China's Economy Faces Slowing Growth, But Experts Say Period Of Structural Change Will Help Secure Long-Term Stability

HONG KONG -- As China prepares on Tuesday to unveil its annual growth figures for 2014, which are likely to be the first since 1998 that miss their target, experts say that while the country's export-led boom may be slowing, its economy is undergoing a period of structural change that will ultimately help secure long-term growth.

China's economy targeted a growth rate of 7.5 percent in 2014, a target most analysts suggest the country will miss. Though the projected growth rate of between 7.1 percent and 7.2 percent predicted by some analysts would be the envy of many a world economy, some sectors of the economy are ill-equipped to cope with the change.

“The slowdown is obvious,” Chan Hin-ling, associate professor of economics at Hong Kong's Baptist University, said.

“If you look at the last five years, China's growth depends on investment. Consumption is not high, but [the Chinese economy] grows a lot by investing in infrastructure -- in the mining industry and housing. Now it has a quite serious problem of excess capacity, it cannot grow by investment again,” he added.

A key area of concern is China's property market and construction industry, which has borrowed heavily from both domestic and international lenders in recent years. The recent default by developer Kaisa Holdings, coupled with the appearance of “ghost cities,” failed and abandoned property developments, in recent years has raised concerns about a possible housing market adjustment.

“The real estate sector is no longer the engine of Chinese economic growth,” Xu Xinpeng, a professor of economics at Hong Kong's Polytechnic University, said. “[Chinese] local government relies heavily on sales of land for revenue. Local governments have experienced increasing problems in terms of generating revenue.

“So we are going to see local government increasingly distressed in the coming months and years,” Xu added.

China's pollution-intensive manufacturing industries have also come under increasing government scrutiny, with authorities more inclined than in the past to hand out fines to businesses that excessively pollute, and the introduction of tougher "green" laws at the end of last year.

“I think that this environmental issue is one of the biggest constrains to the Chinese economy,” Xu said. “We see reports that pollution in China is one of the [main drivers for] the richest people leaving the country.

“To address that issue means the cost of production will be higher for a lot of sectors. So that will be a constraint to many [businesses]. In the medium term, that will be negative for some manufacturing firms, but in the medium to long term, I think it is necessary for China.”

The risks of economic volatility if the economy sheds manufacturing jobs, however, could be tempered by an increasing trend toward urbanization, and a resulting increased demand for services.

“If we cannot continue to rely on exports to generate large-scale employment, you need to find a way to absorb this labor, and a good sign is that there is urbanization, which I think will create a large demand for services in medium-sized and small cities,” Larry Qiu, a professor at the School of Economics and Finance at the University of Hong Kong, said.

“When there is a large internal demand, services are labor-intensive industries, you will find that people will move into those industries,” he added.

Whether Chinese firms can truly innovate, rather than simply imitate their foreign competition, will be a key factor in determining the success of the country's attempt to transition from an export-led to a consumption-based economy.

“This is something that the government has to consider seriously as one of its biggest challenges,” Qiu said. “This challenge is not just economic. … The institutions that will be conducive to innovation are the most important. So that will be the medium to long term challenge for the Chinese government -- how to develop the institutions, so that entrepreneurs will be willing to invest in research and development and the long-term growth of Chinese economy.”

In terms of likely growth, official figures project it could be as high as 7.3 percent, a drop from previous years, but growth that would be reasonable considering the current global economic climate.

“I think anything above 7.5 percent is not reasonable; and between 7 percent and 7.5 percent would be a very good scenario for China -- but below 7 percent would be a disaster,” Qiu said.