On July 11, the IMF lowered its forecast for world economic growth from 3.3% to 3.1%. One important reason, the IMF explains, is the slowdown of China and other emerging economies. Concerns about the outlook for the Chinese economy have mounted, particularly given the apparent tolerance of China to slowing growth. Some U.S. media and Wall Street institutions deem China economy’s slowdown as a “black swan” event. But objectively speaking, the overreaction to China’s slowdown and the rising pessimistic opinions is partly due to Wall Street’s speculation and partly due to the lack of clear understanding on China’s economy.
Yu Xiang
The world economy is still in recovery. Influenced by the decline of external demand and domestic economic adjustment, China’s slowdown is understandable and predictable, but not a “black swan” event. Now, Europe is still far away from stepping out of the sovereign debt crisis and growing imbalances within the Eurozone are increasing rather than decreasing. In Q1 of 2013, the Eurozone economy contracted by 0.2% and marked the fourth consecutive quarter of decline. In Japan, “Abenomics” achieved some results during the first half of 2013, but its sustainability is being widely questioned and the potential for bad side effects are very big. The emerging markets are expanding at the lowest speeds in a decade. Growth in India (around 5%), Brazil and Russia (around 2.5%) is barely half what it was at the height of the boom. Compared with the sharp slowdown of Brazil, India, Russia, China still holds a relatively high growth title.
China’s slowdown is under control. The slowdown is an initiative to adjust the economic structure, quite different from the European slowdown. Premier Li Keqiang has emphasized the government’s commitment to maintaining economic stability, and this set target is real and dependable. The Chinese government has recently announced a series of micro stimulus plans that signify the government has the fiscal and monetary strength both to absorb losses and to stimulate the economy if necessary. The Ministry of Finance decided to reduce the tax burden on small and mini enterprises since August 1, with the tax cut reaching nearly 30 billion RMB annually. On July 24, the State Council executive meeting decided to increase railway investment by 3.3 trillion yuan, increasing 0.5 trillion yuan from the planned 2.8 trillion yuan during the Twelfth-Five Year period. The Ministry of Environmental Protection will reveal a plan to input 1.7 trillion yuan to tackle air and water pollution. On July 30 the People’s Bank of China injected 17 billion yuan to the market through a 7-day reverse repo. Although quite small for the Chinese interbank market, the central bank injection action and the above stimulus plans signify the government’s willingness to maintain the economic stability.
More importantly, China’s economy has not run out of momentum. Firstly, China is still a developing country and has a “potential advantage of backwardness”. Over the past 10 years, China has gradually shifted towards the higher end of the industrial chain, from the production of low-end products to the manufacturing of electronic equipment and high-tech products. Though Chinese production costs have begun to rise, taking into account the great gap between China’s different regions, China can achieve the transfer of industries domestically. In addition, the continuously pushing-forward political reform will release huge reform bonuses, promoting China’s economy forward.
Secondly, urbanization has great potential for promoting economic growth. China’s urbanization rate is still low, only 50% in 2011 and 52.6% in 2012, equivalent to the early 1970s in Japan. China’s urbanization will accelerate to 75% over the next decade, with lots of the rural population settling in towns and cities. This new urbanization move will increase residents’ income and in turn boost domestic consumption.
Thirdly, China still enjoys a demographic advantage. China’s huge population means a huge market and a large proportion of young people in the population means economic potential. According to the 2013 CIA World Factbook, the median age of China’s population is 36.3 years old, while Japan’s is 45.8 years old. The proportion of population below 24 years of age in China is 32.6%, while it is 23.1% in Japan. Therefore, the proportion of young people in the population is 10 percentage points higher in China than in Japan.
In the next period of time, China’s economic growth rate will be less than 8%, but it might be more stable. China is entering a stage of “New Normality”, which is characterized by: “lowering growth rate initiatively, increasing employment, adjusting economic structure, focusing more on people’s happiness”. Double-digit economic growth is over. China’s long-term picture looks reasonably bright.
