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Long Live China’s Slowdown

NEW HAVEN – At 7.7%, China’s annual GDP growth in the first quarter of this year was slower than many expected. While the data were hardly devastating relative to a consensus forecast of 8.2%, many (including me) expected a second consecutive quarterly rebound from the slowdown that appeared to have ended in the third quarter of 2012. China doubters around the world were quick to pounce on the number, expressing fears of a stall, or even a dreaded double dip.

But slower GDP growth is actually good for China, provided that it reflects the long-awaited structural transformation of the world’s most dynamic economy. The broad outlines of this transformation are well known – a shift from export- and investment-led growth to an economic structure that draws greater support from domestic private consumption. Less well known is that a rebalanced China should have a slower growth rate – the first hints of which may now be evident.

A rebalanced China can grow more slowly for one simple reason: By drawing increased support from services-led consumer demand, China’s new model will embrace a more labor-intensive growth recipe. The numbers seem to bear that out. China’s services sector requires about 35% more jobs per unit of GDP than do manufacturing and construction – the primary drivers of the old model.

That number has potentially huge implications, because it means that China could grow at an annual rate in the 7-8% range and still achieve its objectives with respect to employment and poverty reduction. China has struggled to attain these goals with anything less than 10% growth, because the old model was not generating enough jobs per unit of output. As Chinese manufacturing moved up the value chain, firms increasingly replaced workers with machines embodying the latest technologies. As a result, its economic model spawned a labor-saving, capital-intensive growth dynamic.