The Meaning of China’s Economic Slowdown

Posted on July 31, 2012


More than a year ago I, along with several colleagues, published a paper entitled “When Fast Growing Economies Slow Down.” In it we predicted that a significant slowdown in Chinese growth was coming. While it was not possible to be precise about the timing, we warned that the number of years for which China’s GDP would continue to grow at high single-digit rates could likely be counted on the fingers of one hand.

We got considerable pushback from critics in China and elsewhere. We had underestimated China’s enormous growth potential, these commentators warned. We failed to appreciate that the country’s growth model was unique and that it was not possible to extrapolate China’s future from the experience of other fast-growing economies.

Well, the slowdown is here.

Chinese growth in the second quarter slowed to 7.6 percent, down significantly from the double-digit norms of the past. Indeed the official figures may understate the magnitude of the change. The growth of electricity consumption has been falling even faster; at its most recent reading it has fallen to virtually zero. Unless the Chinese steel and aluminum industries have discovered how to make do without electricity, it would appear that their growth has virtually ground to a halt. That producer prices are falling is more evidence of weak demand.

The question is how much of this deceleration is structural, reflecting the fact that no economy can grow by ten percent per annum forever, and how much is cyclical, reflecting the weakness of the global economy. Clearly part of what we are seeing is structural. The Chinese population is aging. Labor force growth is slowing. Workers, especially in the urban centers, are demanding higher wages, which are being granted to ensure social stability and in response to pressure from foreign companies concerned with matters of image, all of which raises production costs. Other lower-cost national producers, in East Asia and elsewhere, are nipping at China’s heels. At the same time, part of the deceleration is cyclical. The tepid recovery in the United States and crisis in Europe augur poorly for Chinese exports, which were up by only 9 percent in the first half of 2012.  When – it is tempting to say “if” – Europe and the U.S. begin to do better, exports and the growth of the Chinese economy should pick up again.

Chinese authorities also have considerable capacity to offset the impact of these weak external conditions on their economy. As in 2009, in the wake of the Lehman Brothers shock, they are encouraging the banks to lend. They have reduced reserve requirements for the banks and cut policy rates for the first time in three years to make credit more freely available to the economy. They are encouraging state-owned enterprises to invest. Again as they did starting in 2009, they are beginning to roll out additional infrastructure projects.

At one level, it is a good thing that Chinese officials have these policy levers to pull, unlike their counterparts in the U.S. and Europe, whose policy room for maneuver is all but exhausted. The policy response prevents China from suffering unnecessary economic damage from events in Europe and the United States. Insofar as growth faster than seven percent is important for social stability, even graver risks are averted.

But at another level, the policy response is only storing up problems for the future. Prior to the current slowdown, the Chinese authorities had committed to restructuring their economy.  Restructuring meant redirecting Chinese output from foreign to domestic markets, which implied a change in the product mix, given differences in Chinese and foreign spending patterns.  Restructuring meant rebalancing domestic spending from investment to consumption. The investment rate would be lowered from a stratospheric 50 percent, given that no economy can productively invest such a large share of its national income for any length of time. There would be no more construction of ghost towns and no more bullet trains running off the rails, in other words. As wages rose, the share of consumption would be allowed to rise from 1/3 of GDP toward the 2/3 that is the international norm. Bank balance sheets would be strengthened by holding financial institutions to stricter reserve requirements and higher lending standards. The result was to be a better balanced, more stable, and less financially vulnerable Chinese economy.

Given the global slowdown and the Chinese policy response, this restructuring agenda is now on hold. The new measures will succeed in keeping high single-digit growth going for a time, as they did in 2009-10. But they will do so by aggravating the economy’s imbalances and storing up problems for the future. This is not good news for those of us concerned with China’s longer run prospects.

Barry Eichengreen is George C. Pardee and Helen N. Pardee Professor of Economics and Political Science at the University of California, Berkeley.   

The End of China’s Rise

Just as most everybody has come to agree that China is the rising global power—with an economy that shortly will supersede that of the United States, a model of state capitalism preferred by many Third World nations over democratic capitalism, colonization of parts of Africa and Latin America and increasing influence among its neighbors—the world’s largest emerging power is already plateauing. While China weathered the financial crisis that has bedeviled the West since 2008, it faces serious challenges of its own. If major trends continue to unfold, those who wrote that we are about to enter a Chinese century will soon discover that it ended before it started.

China’s exceptionally high economic growth rate is what first called attention to its rising power. Strong economies can play a key role in the global marketplace and pay for major military buildups. However, China’s growth rate has slowed from 10.4 percent in 2010 to 7.5 percent in 2012. The rate, which economists predict will only decline further, may already be lower. The figures used by the media are based on Chinese data, the veracity of which many question.

Furthermore, according to The Economist, the closer a developing nation comes to catching up with developed economies, the harder it is to sustain growth rates because it is increasingly forced to innovate for itself. Among emerging-markets economists, the question is not whether China’s growth will slow but whether China will experience a soft or a hard landing.

A slowing economy is challenging for all governments but especially so for the Chinese: the legitimacy of their regime is not based on democratic choice by the people but on its ability to provide a high and rising standard of living. The recent strong growth generated high expectations among the Chinese people, most of whom have not attained the kind of affluence found among those who made it, a group that is mainly located in the coastal cities. In contrast to populations where all are down and expect little, China’s disparities and inability to meet expectations of future high growth are the kind of developments that social scientists view as major factors in destabilizing regimes.

