China’s Economic Slowdown: Separating Facts From Fiction

The widely held view of China is that its spectacular economic success contains the seeds of its economy’s imminent collapse. This may be a kind of anchoring bias, which influences views of the Country, as well as stories in the media. China no doubt appears to have an economy unlike others. The standard rules of development haven’t been followed. Its economic rise seems to be irrational at best and criminal at worst. Historically China has never been a ‘normal’ economy- it experienced abnormal growth rates averaging close to ten percent for nearly four decades. There should be no question that China’s economic slowdown would have a significant impact on the global economy. This post evaluates the truth in some of the leading concerns China’s observers have about its economy’s future growth potential.

I. Mounting Debt

Skeptics about its future point to China’s mounting debt. Rather than deleveraging at the onset of the financial crisis of the last decade, China’s total debt doubled during this period to about $28.2 trillion, a recent MGI study found. This equates to a debt-to-G.D.P. ratio exceeding 250% (which is, however, lower than most high-income economies). In the past, IMF cautioned economies that experienced such raising debt ratios- like several European countries- that eventually succumbed to a financial crisis. China may be different since not all debt is created equal. China’s debt is in the public sector. Local governments have borrowed heavily in their rush to finance major infrastructure projects. Public debt implies that the risks are borne mainly by the state, which has deeper pockets.

Despite an increase in mortgages, Chinese households have lower overall debt burden compared to their western counterparts. While China’s rising debt may seem recklessness, it looks like its economy has the financial capacity to weather a crisis. An analysis of China’s financial sector indicated that even in the worst case scenario- that is if the credit write-off reached unprecedented levels- only a narrow segment of Chinese financial institutions would be severely affected. Then even though growth would slow, the overall economy most likely wouldn’t seize up. Finally, the Chinese government holds 60 percent of the market capitalization of Chinese companies and the stock market represents a much smaller portion of its capital funding, both positive indicators in case of a financial crisis.

II. Questions Around Sustainable Growth

The second issue that concerns China’s observers is that its high growth rates are unsustainable unless consumption replaces investment as the economy’s main force. They point out that currently while investment accounts for an unusually high share of gross domestic product, consumption accounts for a meager share. The leading cause of this imbalance is urbanization. Over the past four decades China’s urbanization ratio has increased from less than 20 percent to nearly 60 percent. In this process, workers from labor-intensive rural activities have moved to more capital-intensive industrial jobs in cities. As a result, an ever-greater share of national income has gone into investment.

As a result of China’s increased urbanization corporate profits have risen, leading to higher wages, which have spurred consumption. In fact, even as the consumption share of G.D.P. has fallen, personal consumption has grown multiples faster in China than in any other major economy. Additionally, China has successfully turned to its consumers to pick up the slack during slower times. Retail sales have boomed. An increasing middle-class China buys more cars, smartphones, appliances, and a wide variety of other goods. This boom may be easing which likely has a number of underlying reasons, like a decline in consumer lending for cars and a flattening of the market for smartphones.

III. Flattening Exports

The Chinese economy benefited greatly from its extraordinarily successful exports. Chinese exports grew by an average of 17% a year for three decades, an astounding record. This growth propelled China to become the biggest exporter in the world. However, China’s export cannot grow faster than the global economy. To expand quicker than the global economy, China will need to take market shares away from other economies, which will be economically challenging as well as politically unfavorable.

In the coming decades, China will have to be satisfied with low single-digit growth rates in export. China’s economic slowdown is therefore natural. It is natural because easier issues such as price liberalization and low value-added labor-intensive exports have already happened. It is also desirable because the slowdown necessitates a transition to higher value-added production, rising wages, stronger domestic consumption, and a generally improving living standard. Implicit in this economic transition is a potential quantity-quality trade-off: lower headline growth rate for the economy but higher quality of growth for the society.

China: Trade balance from 2007 to 2017 (in U.S. dollars)

IV. Wealth Gap

This leads to the next issue -the problem of the wealth gap in the Country. While economic growth has helped the vast majority of the population, the wealth gap between the countryside and the cities has also widened. There’s also a widening gap within urban areas—the rich are growing richer. China’s Gini Index as of 2016 was 46.5. The closer the value is to 100 the greater is the inequality, 40 is the warning level set by the United Nations. However, urban disparity and a lack of access to education and healthcare are not problems unique to China. Leaders of the government have recommended policies to improve income distribution and to create a fair and sustainable social security system. However, implementation remains a matter for localities and varies considerably among them.

Gini Index: Inequality of Income Distribution in China from 2006 to 2016

Conclusions

There are many challenges currently facing China. For now, however, it’s a mistake to fixate on China’s GDP growth rates. Focusing only on its GDP growth will be to miss the significant picture altogether. For example, in 2010, 10% real GDP growth added $606 billion to the economy. In 2017, however, 6% growth added $1,202 billion, double the amount of the 10% growth in 2010. Therefore, in spite of China’s economic slowdown, China’s global economic reach and influence is set to expand. This is the bigger picture that we may need to watch. In short, China’s growth is slower, but weighing the evidence, we can say that the sky isn’t falling.

 

Khyati “Kathy” Rai

Asia Global Leadership