China has grown to become the second-biggest economy worldwide, having posted double-digit expansion figures for decades. But now it must shift into a lower gear while trying to avoid damaging its economic engine.
Which road will China's economy go down after more than two decades of strong growth? Will that road have a soft surface, or a hard and bumpy one? This is the kind of question that economic pundits the world over have started asking themselves.
China is the world's second-largest economy and a hard landing would have global repercussions. An economic expansion of 6.9 to 7.1 percent as envisaged by the leadership in Beijing may seem impressive at first glance if compared to far weaker dynamics in Western economies - but only at first glance.
That's because an emerging economy such as China has a lot of catching up to do and needs higher growth rates than a highly industrialized nation like Germany in order to create more jobs and avoid social unrest.
Economists put the critical threshold of growth needed at 6 to 8 percent to do that. China is running the risk of dropping out of this "stability range."
The Chinese leadership has penciled in lower growth and wants to restructure the economy. Instead of investing in more and more companies to produce goods for export, the focus is now on fueling domestic consumption.
For some time now, the leadership in Beijing has realized that its conventional growth model of large-scale savings and excessive investments is not really sustainable, said US economist Nouriel Roubini. But, he added, the shift of focus is meeting with some resistance and cannot be implemented overnight.
Roubini says Chinese President Xi Jinping is bound to act against the interests of lobby groups which have profited from the higher growth rates, be it state-owned companies, regional governments, the army and also the private sector. He takes it that more far-reaching reforms will only be enacted after Xi has strengthened his own power position.
Waiting for reforms
In point of fact, many envisaged reforms have been slow in taking shape. German companies have welcomed China's new focus on domestic consumption. Alexandra Voss, who is with the Chamber of Foreign Trade and Commerce in Beijing, says it will be important just how the planned reforms will be put into practice. What's crucial, she said, is fair access to markets, less red tape and strengthening the rule of law.
"The reform package is generally hailed as being positive by our members, although the details are still very vague," Voss told DW.
In Germany, investments made up some 17 percent of GDP in 2013, while in the US they amounted to 19 percent in the same year. Private consumption came in at almost 60 percent of GDP in Germany and about 70 percent in the US. In China, though, investments made up almost 50 percent of GDP and private consumption under 35 percent.
Roubini argues there will be less growth if more money goes into households to fuel consumption, while investments are reduced. The service sector will be less productive than capital-absorbing production, leading Roubini to believe that China is likely to post a growth rate of just 5 to 6 percent over the next couple of years.
How to generate more growth
Currently, the real estate market is the biggest drag on the Chinese economy. While the overall economic picture has improved somewhat since the end of September, investment in property has been going down. And so will state spending, claims Michael Spencer, chief economist of Deutsche Bank, Asia Pacific.
Spencer told Bloomberg a while ago that the Chinese central bank would cut its interest rates in March and May. As for March, he's already been proven right. Officially, the March 1 rate cuts were enacted because of deflationary pressures and sinking raw materials prices.
Since oil lost half of it value globally, average consumers have gotten an idea of what economists call the end of the raw materials super-cycle. For some years now, demand for raw materials has been dropping sharply, with producers unable to sell enough.
China's industrial sector now logs overcapacities at a level not known before. Take the steel industry: Despite steel prices already pointing down globally, China inaugurated 20 new furnaces in 2013, accelerating the downward price spiral.
Towards the end of November, the Asian country posted an overcapacity of 110 million tons of iron ore, data service SteelHome reported. The picture looks similar in the shipbuilding, cement and aluminum industries.
Consultancy McKinsey said China's debt load has quadrupled over the past seven year to $28 trillion. Identified as risks have been shadow banks, which are hardly ever regulated, as well the huge debts that regional governments have amassed. Some 50 percent of all credits in China have gone into the real estate sector, although many new buildings keep standing idle.
Soft or hard landing?
Deutsche Bank's Michael Spencer noted that China is sitting on an incredibly high mountain of currency, which it could not only use to intervene in currency markets directly, but also use to ward off other threats.
China's currency reserves amount to $3.8 trillion, Spencer explained, adding that the country could sell or buy US dollars for up to 12 years, depending on the desired impact on markets.