It’s undeniable that China’s economic slowdown will inflict short-term pain on the world economy including the United States. After Canada, China is the United States’ largest trading partner. In 2012, two-way trade reached $536.2 billion. Slowing economic growth in China threatens to reduce the bandwidth of Pacific trade. But just as U.S. Vice President Joe Biden said in a Bloomberg Television interview, China’s slowdown will affect the world, but won’t derail U.S. recovery. America’s exposure to Chinese demand is limited. Goldman Sachs calculates that companies in the S&P 500 directly attribute a mere 5% of revenue to emerging markets, and just 1% to China. Weighing the pros and cons, the Chinese economic tapering off brings more good than harm to the United States.
Firstly, a stabilized China is more favorable for the U.S. and the world. In the past decades, pursuing rapid growth as a priority objective has incurred lots of problems: environmental degradation, which has been a major point of political vulnerability for the government; rocketing real estate prices; the shortage of medical care, where rising prices have been a major sore point for urban Chinese; and a big income gap, where the nation’s Gini coefficient is 0.474 in 2012, up from 0.412 in 2000, and is stirring vehement public disapproval. If these problems are not to be solved, there will be more social unrest. An unstable China will bring no good to the U.S. and the world.
Secondly, China’s economic slowdown is helpful to alleviate U.S. psychological anxiety. On July 18, a poll released by the Pew Research Center showed 44 percent of Americans surveyed believe that China’s economy is more powerful than the United States, but only 37 percent of Americans hold a positive impression on China. The Economist predicted that as early as 2016 China will surpass the U.S. as the world’s largest economy. Americans are worried that China’s economic strength will turn into great political aspirations, threatening U.S. hegemony in the world. The U.S. National Intelligence Council, predicted in its report “Global Trends 2025: A Transformed World,” that the future of the international system will transform from a unipolar world dominated by the old powers to a sharing hierarchy between the old powers and newly emerging countries, including China. China’s economic slow down will to some extent prolong the catch-up time (estimated to be at least 5 years) and ease the strategic anxiety of the United States.
Thirdly, from an economic point of view, setting China’s economic setting growth on a healthier, long-term trajectory into a “new normal” is a good thing. To begin, China’s slowdown is helpful to lower international commodity prices, reducing imported inflation pressures in the United States. The Standard & Poor’s GSCI Spot Index (SPGSCI), a gauge of 24 raw materials, lost 4.7 percent in April, the most since a 13 percent plunge in May of last year. The Bloomberg World Mining Index, whose 115 members include BHP, Anglo American Plc (AAL) and Rio, has slumped 28 percent this year.
China’s slowdown is accelerating capital outflows back to U.S. markets. Now, China’s foreign exchange data has mirrored this trend. While the U.S. is revitalizing manufacturing sectors and promoting economic transformation from an overly fictitious economy to a real economy, this process needs capital input. Additionally, capital returning to the U.S. would be very helpful for its economic adjustment process.
Reducing the growth rate is aimed at making room for rebalancing the Chinese economy, which to some extent brings pressure on the U.S. trade structure and even its economic model. As Stephen S. Roach, former Chairman of Morgan Stanley Asia and the firm’s chief economist, wrote in his article “Long Live China’s Slowdown,” China’s slowdown means China will reduce the amount of purchasing dollar-based assets such as U.S. Treasury bills. As a result, America then has to think carefully about its economic model, how to fund its budget deficit and on what terms.
In the long term, a reformed and rebalanced Chinese economy will be more favorable for U.S. exports. Rising into the ranks of middle-income countries will give China more financial resources to protect intellectual property rights, cyber security and other issues that the U.S. is much concerned about.
Finally, a tapering off and more rebalancing of China’s economy would be less risky for the United States. The real risk lies in China’s giving up its effort to transform its growth model thwarted by difficulties and pressure. That’s really something to worry about.
Yu Xiang is a Research Fellow at the China Institutes of Contemporary International Relations.
