China: react to the slowdown

The annual GDP of China fell from 8.1% in first quarter 2012 to 7.6% in the second, reaching its lowest level since the second quarter of 2009. The announcement of this figure may have allayed the fears of a hard landing for China, but many observers have felt that China should boost its economy to ensure the 8% annual growth.

The Chinese government has tightened monetary policy since early 2010 to contain inflation and asset bubbles. This resulted in lower inflation – 2.2% in June, the lowest since 29 months, and even a modest decline in house prices.

The slowdown of China’s growth reflects, to some extent, the success of government’s efforts to curb the housing bubble, as well as other official policies designed to rebalance the economy. Investment in property development, which directly represents over 10% of GDP, fell by 16.3 points in the first half of 2012. This has led to a slowdown in investment in many industries, such as building materials, furnishings and appliances, causing a drop in annual growth in capital investment by 25.6% to 20.4%.

The trend in household consumption is less clear. But many economists have found evidence to suggest that growth in household consumption was higher in the first half of 2012 than indicated by official statistics.

The slowing economy in 2012 should have been anticipated by the government in 2011. In a speech before the beginning of 2012 Annual Meeting of the National People’s Congress, Premier Wen Jiabao, explained government’s indicative target of the economic growth was 7.5% for 2012 and stated that the purpose was “to encourage work in all sectors to accelerate the transformation of economic development model and make economic development more sustainable and efficient. ”

In fact, to create sufficient space for a changing growth model based on GDP, the 12th Five-Year Plan of China sets an indicative target of 7% per year for 2010-2015.

The government has maintained for years an implicit objective of minimum growth of 8% per year, considered necessary to create ten million new jobs annually. But demographic trends and structural conditions have altered the labor market.

Premier Wen said recently that China “should continue on the path of a proactive fiscal policy and prudent monetary policy, while focusing on growth.” Moreover, the government approved in recent months major projects in the steel and energy, and other agreements could materialize.

It is entirely appropriate for a government to respond quickly to a changing situation. But the slowdown to 7.8% annual growth in the first half of 2012 does not justify a change in direction. China has to choose between high growth and rapid structural adjustment. It can not have both at the same time. Facing with the current slowdown, China can afford to keep its course, at least for now.