The Chinese economy grew at a rate of 7.4 percent in the first quarter of 2014 compared to the same period last year, according to official figures released recently. Such numbers are often looked at with some skepticism by outsiders, and as usual conformed closely with the statements of top Chinese officials about where they expect economic growth to go this year.
A growth rate of 7.4 percent on a yearly basis is the slowest announced pace of growth since 2012. On a quarterly basis growth slowed to 1.4 percent from 1.7 percent from September to December last year.
“It means that fixed asset investment has slowed down for a further step,” said Qu Hongbin, chief China economist and co-head of Asia Economics at HSBC, who gave an analysis on Weibo. “The rebound of fundamental construction couldn’t even outweigh the impact of the downfall in real estate, and the investment in manufacturing was still low but stable. The future investment growth momentum is still quite weak.”
At the same time that the official figures were published, Chinese officials took to the media to explain some of the problems in the economy. “The quality of GDP is relatively low, and the wealth transfer effect relatively poor,” said a headline in Economic Reference.
It comes down to the cost of economic growth. Purchasing growth with debt will ultimately be unsustainable, said Han Wenxiu, the deputy director of the research office of the State Council. “Loans are increasing every year, and at one point the debt will be too much,” he said.
GDP does not tell the whole picture of the health of the economy, he said. “Building a bridge is GDP. Pulling it down also contributes to GDP. Building another one is also GDP. Build it three times and you’ve wasted huge capital, but the only wealth you’ve created is just that one bit.”
As an official researcher he avoided using the term “crisis” for what may face the Chinese economy if it continues to rely on debt to fuel growth. But many foreign economists have come to associate a dangerous fiscal crisis with China’s unsustainable buildup of debt. Since the global financial crisis in 2007–2008, Chinese leaders have stoked the economy through such growth by allowing state-run banks to lend enormous sums for infrastructure projects that gain insufficient economic return on the capital investment.
One of the tasks under the new leadership of Xi Jinping has been to rein in such practices, and instead allow growth to be created organically, through consumer spending. The obstacles for this transition are high, however, and it has yet to be realized.
Chinese leaders have vowed to make the economy more open to private industry and foreign businesses, and have announced a number of piecemeal measures to that effect. It is easier to register businesses now, for example, and Internet companies are being given licenses to go into banking. But deeper structural issues—such as continued state control over key sectors, including banking—whose resolution would allow a more dynamic economy, are intimately tied up with the political system, and could take many years to change, if such changes are possible at all.