Australian Financial Review: Why China is aiming for 'low' growth rate of 7 per cent that other countries would kill for

China Labour Bulletin is quoted in the following article. Copyright remains with the original publisher.

March 5, 2015


China's leaders are about to set their lowest economic growth goal in at least a quarter century. How can they get away with it?

Premier Li Keqiang is expected to announce this year's target for growth in gross domestic product of "around 7 percent" when he gives his work report - China's version of the State of the Union - to launch the National People's Congress on Thursday morning local time.

China's Communist Party has long maintained a pact of sorts with the people. The leadership has guaranteed rapid economic growth to boost businesses and lift incomes. In turn, the people should not demand the right to choose their civil servants or openly criticise the party.

That tacit deal has started to fray in recent years, as workers, farmers and urbanites have become increasingly outspoken about their grievances over unpaid wages, land grabs and rampant pollution. Meanwhile, economic growth was 7.4 per cent last year, its slowest pace since 1990 and well below the almost 10 per cent average annual growth that marked the first 25 years after the launch of reform and the opening of China in 1978.

So shouldn't Chinese leaders be even more determined to boost growth now?

The simple answer is: jobs.

In the past, ensuring GDP growth had an exalted status. During the global economic crisis, the Chinese government's rallying cry was Baoba, or Protect Eight - 8 per cent growth.

Today, China's leaders are increasingly aware that ensuring adequate employment and growing incomes is even more important. That's particularly true of Li, premier since March 2013, who has a law degree and a doctorate in economics from Peking University, and is known as an advocate for more economic reform. The leadership can even afford to miss its GDP target, as arguably it did last year when the goal was "about 7.5 per cent", as long as Chinese are employed and keep earning more.

And it has been working. Last year, Li promised China would add 10 million urban jobs and handily beat the target with 13 million. People's livelihoods improved, too. That was partly because of a tighter job market due to China's aging population, with national per capita disposable income up by 10.1 per cent to 20,167 yuan ($4112), according to China's National Bureau of Statistics. "Both registered and surveyed unemployment rates [were] lower than the previous year," said premier Li, speaking at the World Economic Forum in Davos, Switzerland, on January 21. "That is, we achieved growth in employment despite the economic slowdown."

Slower growth will not be as welcome in the US and the European Union. China's imports have fallen every month since October, and dropped a precipitous 19.9 per cent in January from a year earlier, the worst performance since 2009. If China's purchases from abroad continue to slide, as many expect, that will hurt big trading partners, including the US and EU, both of which had shipments to China fall in January.

Jobs are important in China for the same reason they are everywhere - they directly affect the quality of life of people and families. (This year, the target is likely to be 10 million new positions again.) But in China, there is the added imperative of social stability. According to research from the Chinese Academy of Social Sciences, labour-related issues are one of the largest triggers for protests in China, along with land grabs by local officials, pollution, and ethnic tensions. The Hong Kong-based China Labour Bulletin recorded 569 incidents - demonstrations and strikes - by construction workers, miners, factory workers, and teachers in the last three months of last year. That was more than three times the number from the same period a year earlier.

"Stress tests show the possibility of a large amount of unemployment, which could lead to social instability if the economy cools down too fast," Li said at a meeting in Beijing to plan for the work report, five days after his Davos speech, the official English language China Dailyreported on January 27.

Louis Kuijs, chief China economist at Royal Bank of Scotland in Hong Kong, said: "The preoccupation with preventing social unrest is still incredibly high in the job description of what matters to Chinese officials."

A lower GDP target is now acceptable also because economic growth delivers more employment than it ever did before. That had much to do with the expansion of the job-intensive service sector, particularly tourism, e-commerce and logistics, and health care, Kuijs said. After surpassing industry for the first time in 2013, the service sector grew 8.1 per cent last yearand now accounts for 48.2 per cent of Chinese GDP. That compares with 7.3 per cent growth last year for industry, amounting to 42.6 per cent of total output now. Already in 2013 there were 296 million people working in the service sector, more than the 232 million people working in industry, said Kuijs.

"Nowadays China needs less growth for the same amount of job creation," he said.

China's economic policymakers are well aware that growth must slow as China weans its localities off debt, curbs an already serious problem with surplus industrial capacity, and tries to clean up its badly polluted environment.

Mark Williams and Julian Evans-Pritchard, economists at London-based Capital Economics, wrote in a February 27 note: "Slower growth is probably inevitable if structural problems caused by over-investment are to be addressed. Policymakers seem increasingly comfortable with the idea that China is undergoing a structural transition to a 'new normal' of slower growth."

Expect the greatest pain abroad to be reserved for resource-rich countries such as Australia and Russia. The value of crude oil, steel, and iron ore imports to China is already falling rapidly, a trend likely to continue as China's property sector and new construction cool.

Kuijs said: "China's slowdown may be worse for some other countries than it is for China itself. The acceptance of slower growth on one hand, and the desire for a more rebalanced economy, are both unfavourable for commodity exporters."

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