Should China Worry About a GDP Slowdown?

Growth in China seems to be slowing. Will political instability rise?



For years, the conventional wisdom about China's GDP was this: if the country didn't meet its target of 8 percent annualized growth, political instability would result. The reasoning behind this wisdom is pretty simple: the Chinese Communist Party, having long ago forfeited its ideological legitimacy, depends solely on providing economic growth in order to stay in power. So long as enough people prosper, they'll put up with a fair amount of repression and corruption. But as soon as economic growth slows, China could be in for a rude awakening.

Has the time come? China's GDP grew by only 7.8 percent in 2012, its worst showing in over a decade, and the numbers for the first quarter of 2013 are even worse: just 7.7 percent, below the 8 percent forecasted by a Wall Street Journal survey of economists. To make matters worse, there's some question that the actual number is even lower: some economists are questioning the accuracy of China's inflation statistics, which would mean that real growth is lower still.

Should Beijing be worried about political unrest, then? Probably not, at least in the short term.

For one, China's economic slowdown is, in part, a consequence of demographic changes sweeping the country. According to Yiping Huang, a scholar at Beijing University, the downward shift in China's economy neatly mirrors the decline in the country's working-age population -- there were 3.5 million fewer people of working age in the country in 2012 than there were in 2011, a far cry from a decade ago when this figure increased annually.  As a result, the economy can slow without a corresponding rise in unemployment. And unemployment, more than anything else, is what Beijing fears can trigger political unrest.

Secondly, a GDP slowdown may help Beijing tackle some of the structural problems with the economy, once described by former Premier Wen Jiabao as "unbalanced, uncoordinated, and unsustainable". Patrick Chovanec, an economist who has written extensively about the Chinese economy, says that "if China slowed for the right reasons, by being more selective with their investments, and moving toward more consumption, a slight slowdown would actually be a good thing." In other words, a slowdown can help tackle a number of issues that threaten China's long-term health -- income inequality and environmental issues being two of the bigger ones -- as well as mitigate the country's looming bad debt program.

If anything, a bigger risk to political stability in China is an economic collapse rather than a gradual slowdown. A cataclysmic financial crisis -- precipitated, perhaps, by the popping of one of China's housing bubbles -- that resulted in the depletion of investor savings could unleash far more public anger than a slight drop in GDP growth.  And even then, Beijing has taken steps in the last three years to cool its housing bubbles, tightening mortgage lending requirements and placing limits on where Chinese people may buy houses. Though these issues are real concerns, Nicholas Consonery, a China analyst at Eurasia Group, says that the overall risk of an economic meltdown in China remains low.

In the long term, of course, political dissent threatens the Chinese Communist Party -- just as it does any authoritarian regime. But for now, the idea that China has to maintain 8 percent growth to survive doesn't apply. "The new benchmark figure," Consonery told me, "ought to be 7.5 percent".