Continuing the recent trend of slowing down China’s rapidly growing economy, Beijing has set the 2017 growth target for 6.5 percent. China’s leaders look to slow down the economy to stem long-term threats that have arisen from overly generous lending and credit services, heavy stimulus efforts, and massive debt. The low growth targets also mark Beijing trying to move China away from an economic model grounded in breakneck paced industrial expansion to a more stable one focused on services in urban centers.
In recent years China sustained incredibly high growth rates that sometimes pushed past 10 percent (for comparison, after the financial crisis US GDP has grown at around 2 percent annually). This growth came from – among other sources – a massive industrial sector fueled by state owned industries running on cheap and plentiful credit supplied by state owned banks. While China profited immensely from pouring money and loans into heavy industry, eventually long-term problems emerged.
The staggering production of coal and steel led to a litany of environmental problems within China, ranging from notorious air pollution to competition over agricultural land to rivers and water sources being run dry. On top of that, the heavy growth came at the cost of massive corporate as well as governmental debt that leaves some Chinese businesses vulnerable to collapse if production and profit slows down too much. As government sources of lending tightened the belt much less stable underground lenders began illegal shadow banking operations putting some enterprises even deeper into even more dangerous debt.
All of these factors push Premier Li Keqiang, pictured above, and China’s leadership to slow the country’s growth down, aiming for lower targets. Li also announced that Beijing wants to create 11 million new urban jobs and gradually move the country’s growth engine over from industry to services. To further facilitate that shift Li looks to help entrepreneurs create more business by easing government constraints and opening more official government credit lines to smaller businesses. Li was open in noting and addressing the issues of rampant debt and financial risk in China but also pushed for calm, stating that, “systemic risks are under control.”
Much of what China’s government publishes, economists and experts stress, should be taken with a grain of salt. Plenty of economists believe Beijing exaggerates growth figures to prevent worries within the country and look to other metrics to measure China’s success. Reformists in China are wary too, thinking that new promises from Li Keqiang may not mean much and government favoritism towards state owned enterprises will still crowd out smaller businesses trying to grow.
While many economists do believe it is good in the long-term to slow China’s economy down, it is still unclear if China’s government is doing enough to seriously restructure the economy and tackle its financial problems. Furthermore, as Europe’s economies flag and the US looks unpredictable and protectionist, China’s slow down may come at a bad time for a still recovering global economy in need of both buyers and sellers.