China decline sparks "new normal" debate Keeping track of growth: migrant workers toil on a railway line at a station in Quanzhou, southeast China's economic slowdown has triggered a debate about a deceptively simple question: what is the country's "new normal" growth rate? During the past three decades, businesses and investors became accustomed to 10 per cent annual growth. There were periods of overheating and undershooting but the economy always gravitated towards 10 per cent. IN Chinese Economy Analysts believe those double-digit days are firmly in the past. But there is no consensus about the economy's new growth trend, with estimates ranging from 7 per cent to 9.5 per cent. This disagreement might sound trivial - after all, even at 7 per cent, China would handily outperform virtually every other country in the world. But the difference is in fact monumental - the faster growth rate would make China about $3tn wealthier in a decade and keep global commodity prices a lot higher for a lot longer. Qu Hongbin, an economist with HSBC, is unabashedly in the bullish camp. "China's economy is slowing but this is mainly the result of cyclical factors such as weakening external demand and the lagged impact of earlier tightening measures," he wrote in a recent report. In his view, the government must adopt counter-cyclical measures - more fiscal spending and more monetary easing - to boost gross domestic product. The latest batch of data has led analysts to conclude that growth in the third quarter will be closer to 7 per cent. Industrial output growth fell to its lowest since May 2009 in August. But the government has approved a spate of major investments, including 25 new urban rail projects, in the past week that could provide a lift over the rest of the year. Many analysts counsel against another round of heavy government spending. One of the louder voices in the bearish camp is Andy Xie, an independent economist. He believes that China has come to a true structural turning point, where the inefficiencies of a government-led growth model hurt the economy."As China has exhausted its surplus labour and western economies are in secular decline, exports won't rise to cover up the inefficiencies any more," he says. In the short term, analysts are marshalling different numbers to argue that the Chinese economy, though slowing, is performing in line with its potential; or, on the contrary, to argue that the slowdown has taken it below potential. Helen Qiao, an analyst with Morgan Stanley, said a range of indicators such as falling corporate profits and a sharp drop in inflation point to below-potential growth. "These are all signs of a negative output gap, which calls for policy adjustment," she wrote in a report. The potential growth level remains at around 8.5 per cent for 2012. The concept of potential growth refers to the rate of expansion that is just right for an economy: not so fast as to cause high inflation, nor so slow as to lead to high unemployment. It is by that latter metric - unemployment - that many other analysts believe China's slowdown is only natural. Although the labour market has started to come under stress, there has not been nearly as many job losses as in 2008 at the height of the global financial crisis. This suggests that the economy simply does not need to grow as quickly as it did a few years ago to generate jobs for all those moving off of farms and into cities. "It's not like if you get this slowdown in growth there's some kind of huge Armageddon in unemployment around the corner," says Arthur Kroeber, managing director of Dragonomics, a research firm. Demographic change is the main factor behind this. China's working-age population has been growing much more slowly over the past five years and it is set to peak in 2015. But potential growth is not only determined by demographics. It is also about productivity: just how much is each worker actually making. Hence the focus on China's once-in-a-decade leadership succession that is set to take place next month. The country's future growth path, far from being set in stone, will be shaped by policy choices in Beijing. As Mr Qu of HSBC cautions, the bullish case is based on a big assumption: that China will continue its 30-year-long march towards a more market-driven economy. "The success of these reforms holds the key to sustained productivity growth," he says.