Which way is the Chinese economy gonna go?
Big changes are coming to the Chinese economy in the next few years, and whether the country’s rulers navigate them smoothly remains to be seen.
That’s the gist of an annual report from the International Monetary Fund (IMF). As reported by the New York Times:
For decades, a cheap currency, cheap labor and huge infrastructure investment fueled enormous growth. China has made “substantial” progress on rebalancing its trade deficits with the rest of the world, the IMF said, and its current-account balance as a share of its total economy is less than a quarter of its (pre-global recession) peak. …
But imbalances in China’s domestic economy “remain large,” the IMF warned, as Chinese consumers have not replaced consumers from the United States, Germany and other countries who helped stoke China’s growth for years. Consumption rates have barely budged from last year. But net purchases of physical assets like roads, hospitals and commercial buildings grew further as a share of the economy.
“A decisive shift toward a more consumption-based growth path has yet to occur,” the IMF said. “Accelerating the transformation of the growth model remains the main priority.”
This argument fits snugly with what China watchers are increasingly saying: That after years of export-led expansion, the well that is foreign consumption is running dry. While still significant, external demand for China products just ain’t what it used to be.
So what must happen to keep Beijing in the black – or at least on a growth rate that won’t send the global economy toward another full-on freakout? A policy shift to promote internal consumption. Doing so would amount to a tacit acknowledgment of the desires of China’s burgeoning middle class, one that lists “retail-tainment” among its favorite pastimes.
Now, this isn’t an easy switch for China to make. When a government shifts its economic policy, certain sectors of its economy stand to win and lose. Just look at what happened to American manufacturing employment (5.5 million jobs lost in the last decade) when a Democratic president and a Republican Congress decided to grant China normalized trade relations in 2000. To be sure, a lot of state-supported enterprises that have gotten rich off of China’s furious manufacturing aren’t going to take well to a back-seat role in a future retail revolution.
What’s more, it’s hard to turn such a massive economy away from what works. Before the onset of the global recession in 2008, the Chinese economy grew at a feverish pace, at one point by nearly 14 percent per year. But growth is now down to roughly 7.5 percent – still a solid rate, but relatively anemic – as recession-era belt-tightening puts the squeeze on worldwide consumers and external demand peters out.
But as the saying goes, you don’t need a weatherman to tell which way the wind blows. And the Chinese middle class, which is increasingly seeking all of the trappings of a middle-class lifestyle, is only going to get bigger. According to the Organization for Economic Cooperation and Development, about 10 percent of China’s 1.35 billion citizens now count as middle class. The middle-class share of the population is expected to rise to 40 percent by 2020. And all things being equal, members of the Chinese middle class are much like people in the middle class anywhere: They’re concerned about stability; about quality education for their kids; about environmental and food safety standards; and, maintaining a comfortable lifestyle.
The new leadership in the Chinese government, for the most part, is talking down a chorus of indicators that say they’ve nearly tapped out export-led growth. It’s all under control, they assert, and nothing they’ve seen so far is outside their expectations. They’re planning for those policy shifts that the IMF has called for. But some analysts point out that China's post-recession growth rate has been propped up by unsustainable, cheap credit. And others still are unconvinced that there's much reform at all to China's economic reform movement:
Unfortunately, the reform drive has yet to advance much beyond hot air. "Progress with rebalancing has been limited and is becoming increasingly urgent. A decisive shift toward a more consumer-based economy has yet to occur," said the IMF.
China is still diverting 48 (percent) of GDP into investment, the highest in the world and far higher than the figure in Japan or Korea during their catch-up spurts. Consumption is still stuck at around 35 (percent) of GDP, which matters for the rest of us. It means that the country is still reliant on export-led growth, flooding Western markets with excess goods by means of a suppressed currency and subsidised state credit.
Indeed. We’ll be watching to see how it all shakes out; what happens in the world’s second largest economy will undoubtedly have an effect on economies across the globe.
Related recent Blogs
- A bad time to sideline trade talks • by mmcmullan • 12/04/2013
- Infrastructure investment means job creation • by TGarland • 12/04/2013
- China trade deficit on pace for new record, but will anyone notice? Alliance for American Manufacturing (AAM) Statement. • by scapozzola • 12/04/2013
- What to do with abandoned factories? Bring in the artists! • by LDonia • 12/03/2013
- Surprise, surprise? Americans still say job creation should be top priority • by mmcmullan • 12/03/2013
- Fmr. Transportaion Secretary Ray LaHood urges infrastructure investment • by TGarland • 12/02/2013
- The Computer Wore Heels: Check out "Top Secret Rosies" • by mmcmullan • 12/02/2013
- The Veep heads to Asia, while Michigan Democrats and automakers press the "currency issue" in TPP talks • by TGarland • 11/27/2013
- G+ Hangout postponed! • by LDonia • 11/26/2013
- Americans increasingly sweating this economy, and it's no surprise • by mmcmullan • 11/26/2013