The dismal Chinese economic data continues to roll in. What had initially been considered a blip on the radar is looking more like a long-term slowdown. Many analysts (including, somewhat surprisingly, a Chinese government think tank) now believe China’s GDP growth will likely have a 7 in front of it; if so, it would be the first time in over a decade the country has grown at less than 8 percent.
And while debate remains as to whether this deceleration is the result of a natural slowdown for a developing economy entering a new, lower-growth phase, an inevitable response to a global slowdown or whether it’s due to a sclerotic political and economic model in dire need of reform, Beijing neither saw the slowdown coming nor accepts it now as inevitable. How could it? Given the nexus between social stability and high growth, China’s rulers rightly fear that a relatively sluggish economy could erode whatever remains of its legitimacy among the citizenry.
So how will the government respond?
The last time the government faced an economic crisis, during the global financial crisis of 2008–09, it responded quickly with a massive stimulus package. As the Washington Post reports, a similar proposal this time has been ruled out…or has it?
On the one hand, officials have insisted that there will be no new stimulus. On the other, the Central Bank has announced new rules to ease liquidity, and the main economic planning agency, the National Development and Reform Commission, has accelerated approval of hundreds of projects this year, many in the solar power and alternative energy sector.
“They’re very schizophrenic,” said Patrick Chovanec, an American who teaches finance at Tsinghua University in Beijing. Government policymakers are “stepping on the accelerator and stepping on the brake at the same time. They want the growth, but they don’t want the problems that come with the growth, the bad debt and the inflation.”
“I think they’ve painted themselves into a corner,” Chovanec said. “They have a limited number of levers, all of them come at a cost.”
This confusion is not something China’s current generation of leaders is used to confronting. Since they took power in 2002, the country has experienced unprecedented prosperity. Not once did growth fall below even 9 percent, and in the heady days of 2007 it reached an extraordinary 14.2 percent. While the benefits of this boom have been unevenly distributed, enough has trickled down to lift hundreds of millions out of poverty and into a thriving middle class.
In one sense, the timing couldn’t be worse for Chinese policymakers. With the leadership transition looming later this year, a series of political hitches and above all the Bo Xilai firestorm have left the ruling elite distracted with palace intrigue at a time when they ought to be focused on the economy. An increasingly assertive American presence in the region is also creating headaches for Beijing.
But the purge of Bo could prove a blessing in disguise. He belonged to a faction that advocated more, not less, government control over the economy. If the modernizers remove enough of Bo’s allies, then the scandal may in fact present an opportunity for the country to open up its economy, boost consumption and exports, and ween itself off the crack cocaine of massive investment projects.
China’s unique mix of authoritarian capitalism has served it well for the past thirty years. But that growth model and the social passivity on which it depends are showing their age. Whether the ruling elite possesses enough flexibility and political will to manage the next stages of China’s development remains to be seen.
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