This may be a year of reckoning for China and its fast-maturing economy.
The world’s second-largest economy has seen its growth slow to the lowest rate in more than a decade, amid export slowdowns and a credit bubble at home. Its working-age population declined for the first time in recent memory last year. And an indicator of inequality, released by China’s government for the first time since 2005, shows a dangerously high imbalance between the country’s rich and poor.
It is a set of distinctly grown-up problems for the world’s newest economic powerhouse, now facing the risk of getting stuck in the middle-income trap.
“What we are beginning to see this year is China is at an economic crossroads and China’s leaders need to decide whether they want to attempt real economic adjustment,” said Patrick Chovanec, an associate professor at Tsinghua University’s School of Economics and Management.
Friday’s annual year-end recounting of major statistics showed the economy expanded by 7.8 per cent last year, its slowest rate since 1999, though a faster-than-expected fourth-quarter surge of 7.9 per cent is thought to bode well for at least the first half of 2013.
“The overall national economic performance [has been] stabilized,” Ma Jiantang, commissioner for China’s National Bureau of Statistics, told reporters, after referring to an “increasingly complicated and severe international situation.”
The country’s total value of imports and exports grew more slowly than in the previous year, up 6.2 per cent year-on-year, far missing an earlier government target of 10 per cent, but, again, recovering from the euro zone crisis and U.S. malaise.
Perhaps more significantly, there were 3.45 million fewer people of working age, that is 15 to 59, in China last year, a 0.6-per-cent drop and a first for modern China. It’s an indication of a looming demographic crisis brought on by its three-decade, one-child policy.
Economists and academics have in the past warned that this shrinking, aging work force may limit China’s ability to change itself from a developing to fully developed nation: In essence, becoming old before it becomes rich.
“It will have a profound impact, yet what … is still unclear now,” said Duan Chengrong, a professor of population studies at Renmin University.
“It requires more observation and research. China’s economy has thrived on cheap labour, acting as a world factory. The plunge in labour population will be a great challenge to this mode of development. However, development relying on the large number of people is a policy that cannot last. If we can make our industries more advanced and improve productivity, and work in this direction, perhaps China won’t be called the world’s factory in 20 years.”
Officials also for the first time in a decade revealed an official measure of the country's Gini coefficient, an index that measures income inequality in which 0 is perfect equality and a reading of 0.4 or higher indicates risk of social unrest. China, after hitting a high of 0.491 during the 2008 economic crisis, now sits at 0.474, officials said.
Though Chinese academics have warned the number is likely much higher, the admission is significant as formal acknowledgment of the large and growing gap between the rural poor and the urban middle class and wealthy in this country of 1.35 billion people, where urban residents’ average annual income of 26,959 yuan ($4,279) last year was nearly four times that of rural residents.
Policy makers are beset by other challenges. Rising production costs are beginning to drive the manufacturers that built China’s growth to lower-cost centres like Vietnam. Bad debt left over from government stimulus plagues the official banking system, as well as the increasingly unruly shadow banking system. And there is the terrible environmental toll, of breakneck growth, including air pollution that in Beijing Friday again reached hazardous levels on a U.S. embassy monitor.
“The upturn has a little bit more to run. Growth is likely to accelerate further in the first half of 2012 but slow mildly in the second half so that growth for 2013 as a whole will come close to 2012. This is due to the relatively restrained pace of stimulus as the government is keen to avoid a spike of lending and also inflation,” wrote economist Alaistair Chan at Moody’s Analytics. “There were numerous references to stability. A reference to improving the quality and efficiency of growth suggests increased emphasis on reducing pollution and wasteful investment.”
Still, there are signs of life – industrial production was up 10 per cent, though that was slightly lower growth than the previous year, while retail sales grew 14.3 per cent year-on-year.
“Part of the challenge of talking about the numbers, both for fourth quarter and for the year, is that conventionally, we assume high GDP growth is a good thing and slow GDP growth is a bad thing,” Prof. Chovanec said. “Moderation of that, if it’s part of an economic adjustment to get China back on a sustainable growth pattern, is not a bad thing.”