[SHANGHAI] China's economic growth, already at its slowest in decades, will get worse before it gets better, as economists say it will take time before liberalising reforms turn net positive, and Beijing needs to bite more such bullets for a sustainable turnaround.
GDP growth slowed to 7.4 per cent last year, its weakest since 1990, and Beijing is calling for around 7 per cent growth in 2015. The IMF recently predicted 6.8 per cent growth this year, and 6.25 per cent in 2016.
That's still a ripping rate for a US$10 trillion economy, so few economists believe a crisis is imminent, but even fewer believe an upturn is around the corner, as reform itself is partly responsible for the slowdown. "For this year, unfortunately, we have not seen the bottom,"said Wang Jun, economist at the China Center for International Economic Exchanges, a think-tank set up to help Beijing navigate choppy waters after the global financial crisis. "Growth should stabilise, but it's hard to judge for next year because that depends on the progress that we make in structural adjustments." Though Beijing has repeatedly cut interest rates and freed banks to lend more, that has done more to fuel debt-funded stock market speculation than spur productive investment.
The resilience of the stock market surge is in part a recognition that government will have to keep injecting fresh cash, since nearly every indicator of economic performance has been lacklustre or worse in 2015, with manufacturing output sliding, deflationary pressure rising, and demand weak both at home and abroad.
Unemployment, a key benchmark of social stability, remains low at around 4 per cent, but even officials doubt the reliability of that figure.
Private surveys show rising unemployment stress, and local governments are moving to protect jobs at state-owned enterprises.
Officially, non-performing loans remain manageable at below 2 per cent, but most analysts believe real rates are far higher, since many firms and local governments tapped the opaque shadow banking market.
Much of China's current malaise is attributable to the end of the real estate boom, which Beijing encouraged to redirect capital away from an overheated sector.
But that slowdown hit related sectors such as steel, glass and furniture, cut revenues for local governments dependent on land sales, and continues to drag on growth. "There are 55 million empty housing units in China," said China economist Nicholas Lardy. "These aren't doing anything (for the economy)."
China's debt overhang has also made it hard to stimulate productive investment. Private firms, facing stubbornly weak customer demand and high real interest rates, prefer to repay debt than invest in new capacity.
Policymakers fear reform will not be aggressive enough to steer the world's second-largest economy around the so-called middle-income country trap, where rising labour costs halt economic progress without accompanying rises in productivity or innovation.