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China’s Struggle to Slow

BEIJING – At the opening of the annual session of China’s parliament, the National People’s Congress (NPC), Premier Wen Jiabao announced that the government’s target for annual economic growth in 2012 was 7.5%. With the global economy still struggling to recover, Wen’s announcement of such a significant dip in China’s growth rate naturally sparked widespread concern around the world.

But it is important to note that Wen was expressing a policy rather than forecasting performance. The purpose of targeting a lower growth rate, he explained, is “to guide people in all sectors to focus their work on accelerating the transformation of the pattern of economic development and making economic development more sustainable and efficient.”

Fixed-asset investment is the most important engine of China’s growth. As a developing country with annual per capita income of less than $5,000, there is still significant room for China to increase its capital stock. But the growth rate of investment is too high. The issue is not whether China needs more investment, but whether China’s absorption capacity can continue to accommodate the rapid investment growth of the past decade.

In this sense, the investment rate, which in China approaches 50% of GDP and is rising, can be regarded as a measure of the stress that fixed investment places on the economy. It is not entirely an exaggeration to say that the economy’s capacity for investment growth has reached its limit.