The ‘New Normal’ of China’s Economy
Last year the Chinese government coined the phrase “New Normal,” but didn’t explain what it meant. In fact, the “New Normal” means “farewell to prosperity.” It implies that the rapid growth seen in China over the past two to three decades is not likely to continue into the future.
The Chinese people may not even be aware of the causes behind China’s rapid growth over the past two to three decades. I will summarize it here in two stages. The first was the export boom, the second the construction boom.
The “export boom” mainly refers to the trend of many countries going to China with large investments, and transferring their manufacturing to low-wage countries as a result of economic globalization after China formally joined the World Trade Organization in early 2002. This led to China’s rapid export growth, five or six years in a row, of more than 25 percent and sometimes even 35 percent. Such growth was indeed astonishing.
The question is whether a country as big as China can sustain a continuous export growth rate of 25 to 35 percent for two decades. Looking at it rationally, we know it’s impossible. China has a large population and a quarter of the world’s labor force. If China maintained such an export growth, all factories in the world would have to close down, because the size of the world market has an upper limit.
In 2008, China’s export boom was halted by the subprime mortgage crisis in the United States. Consumption in developed countries shrank rapidly. This stopped the boom after nearly seven years. At present, it is obvious that the golden era of China’s export growth has ended. A couple of years ago, China’s export growth dropped to 6 or 7 percent, and in 2015 it fell to 3 percent—the boom was completely over.
With declining exports in recent years, how did China’s economy manage to sustain a high growth rate? The Chinese government, fearing that growth would dry up, released a four trillion yuan stimulus package after the 2008 subprime crisis. One of its key consequences was authorizing local governments to engage in real estate development using bank loans. This strategy was also adopted by China’s state-owned enterprises.
This move transformed the country into a big construction site. The Chinese economy went through a huge change from export oriented to real estate oriented. Related industries, such as steel, aluminum, building materials, cement, glass, and so on all flourished. China’s steel production, which supported large-scale domestic construction projects, more than doubled in a few years, reaching nearly a billion tons per year.
This real estate boom saved China’s economic prosperity for another several years. But can it be sustained? Not likely. Despite so many houses having been built, if they cannot be sold, the local governments and real estate corporations who borrowed money to build them will go bankrupt. This is exactly what China is facing right now.
According to a survey conducted by Peking University last year, over 60 percent of urban households in China already own one residence, 20 to 30 percent of whom own two or more residences—and then among them, several tens of millions own more than six residences. Yet these people purchase houses as an investment, not to live in. In the end they hope to sell their properties at a higher price than they paid for them.
When houses are sold not for people to live in, but for rich people to hold as investments, this is of course a very unhealthy real estate market. This deformity of supply and demand has led to a short-lived real estate boom. Buyers plan to sell houses eventually, but who will buy them? Not many people can afford such expensive residences.
When housing prices so far exceed income, the real estate market becomes saturated and houses are no longer marketable. Real estate investment companies began suffering losses that resulted in broken funding chains and disillusionment with the real estate boom—this is what happened last year.
In 2015, China’s real estate boom ran into a serious crisis, and one decade of positive export growth went negative. With these two factors combined, the Chinese economy has stepped into a difficult stage, which has been called the “New Normal” by the Chinese government.
‘The New Normal’
Specific factors and opportunities led to China’s past two decades of rapid growth. With all these factors now having gone away, China has entered a period of low economic growth from here on out. As far as how low it will be, we are unable to predict. Calamities, such as a real estate crash or further world economic turmoil, may cause the economy to slide down further.
Earlier in 2016, China’s National Bureau of Statistics announced that China’s 2015 GDP growth had declined over the previous year. In other words, the “New Normal” may imply that the decline of China’s economic growth rate has no bottom, while the ceiling will not rise higher than the current level. Perhaps the present economic state is the best that China will see for a long time.
Dr. Cheng Xiaonong was trained as a sociologist at Princeton University. This article is an abridged translation of a Jan. 25, 2016 interview with Radio France International.