In March, China experienced a decline in both exports and imports. The trade data released by Beijing indicated a 6.6 percent drop in exports compared to last year, while imports fell by 11.3 percent.
Surprisingly, China’s GDP for the first quarter grew by only 7.3 percent, the slowest growth rate since 2009. Although this might still seem impressive compared to other countries, it raises concerns within China.
A growth rate of 8 percent is deemed essential for creating enough jobs for the millions of migrants relocating from rural areas to cities. Additionally, such growth is considered crucial for maintaining social stability. However, some experts argue that a slowdown might ultimately benefit the economy.
Recently, Mei Jianping, a finance professor at the Cheung Kong Graduate School of Business, addressed the inevitability of a slowdown. “While it may be possible to achieve a GDP target of 7.5 percent in 2014, this rate is not sustainable,” Jianping stated.
He further explained that for long-term sustainable growth, a 5 percent growth rate is more realistic – and that wouldn’t be a negative outcome.
In Bad Need of A Maalox Moment
“Historically, the Chinese government has provided bailouts to failing companies and those burdened with bad debt,” Jianping noted. “China must steer clear of such excesses moving forward.”
To illustrate his point, Jianping used an analogy: “Imagine I offer you a reward to dine at any Michelin-starred restaurant in New York for five days, but there’s a catch—you can’t use the restroom. How long could you last?”
This metaphor, according to Jianping, reflects China’s economic growth. “For thirty years, China has consumed a significant amount of capital without taking a necessary pause. The U.S. financial crisis, while detrimental, allowed for a reset that helped eliminate excesses, leading to a healthier economy. China hasn’t had that opportunity.”
Regrettably, when the latest recession hit the U.S., it was met with bailouts similar to those China has utilized. The government intervened to rescue institutions like General Motors and AIG, which prevented any necessary economic cleansing. But that’s a discussion for another day; for now, our focus remains on China.
Give Trains a Chance
One of the recurring illusions held by central planners is their belief that they can effectively organize society for the best outcomes. However, they are the ones who define what “best” means. Concepts like freedom of choice and individual autonomy are often overlooked by these planners.
Nothing seems to flatter the vanity of central planners more than large-scale, state-sponsored train construction projects. The execution of such projects brings together all the pretentious aspects of big government, controlling where people travel, how they get there, and when they do so. Moreover, the diversion of public funds for these projects can be justified under the guise of benefiting the economy.
“In response to a slowing economy, China has announced a set of measures, including railway spending and tax relief, aimed at supporting growth and job creation, helping to secure Premier Li Keqiang’s 7.5 percent growth target,” Bloomberg reported last week.
“The government plans to issue 150 billion yuan in bonds this year to fund railway construction, primarily in the underdeveloped central and western regions,” the State Council announced following a meeting led by Li.
“Authorities will also establish a development fund between 200 billion and 300 billion yuan annually to enhance rail financing.”
Given the urgency to meet the 7.5 percent GDP target, it seems that giving trains a chance is the way forward.
Sincerely,
MN Gordon
for Economic Prism
