The ups and downs of a slowdown in China

China’s economic powerhouse is powering down. Quarterly growth of 7.5 per cent might set finance ministry pulses racing in much of the rest of the world. But this is a country where, until recently, it was axiomatic that anything below 8 per cent would lead to social unrest. Nor are the latest figures a one-off – they are merely the latest in an unmistakable downward trend.

Unlike so often in the past, though, the Chinese leadership shows little inclination to act. Indeed, the mood in Beijing is studiedly sanguine. Not only did the national statistics bureau describe yesterday’s figures as “within the reasonable range for the year”. Finance Minister Lou Jiwei even hinted, last week, that growth could drop well below 7 per cent over the coming months (although his remarks were later airbrushed into line with the official 7.5 per cent target by the state news agency).

Why so unconcerned? China’s slowing economic expansion may, in part, be due to falling demand in debt-stung trading partners such as Europe and the US. But it is also deliberate. The boom that has dragged hundreds of millions out of poverty has produced problems of its own; its focus on infrastructure-building leaving China over-indebted, over-reliant on exports, and weighed down by graft and disparities in wealth so extreme that the credibility of even so autocratic a regime as the Chinese Communist Party is under strain.

Although the need to set the economy on a more sustainable footing has been known for some time, China’s politicians always lost their nerve. Any sign of a slowdown – in 2008, say – prompted massive debt-funded stimulus. The inevitable cannot be delayed forever, however, and the new leadership, appointed last autumn, seems to know it.

President Xi Jinping’s so-called “four dishes and a soup” policy is a tilt at both graft and official excess more broadly. Funding for China’s usually lavish national games has also been slashed by nearly four-fifths. Most notably, the central bank curbed its lending last month, provoking a mini Chinese credit crunch. All suggest a government applying the brakes. Reforms that will boost consumer spending and allow the services sector to take up the slack are expected to follow.

With the Chinese economy on course to become the world’s largest within as little as a decade, so fundamental a shift is fraught with implication. First, the positives. Much of the squeeze on living standards since the aftermath of the financial crisis can be blamed on the mis-match between stagnant growth and persistently high inflation. Even a slight dip in China’s insatiable appetite for raw materials relieves the pressure. Britain, in particular, also stands to benefit if the shift from investment to consumer-led expansion means more wealthy Chinese buying Burberry or Rolls-Royce.

But there are major risks here, too. Strong Chinese growth helped tow the global economy out of the financial crisis; as it slows, still-fragile recoveries – most crucially, in the US – may founder. Hardly less of a concern is that China’s fraying social fabric cannot take the pressure, with unpredictable and potentially dramatic consequences.

The smooth transition to a more balanced Chinese economy is, then, in all our interests. But the transformation will be a long and difficult one, and it has only just begun.