Slow growth inevitable for China, 7% GDP rate the new normal: S&P

NEW DELHI: In its latest report titled 'Slower Growth In China: Inevitable, Necessary, And Now More Palatable.', Standard & Poor's Ratings Services on Wednesday said that a 7-7.5% GDP growth rate is a 'new normal' for China.

S&P estimates that China's real GDP could grow just 7%-7.5% for 2013 and beyond, a level that it believes will become the "new normal." That contrasts with growth of well over 9% on average during 2000-2011.

"Artificially maintaining previously high growth rates through aggressive stimulus measures would become an increasingly futile, expensive, and ultimately wasteful proposition for the Chinese government," the report said.

"China's new leadership appears to accept the reality that growth was bound to slow as China converges with the advanced economies," said S&P's chief economist for Asia-Pacific, Paul Gruenwald. "More leverage in the economy means that the government is more willing to accept a trade-off between growth and financial stability. Further, a tighter labour market with higher wage growth means that slower GDP growth is now more politically palatable," he said.

While slower growth will make the Chinese economy more sustainable on some metrics, there is still a need to rotate the drivers of growth toward consumption, which has yet to happen, the report said.

"If growth is too fast, then the return on investment and therefore the quality of credit used to finance that investment will suffer. If growth is too slow, the problem of bad-debt creation is solved, but the ability to service existing debt is impaired," Gruenwald said.

The report also suggests that China continues to punch well above its weight in generating global GDP, at more than 1 percentage point of growth.