Moreover, China’s economic surge of the past several decades also has brought major environmental challenges. By the end of 2007, China was home to sixteen of the world’s twenty most polluted cities and was the highest carbon dioxide emitter in the world. Given China’s economic model, which is heavily dependent on resource extraction, environmental degradation imposes growing constraints on the nation’s growth. This problem is further compounded by the sheer size of China’s population and the difficulty of providing for it. For instance, there already is a serious water scarcity. At the same time, China is plagued by pervasive corruption, particularly at the local level. It ranked seventy-fifth on the 2011 Corruption Perceptions Index, far below nations such as Japan (fourteenth) and the United States (twenty-fourth).

China’s aging population also bodes poorly for its future. Feng Wang, director of the Brookings Tsinghua Center, argues that China’s economic boom owes much to the peculiarities of its demographics—characteristics that are fading. Because China still maintains its thirty-year-old one-child-per-family policy, the coming years will see a drastic decline in its young labor force and a sharp increase in the ranks of its senior citizens.

As to China’s colonizing the world, it faces rising pushback. African nations that have received billions of dollars in Chinese investment and aid complain that their Chinese benefactors often do not hire local workers; they are clannish and avoid contact with the locals; the natives they do hire endure poor working conditions and poor wages; and that the terms of trade are unfair. “Mercantilism” and “neocolonialism” are terms quickly applied to China.

China’s neighbors are increasingly alienated. In several cases, most recently in Burma and Vietnam, Chinese overtures led these nations to move closer—to the United States. Indeed, China has very few allies and those it does have (namely, North Korea) are much more a source of cost and trouble than support.

In short, the image of a thriving, bustling China about to challenge a declining United States is so yesterday. All we need is one more magazine cover story about the rising China—as we once had on the rising Japan—to be sure that this story needs to be rewritten, if not turned on its head.

Amitai Etzioni is a professor of international affairs at The George Washington University. His newest book, Hot Spots: American Foreign Policy in a Post-Human-Rights World, will be published by Transaction in October 2012.

China’s advantages counteract rising pay: analysts

BEIJING: Rapid wage increases are threatening China’s competitiveness, but improved productivity and other advantages mean it will continue to attract investors, analysts say.

Labour costs in China would match those of the United States within four years, catching up with Eurozone countries in five years and with Japan in seven, the French bank Natixis forecast in a study last month.

China “will soon no longer be a competitive place for production given the strong rise in the cost of production”, the bank said.It is a view backed by the respected Boston Consulting Group (BCG), which said in a study last August that by around 2015 manufacturing in some parts of the United States would be “just as economical as manufacturing in China”.

Examples of major manufacturers leaving China abound — BCG said US technology giant NCR has moved its manufacture of ATMs to a factory in Columbus, Georgia, that will employ 870 workers as of 2014.

Adidas announced recently that it would close its only directly owned factory in China, becoming the latest major brand to shift its manufacturing to cheaper countries, though it maintains a network of 300 Chinese contractors.

Chinese workers making athletic shoes are paid at least 2,000 yuan (258 euros; 313 dollars) a month, while their Adidas colleagues in Cambodia only earn the equivalent of 107 euros, the German company said.

Underlining the trend, the salaries of Chinese urban-dwellers rose 13 percent in the first half of 2012 compared with the same period last year, the government said in mid-July. Migrant workers, who are among the lowest-paid in the country, saw raises of 14.9 percent for an average of 2,200 yuan a month.

The most significant wage hikes in 2010 and 2011 often came following strikes at Japanese companies such as Toyota and Honda and a wave of suicides at the factories of the Taiwanese electronics giant Foxconn.

Natixis said the increases could spur manufacturers to relocate to South and Southeast Asia, where labour costs are much lower, and could also benefit countries such as Egypt and Morocco, or even European ones like Romania and Bulgaria.

However, not all economists believe China will lose its manufacturing edge, thanks in part to improvements in productivity.“Most of the increase in wages has been offset by strong productivity growth,” said Louis Kuijs, project director at the Fung Global Institute, a research body that specialises in Asian economies.

Worker productivity has increased at a faster rate than wages in the southern Pearl River Delta, the heart of China’s vast manufacturing industry, according to 200 companies surveyed early this year by Standard Chartered Bank.

“China’s share of the world’s low-end exports has started to fall after years of rapid rises in wages, land costs and appreciation of renminbi (the currency),” said Wang Qinwei, a China economist at Capital Economics.

“But this has been offset by a growing market share in high-end products.”Capital Economics said in a research note published in March: “China’s export sector overall appears no less competitive now than a few years ago.

“Average margins in light industry have increased over the past three years thanks to rapid productivity growth.” China’s coastal areas offered an effective business environment that would continue to draw investors, as would lower costs in inland provinces, said Alistair Thornton, China economist at IHS Global Insight.

These advantages could limit a shift in manufacturing to lower-paying countries such as Vietnam, Bangladesh, Pakistan and Indonesia.“Guangdong and other coastal provinces have a superb advantage over most of Southeast Asia and South Asia in their efficient supply chains, strong economies of scale and reliable business environment,” Thornton said.“The manufacturing that does leave coastal China is not only looking to Southeast Asia and now Eastern Europe, but also inland China, where land and wages and energy are cheaper.”

The News

Posted in: Economy, Politics