China’s new leaders are poised to inherit the weakest economic growth since Deng Xiaoping three decades ago and may need to borrow from his market-opening tool kit to avert a steeper decline.
As the Communist Party prepares to anoint Vice President Xi Jinping, 59, and Vice Premier Li Keqiang, 57, next month as its so-called fifth generation in charge, data from exports to production signal the government will struggle this year to reach its 7.5% expansion target. The retiring top echelon took power in 2003 with growth above 9% and their predecessors were bequeathed a 14% pace in 1993, a year after Deng toured the southern boom towns he’d spawned, urging more change.
U.S. and European consumer spending that fueled expansion for decades is waning, while the young labor force that filled China’s factories is starting to shrink. Unless Xi and Li can succeed where their predecessors came up short and curb state enterprises, boost access to credit for private companies and raise consumption, annual growth could slump to about 4% by 2014, according to Roubini Global Economics.
China’s slowdown is adding to headwinds complicating the global economy’s struggle with Europe’s debt crisis and stunted U.S. job gains. China’s economy, the world’s second-largest, accounted for 36% of expansion last year.
One expert sees China’s growth moderating to 7% in 2013 and remaining at about the same level through 2015, compared with about 10% since Deng began dismantling Mao Zedong’s command economy in the 1980s. Pimco has $10 billion U.S. invested in Chinese corporate bonds, yuan debt issued in Hong Kong and currency contracts
The next generation of leaders must overcome opponents of change, including state-owned companies and banks that are “powerful, resourceful and resolute in protecting their interests,” according to a February report by the World Bank and the Development Research Center of China’s State Council.
While former Premier Zhu Rongji continued Deng’s legacy of reducing the government’s role by closing some state-run companies in the 1990s and firing millions of workers, the public-sector retreat slowed under current President Hu Jintao and Premier Wen Jiabao. Since 2003, policy has shifted toward supporting state-owned enterprises as a source of strength, Beijing-based GK Dragonomics wrote in a May 24 report.
Officials have vowed since at least 2006 to make domestic consumption an engine of expansion, even as its contribution to GDP slumped to about 35% this year from 44% a decade ago, according to Capital Economics Ltd. in London.
China’s overseas shipments rose less than 3% for a second consecutive month in August, industrial output grew at the slowest pace in three years, and foreign direct investment fell for a ninth month out of 10.
