November’s Third Plenum proposed significant economic reforms to rebalance China’s economy and reduce its addiction to debt, in large part by reversing many of the processes that drove growth in the past three decades. Of course this potentially radical shift in China’s development model will make predicting economic performance in 2014 more difficult than ever.
And we have already seen how difficult reform is likely to be. The past four years were characterised by a stop-and-go process of decelerating growth, in which periodic attempts by the regulators to constrain credit caused the economy to slow sharply but, as policy makers backed off each time, both GDP and credit growth subsequently reignited, although at gradually declining paces. We will see this even more sharply in 2014, with a continued unstable balance between attempts to constrain credit growth and attempts to keep the economy from slowing too quickly.
If Beijing does not manage growth rates down further in an orderly manner, China increasingly risks reaching debt capacity constraints, after which growth will drop in a disorderly way. Beijing increasingly recognises the risk, and so the most likely outcome for 2014 is continued but bumpy GDP growth deceleration, until by the end of the year consensus expectations for GDP growth for the rest of the decade drop to 5-6 per cent.