An authoritative economic growth forecast has laid a foundation for adjusting to the nation’s ongoing slowdown

Caixin editorial (5/18/16)

Against the backdrop of a slumping economy, the party-run People’s Daily newspaper has once again sought answers from an unnamed “authority.”

letterLA “person in authority” told the paper in an interview published May 9 that China’s economy is on an “L-shaped” trajectory for recovery.

The interviewee’s point was that neither a U-shaped nor a V-shaped line would appear on charts tracking the nation’s economic growth rate. Instead, the chart would reflect a drastic decline followed by slow yet stable growth.

The message conveyed did not stray far from what analysts had previously agreed upon. Nevertheless, the interview generated a lot of discussion among economists over its timing and implications.

The interview, apparently aimed at dispelling market jitters over slow growth, triggered steep declines that day on the Shanghai and Shenzhen stock markets. Each bourse’s composite index closed the day down by nearly 3 percent.

Equity market traders usually overreact to the Chinese economy’s ups and downs. But the early May sell-off was certainly indicative of the deep shock felt by investors who read the People’s Daily projection.

Investor reactions thus underscored the challenges ahead as the nation adjusts expectations and rethinks the way the economy should be managed, even as the growth rate follows the trajectory described in the newspaper over the next year or two.

In recent years, overseas analysts have offered sometimes contradictory explanations about the health of the Chinese economy. Some thought the economy would inevitably slow, and that a slow-growth economy would have a positive effect by spurring economic reform. Others tended to fuss when the economy’s growth accelerated a little quickly or abruptly slowed.

A look back at recent history may help clear the air and help analysts and economists at home and abroad understand what “L-shaped” economic growth in China is all about.

Back in 1995, China’s GDP was less than US$ 800 per capita. A decade later, it had risen to US$ 1,800. And last year, it was US$ 8,000.

The growth was no doubt impressive. But one day, that kind of growth will certainly reach its limit. What follows could be much more moderate growth, and perhaps a contraction. Read more