The Chinese economy grew 7.8 percent in 2012—the country’s slowest rate of growth since 1999. Clearly, the economy started to turn around in the fourth quarter when growth was 7.9 percent; this was the first time in seven quarters that growth was faster than in the previous quarter. Although growth in 2012 was the slowest in more than a decade, it was not nearly as bad as might have been the case if the government had not intervened. Much of this growth was driven by investment in infrastructure that was financed by government spending.
In addition, 2012 was a year of substantial monetary-policy easing. The lower interest rate environment, in turn, boosted activity in the housing market and lifted house prices. However, Chinese authorities were worried about possible problems stemming from the shadow banking system. They were especially concerned about funds raised by local governments for infrastructure spending. Consequently, although interest rates came down in 2012, the government in Beijing took steps to limit the growth of non-traditional credit. As such, the impact of easing monetary policy on credit market activity was not as significant as it might have been.
To the extent that there was weakness in 2012, it was largely due to the external environment. Chinese exports decelerated throughout much of the year, but they began to stabilize by the end of the year. Of particular importance was the sharp drop in exports to Europe, the most troubled region in the global economy. The result was that Europe went from being China’s largest export market to its second largest market.
Most analysts expect economic growth in 2013 to exceed that of 2012. However, most analysts also do not foresee China’s growth returning to the breakneck pace that it experienced in the recent past. There are a number of reasons for this.
In the future, growth of exports from China is likely to involve higher-value-added products rather than cheap, assembled products.
First, the very high level of government-driven investment is not seen as sustainable. Fixed asset investment was up more than 20 percent from 2011 to 2012, and much of it was financed by the government. There has been plenty of commentary both in and out of government about the need to switch from investment-driven growth toward consumer-driven growth.
Second, as for consumers, there is plenty of room for growth given that consumer spending is a measly 33 percent of GDP. However, driving faster growth will require some longer-term reforms that are not likely to happen overnight.
Third, the rapid growth of the past was substantially dependent on exporting cheap products assembled by low-wage workers, but wages are rapidly rising. Moreover, the value of the renminbi has risen, and it is expected to rise further. In addition, worker unrest in China has caused uncertainty about the stability of labor-market relations. All of these factors have led many businesses to gradually shift production capacity from China to other countries, including Vietnam, Indonesia, Brazil, and Mexico. In the future, growth of exports from China is likely to involve higher-value-added products rather than cheap, assembled products. Yet it is not clear if the development of this capacity will offset the exit of low-wage production.
Finally, China’s big export markets (Europe and the United States) are both growing much more slowly than in the past. Europe is in recession and is expected to have a weak recovery. Meanwhile, US growth is disappointing, and in the future, it is likely to be driven by investment and exports rather than by consumers. Consequently, these markets hold little promise for China. If China’s growth depends on exports, it will have to involve goods and services sent to other emerging markets.