With Chinese growth a 7.3% following third quarter numbers, there is a possibility that China’s meteoritic rise will finally come back down to Earth. However, it does not seems that investors or Chinese citizens should worry as there is ample opportunity to keep greater than 7% growth rates in China for the foreseeable future if the Communist Party of China chooses to take action.
Although 7% growth seems high by any standards, especially when compared to Western countries, we must also understand that China needs such a high growth rate if it is every going to raise the standard of living of its citizens to a meaningful level. The Rule of 70 tells us that a 7% growth rate will allow China’s economy to double in 10 years. The GDP per capita of China is approximately $7,000 per year. This would mean that by 2024, the average Chinese citizen would earn double that. If the Chinese government were to allow growth to drop to even 5%, this timeline would extend to almost 2028. The power of compounding growth makes keeping the rate up an extremely high priority to the Chinese people and the Communist Party.
The slowdown comes from a lagging real-estate sector and slow-down in industrial production over the past year. Fortunately for the people, the government has a bevy of tools to enrich them but at the cost of power for the Communist Party. Remember, China is a heavily controlled economy with free-market aspects. As time has progressed, increasingly free-market ideas have come to shape the nature of the Chinese marketplace. However, with each concession of freedom, the one-party state loses legitimacy. Philosophically speaking, not only does a free-market represent the free trade of goods and services, but also the exchange of ideas. As John F. Kennedy said: “A nation that is afraid to let its people judge the truth and falsehood in an open market is a nation that is afraid of its people.”
Communistic totalitarianism is incompatible with a liberalized market in the long run. This has been the reason why the Party has been hesitant to cut interest rates and red tape, ideas seen as capitalistic economic engineering rather than communist utopia. With this slow-down in growth, Chinese Communists are in a difficult situation. They can boost growth and resentment of their tyrannical ways (through market liberalization), or they can allow growth to stagnate and stir up a popular revolution due to failed policy.
Either way, I believe this is the first step on the long road toward the end of communism in China. With declining economic prosperity, the Communist Party will have to continue to liberalize at its own peril or hunker down at, again, its own peril.