Discovering China's new, normal growth

Over the past three months, China has produced tepid macro economic data showing the world's second largest economy slowing down.

It is time to rethink the China's growth story under a new normality, with new thinking and a new framework.

KEEP CALM AND CARRY ON

An article in the UK's Daily Telegraph on Sept. 19, gave China's slowdown as No.1 in "10 warning signs of global financial meltdown".

Ma Guangyuan, independent Beijing economist, disagrees, "this worried tone about stalled growth in China is the latest fashion in overseas markets."

The Chinese economy is slowing, no doubt about it. August's macro indicators were the worst since the 2008 global financial crisis, and the data did indeed show a notable slowdown, with industrial growth and fixed-asset investment both hitting multi-year lows. Electricity consumption, property sales and foreign direct investment all came in weaker than expected, but the Chinese leadership, economists and academics are keeping calm and carrying on.

"China's current economic slowdown is a fact and the decline of growth rates is normal; new normal," Ma said. It is inappropriate to compare August's key macro indicators with the previous 30 years', he said.

In the 35 years between 1978 and 2013, annual growth of the Chinese economy averaged close to 10 percent and, between 2003 and 2007, it was over 11.5 percent. Growth decelerated to 7.7 percent in 2012 and 2013 and in the first half of 2014, we are looking at a figure of 7.4 percent.

"With the approach of the Lewis turning point and increased factor cost, rates near 10 percent are no longer sustainable," said central bank official Sheng Songcheng.

The Lewis turning point is the juncture between an abundant labor supply and a shortage. The shrinking working-age population in China is cutting deep into China's traditional labor cost advantage.

"China's potential growth is falling to around 7 percent," Sheng said. Potential growth is the maximum pace that an economy can sustain over the medium to long term without stoking inflation.

Demographics aside, the slowdown can be blamed--or credited, depending on your point of view--on institutional reform and diminishing returns on capital investment, chief China economist with Bank of America Merrill Lynch Lu Ting said in a earlier note.

THINK NORMAL, ACT NORMAL

The idea of a new normality was first popularized by the bond fund giant Pacific Investment Management Co. to describe below average growth after the global crisis. The term gained ground in China when in May, President Xi Jinping described the need to adapt to a new normality and remain cool-headed as the brakes went on.

Guan Qingyou of Minsheng Securities has laid out three key features of the new normality - much slower growth; continuing structural reform; no big stimulus. In past months, China has repeatedly expressed a new tolerance for slower growth as a precondition to structural reform.

Facing the new normality, Premier Li Keqiang at Summer Davos in Tianjin last month, focused on structural readjustment and other long-term problems, saying he would not be distracted by minor fluctuations of individual indicators. Instead of economic stimulus and easing monetary policy, Li has vigorously promoted reform and economic readjustment.

Economist Ma Guangyuan perceives a lack of wisdom among overseas observers who try to balance reform against stable growth, while baying for a short-term stimulus.

China is still digesting the 2008 stimulus to counteract the global financial crisis. It left China with no choice but to press ahead with difficult reform and lay a foundation for future growth, Ma said.

"It is time to rethink China, as we get ready for a new round of institutional reform which will reshape our nation for many years to come," Lu Ting said.