The Chinese government has worked on these reforms understanding the likely results.

Therefore, even when it became clear in July of this year that the goal of doubling real GDP was infeasible, the government's basic policy remained unshaken. One high-ranking government official explained to me as follows:

"At the 19th National Congress of the Communist Party, President Xi Jinping stated that China would shift from the period during which it aimed at rapid economic growth to a new period during which it aims at improving the quality of the economy."

"After that, the Chinese government, which no longer needed to stick to the goal of achieving target growth rates, entered a period during which it should place emphasis on advancing reforms to improve the quality of the economy and society, including the improvement of the environment, product and service quality, and so forth."

Furthermore, the government official added the following:

"Previously, emphasis was placed on maintaining employment opportunities for social stability, and for that reason, it was important to achieve goals for growth rates."

"But, today, while it is important to improve the quality of the economy as people enjoy more affluent lives, labor shortages are becoming a serious problem as the birthrate has started to decline, and the aging of the population has begun to progress."

"Due to these structural changes in the economy and society, the importance of stimulative measures to maintain employment has declined. This is also the reason that the Chinese government has ceased to stick to growth goals."


4.Representatives of Japanese firms in China are fed up with the biased pessimism of head offices in Japan

Many of the senior managers of Japanese firms long stationed in China, who largely understand what the actual condition of the Chinese economy is and how experts in China see it as described above, took the recent announcement of the GDP growth rate of 6.0% calmly.

In addition to that, the remarkable events that show the current economic slowdown include the unemployment of factory workers of some assembly businesses which are affected directly by the ongoing U.S.-China trade disputes (shift to service industries) and a decline in the willingness of mainly provincial middle income earners to buy a car.

In Shanghai, Guangzhou, and other major cities in coastal areas, on the other hand, the effects of the economic slowdown are not felt much, partly because of strong service industries and steady sales of high-class automobiles.

For this reason, I heard senior managers of Japanese firms stationed in such large cities say that business sentiment had not practically changed since the beginning of this year.

Under these circumstances, due to improved Japan-China relations and the increasingly active stance of the Chinese government to attract businesses from overseas, many senior managers of Japanese firms see that great opportunities to expand Chinese business are on the horizon.

But Japanese mass media are still continuing to make biased and pessimistic reports on the Chinese economy.

When the GDP growth rate was publicly announced on October 18, news that emphasized the negative aspects of the Chinese economy was conspicuous; Japanese mass media reported, for example, that the Chinese economy was currently faced with extreme difficulties, that the slowdown of the Chinese economy was increasingly serious, or that the Chinese government was anxious as the growth rate was gradually falling below 6%.

Many Japanese firms in China received a succession of questions from their head offices in Japan, which heard such reports and wondered about whether the Chinese economy was all right, and were busy answering such questions.

If one fully understands how the Chinese economy is doing, one would not be confused by such biased and negative information, but many members of the management at head offices still have only a shallow understanding of the Chinese economy.

For this reason, every time they watch negative news, they swallow it and ask meaningless questions.

The fact is that many of the Japanese senior managers resident in China are fed up with the repetition of such interactions with their head offices.

Sadly, even now, they are busy with the odd duty of answering meaningless questions based on the misunderstanding of senior managers at head offices without expressing their true feelings in words.


5.Rapid economic growth will only continue for another few years, but the Chinese economy is still most attractive in the world

Regardless of whether they are Japanese, North American, or European, the top managers of first-class enterprises around the world who are developing the Chinese market in earnest, visit China frequently, see things with their own eyes, and make important decisions by themselves at the right time.

The understanding shared by them is that over the next 10 to 15 years, no other global market will be more attractive than China's.

In China, the Foreign Investment Law will come into force in January 2020. This law, which was put together as a measure to meet the pressure of the Trump administration in the United States, provides a legal system to improve China's business environment for foreign-affiliated companies.

The new law is expected to be effective in significantly improving the business environment for foreign-affiliated companies, and examples of the expected effects include stepping up efforts to protect intellectual property rights, prohibiting forced technology transfer, collecting opinions conscientiously in advance if rule changes by the government affect foreign-affiliated companies, ensuring the freedom to remit money to the home country, and filling gaps in treatment between Chinese and foreign companies.

Many of these measures to improve the business environment are beneficial to Chinese companies, as well, but formerly, they had not materialized due to strong domestic opposition forces. In this case, the Chinese government used pressure from the U.S. to put internal reforms into practice.

The real effects of the Foreign Investment Law will not be visible unless it is confirmed how far the Law is applied thoroughly after it is actually enforced. Most of the governments and businesses in Western countries take a skeptical view of how the law will actually be applied, and their prospects for a better business environment under the law are dim.

Chinese government officials explain, however, that the law will significantly change the business environment.

Since last year, as the economic slowdown continued as the result of domestic economic reforms, the Chinese government has become even more active in attracting foreign-affiliated companies than before, and in addition to this, if the recent favorable development of improved Japan-China relations is taken into consideration, I assume that the law is expected to bring certain satisfactory effects for Japanese businesses in particular.

How will the Chinese government actually apply this legal system? I will closely watch the actual application of the law in January and thereafter.

Japanese companies are entering a phase in which they should consider new ways of developing Chinese business according to the actual application of the law.

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