Is China's GDP growth sustainable?

Tue, 25 Oct Pre-Open

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Being an export oriented economy China's growth is predominantly dependent upon the external demand from the West. And with the western world slowing down China's economic growth has come under severe pressure. Managing inflation and (economic) growth has always been a tricky job for the central bankers around the world. Especially if growth is dependent upon external factors like exports as in such instances attempts to re-instill growth via monetary policy tools is futile. China is a classic example to this case.

Waning demand from the western world has seen economy growing at its weakest pace in the last quarter during the last two years. While consumer inflation is in the region of 6%, high food prices are a cause of worry. Thus, the Chinese government too, like India, is facing twin problems of managing growth and inflation. However, the solution to their problems is different as the growth drivers are diverse. India's growth is not largely influenced by external factors (exports) as is the case with China.

So, if China has to resolve its growth issues it has to focus on reducing its dependency on the west. And this can be done by concentrating on job creation which has been impacted by the weakening demand from the West. It may be noted that steps to support the labor intensive industries and small businesses are already on the anvil. This would not only reduce the volatility in growth but also add stability to it.

As far as the inflation issue is concerned it may be noted that consumer inflation is within the comfort zone with the exception of food. And since food inflation is triggered by supply side issues the government can do very little about it. However, improving back end infrastructure and food storage facilities can help reduce food wastage.

Apart from food inflation the Chinese government also needs to take steps in curbing property price inflation. It may be noted that property prices in China are at record highs despite the annual property inflation being at 3.5%. This signifies of some kind of a property bubble in China. And we all know what happened in the West once the property bubble burst. In order to avoid such a scenario, government must take steps in rationalizing the property prices. Measures should also be taken in expanding affordable housing to the poor. Getting faster and easier access to land for cheaper projects would bring a firm grip on affordable housing construction.

Thus, if China manages to reduce its dependency on West and finds an amicable solution to the property price woes it may continue to grow at a healthy pace as witnessed in the past.