We’ve been arguing for some time now that the 8% GDP growth figure deemed by many to be a requirement for China to maintain stability is at best a rough approximation – but more likely not even that. Now, thanks to a blog post by James McGregor (hat tip to Imagethief), we know the origins of the mythical number: a back-of-the-napkin calculation by Hu Yaobang when asked by Deng Xiaoping in 1982 how the country could quadruple the size of its economy by 2000.
Without resorting to an excess of smugness and I-told-you-so-ism, it’s interesting to hear precisely how out-of-touch with present day China that number is. Furthermore, lost in the doomy forecasts of what awaits China if it doesn’t maintain 8% growth is an understanding of how slower growth could be a blessing in disguise.
Consider the power sector. It’s not news that China’s outdated and overstretched transmission and distribution network is a significant bottleneck to Beijing’s goal of universal, reliable power. François Nguyen, senior policy adviser for electricity markets at the International Energy Agency recently expressed to me his hope that China could use the opportunity presented by slower growth to overhaul its power sector:
“It does give time to implement infrastructure projects. And I know that the two transmission companies, State Grid and China Southern Power Grid, have ambitious programs to build infrastructure to connect generation sources in the north and the west to the east and the southeast.
[The slowdown] gives more time to implement these projects. That is good for the supply/demand situation, and it’s an opportunity to improve the inefficiencies of the market. Now they have more time to put in infrastructure, to improve the network and to improve the overall capability of delivering to end-user markets.”
Furthermore, amid slowing power demand growth, China has a chance to reform its pricing structure. Despite power shortages in parts of the country caused by pockets of strong demand and poor supporting infrastructure, China is not generally lacking in generation capacity. Compared with liberalized markets like Ontario and California, where pricing reforms were introduced while power supplies were tight, China would be much less likely to experience sharp increases in prices. Furthermore, Beijing would not have to liberalize pricing structures all at once – it could, and most likely would, maintain some final say in power prices, while allowing considerably more flexibility.
There could also be some icing on the cake for the environment.
“Slower demand means smaller increases in CO2. There’s less production and therefore [lower] CO2 emissions … In a sense, it does not make the generation companies happy because they have lower profits and less liquidity, but overall I think it’s a good time to introduce reforms to accelerate infrastructure projects with a beneficial impact on the environment.”
Given the color of the air in Shanghai today (yellow tending to brown), the environmental advantages of lower-than-8% growth are sounding awfully nice.
For more on the links between power and economics, stay tuned for our April issue.