Why China Is Okay With 7.5 Percent GDP Growth

Business Week – For years, there’s been one constant for people talking about the Chinese economy: GDP growth would exceed 8 percent. It didn’t much matter what happened in the rest of the world—the U.S. and other export markets might be thriving or might be struggling, but China would grow at least 8 percent, year in and year out. The country needed to create enough jobs for the millions of young people entering the workforce every year, and the Chinese leadership decided that anything below 8 percent would put job creation in jeopardy.

Chinese Premier Wen Jiabao on March 5 announced that the government has a GDP target of 7.5 percent this year. China hasn’t had a growth target that conservative since 2004.

And what about the job-creation imperative that made the 8 percent target so critical for so long? China is going through a major demographic shift, thanks to fast economic growth and the one-child policy. As the population starts to age, job creation for millions of young people isn’t so vital anymore. While China needed 10 million new jobs a year in the early 2000s, today it needs just half that number, says Jian Chang, China economist in Hong Kong with Barclays Capital. “The labor force as a whole is barely growing now,” says Stephen Green, head of Greater China research for Standard Chartered Bank in Hong Kong. As a result, Chinese policy makers “just don’t need to create as many jobs as they [once] did.”

Barclays economist Chang, who expects inflation to average about 5 percent over the next decade, compared with 2 percent over the past 10 years. Since “they don’t need to worry that much about job creation,” she says, there’s less urgency to subsidize the cost of electricity, water, and oil for producers. “China is changing from this miracle growth to a more normal growth stage,” says Chang.

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