Xi Jinping: The slow boat in China is good for the region

China's growth is slowing, in line with long-declared policy to prevent overheating. Asean too will benefit from less competitive pressures in exports and investments.

HAVING chalked up 9.9 per cent growth a year for over three decades, China's economy is showing clear signs of slowing down.

No economy can keep on growing at such a breakneck rate for so long without running into constraints. An economy that has experienced high growth for a prolonged period inevitably slows as its original growth-inducing forces weaken. This is simply a result of the working of the market forces.

China's slowing growth is not only inevitable; it is a desirable phenomenon, not only for the country, but also for its neighbours.

On the supply side, economic growth is fuelled by an expanding labour force and productivity increases. Last year, however, China saw its working-age population decline for the first time. This is an indication that China's labour supply is approaching what the Nobel economist Arthur Lewis called the "turning-point" - or the "Lewis turning point". With the supply of labour no longer unlimited, minimum wages have been rising.

What many commenters often overlook, however, is that the impact of demography on growth is usually long-term and gradual. China's declining population growth will not translate into serious labour shortages until well after 2020. China's immediate concern is the gradual disappearance of its "demographic dividend".

This refers to the easy availability of abundant cheap labour that fuelled China's massive industrial expansion. Over the next few years, China will see the number of 20- to 35-year-olds decline. This is the labour pool that is most in demand for labour-intensive manufacturing activities.

Increasingly, China will also face difficulty maintaining the high rates of productivity growth experienced in the past. This is because it has exhausted the easy sources of productivity gains associated with market reform and initial institutional improvement. Future productivity growth has to come from more investment in human capital, more expensive research and development, and more thorough-going institutional reform.

The lower growth potential this implies, however, is not necessarily bad. China today is the world's second largest economy. With a total gross domestic product (GDP) of US$8 trillion (S$10 trillion), it already exceeds half of the US level. Should China continue to grow at double-digit rates, it would simply be too disruptive for both China and the world.

Historically, other high-performance East Asian economies have experienced shorter periods of high growth. Japan had strong growth for just over 20 years, through the 1950s, 1960s and part of the 1970s. South Korea and Taiwan also had about 20 years of rapid economic expansion, mainly in the 1960s and the 1970s. Hong Kong and Singapore had even shorter periods of high growth. In terms of sustaining long-term growth, size obviously matters. Singapore ran into serious labour shortages after just over 10 years.

China has sustained hyper growth for more than 30 years. This is because it has much greater internal dynamics. A case in point is that only half of China's population today is urbanised. China may therefore still have plenty of room for expansion in the medium term.

Still, China must also start adjusting to the inevitable transition from double-digit hyper expansion to more sustainable growth levels.

Adjusting to lower growth

FOR some time now, the central government in Beijing has wanted lower and more stable growth. Throughout the 1990s, then Premier Zhu Rongji spent enormous effort fighting economic overheating. In the 2000s, then Premier Wen Jiabao did the same, reining in over-investment and property speculation. In mapping out their Five-Year Plans, China's policymakers regularly targeted annual growth at only 7 per cent to 8 per cent. But these modest official targets were variably exceeded in practice, with actual growth often in the double-digit range. This was partly because local governments wanted higher growth for themselves.

Beijing is therefore happy to embrace the more sustainable lower growth.

A recent projection by the World Bank shows that China's average growth through most of this decade will still be around 7 per cent to 8 per cent, easing to 6 per cent or 5 per cent in the 2020s. What is "low growth" for China is actually not low at all by regional and global standards.

Furthermore, the new leadership under President Xi Jinping actually sees lower growth as an opportunity to achieve better quality growth and build a more inclusive society. In Mr Xi's view, lower growth is no obstacle to the realisation of his "Chinese Dream".

Lower growth and rebalancing

ACCORDING to Nobel prize-winning economist Simon Kuznets, economic growth and structural change are one and the same process. Slower growth will therefore go hand in hand with macroeconomic restructuring and rebalancing.

China's economic growth on the demand side is known to be mainly investment driven. High investment will fall in future, particularly since many large industries are suffering from excess capacity. The housing sector also remains overheated. For more stable long-term growth, domestic consumption must be boosted. Currently, China's consumption level is just too low, at about 40 per cent of GDP compared with 55 per cent for India and 70 per cent for the US.

Even more crucial for China's rebalancing effort is the need to reduce its dependence on exports.

This is because China's comparative advantage has been seriously eroded by increasing costs and rising wages. Industrial wages went up 14 per cent last year. The gradual appreciation of the yuan has put additional pressures on China's export competitiveness. The yuan has appreciated almost 40 per cent in nominal terms since 2005. It will be hard for China's exports to grow at double-digit rates from now on.

China's growth pattern actually started to shift last year. But economic restructuring is a slow process. Beijing will continue to embrace slower growth along with macroeconomic rebalancing. Lower growth means less pressure on the environment and society. It also helps make growth more stable and more sustainable.

Boon for Asean

CHINA'S lower growth is also good for neighbouring Asean economies. Historically, China's economic relationship with Asean has had both complementary and competitive aspects. China's economic growth increased demand for the region's primary commodities and natural resources.

At the same time, China's dynamic manufactured exports put strong competitive pressures on the region's nascent manufacturing sector, both directly and in third-country markets. Some Asean countries (for example, Indonesia) were apprehensive over the diversion of foreign direct investment (FDI) from the region to China. To allay Asean's fears and to promote closer economic relations, China took the initiative to conclude the China-Asean Free Trade Agreement in 2002. China-Asean trade has since sky-rocketed from US$8 billion in 1991 to a staggering US$401 billion last year. China today is a top trade partner with virtually every Asean country. China is also becoming an important international player in the FDI scene: China's cumulative FDI in Asean reached US$19 billion by mid-last year.

In this sense, China and Asean have built up an economic relationship that is not likely to be affected by China's potentially slower growth. China's economic rebalancing can be a positive factor for Asean's development. There will be, for example, less competitive pressures on Asean's labour-intensive manufactured exports. More FDI may also find its way back to South-east Asia.

Meanwhile, China remains the main economic growth engine for the region. Slower growth will not diminish China's growing geo-economic predominance in the region. But China's geopolitical influence in the region remains constrained, partly because China's "peaceful rise" has not been widely embraced yet.

stopinion@sph.com.sg

The writer is a professorial fellow at the East Asian Institute.

By Invitation features expert views from opinion leaders in Singapore and the region.