By Peter G. Hall
Sino-slowing is among the top topics on the summer chat circuit. Small wonder – current trends seem to break with a stunning 30-year winning streak that has set a lot of modern-day records, and vaulted the ancient land into number two spot on the global GDP charts. Its resilience during and after the global meltdown of 2009 further buffed its superstar status. Now that’s being called into question. Will the slowing continue, and is it putting the global outlook at risk.
Although China’s modern ascendancy is an overplayed soundtrack, it still elicits gasps. Growth in the two-decade period preceding the 2009 crisis averaged 11 per cent, after accounting for inflation. In the 5-year period leading up to the crisis, annual average increases were almost 12 per cent. Even during the crisis, growth maintained a very impressive 9.2 per cent clip. Although many expressed fears that the pace was unsustainable, it was not until last summer that growth began to wobble. For the first half of this year, it is averaging 7 per cent, below official growth projections.
Should we worry? Put in context, a slowdown in China is probably overdue. China’s rise was heavily dependent on external growth, which was excessive in the 2004-08 period, but has been anything but robust for at least five years. Crisis-inspired public policy measures – by some estimates, amounting to over 25 per cent of GDP – have been instrumental in spurring growth on in the past five years, buying time ahead of the elusive global recovery. Yet some are concerned that these measures have merely papered over excesses in economic capacity that need to be dealt with.
Continuation of expansionary policy is a key assumption in the global outlook. However, China’s new government has recently noted concern about excess capacity and questioned the effectiveness of policy measures. It has even intimated that slower growth might not be so bad. These sentiments are indeed a game-changer – so is it time for a full revisit of the China outlook?
Clearly, the historical red-hot growth pace is bumping up against significant labour constraints. Slow labour force growth is nothing new in China, but the economy has been able to count on an army of un- and under-employed citizens numbering in the hundreds of millions. Years of rapid growth and inland expansion have soaked up a lot of this excess, and double-digit wage growth in populous coastal cities is common. The one-child policy has ensured that this problem won’t go away soon.
Undeterred, China is responding to the labour challenge. Recent outflows of investment in offshore manufacturing facilities have been making their way to populous Asian nations. India, Indonesia, Bangladesh and Vietnam have all been recipients of significant Chinese investments, a process that is creating the means for China to create considerable growth capacity beyond its borders. At the same time, China realizes that its citizens are getting wealthier. Opportunity is enabling them to move up the wage scale, entering a new consumer class. This is creating home-grown growth that is good for China, and the rest of the world. Currently, over 40 million are entering the middle class every year, and that number is increasing annually.
A final reason for believing in sustained strong growth is that the world is recovering. Years of slow growth are helping to work off the excesses of the past, and momentum is once again starting to build. As it does, international trade will again ramp up, and China is bound to benefit.
The bottom line? Many are fretting about recent Chinese weakness, but growth fundamentals are still strong. For now, higher current growth awaits a growth resurgence in the OECD economies.
This commentary is reprinted with permission from EDC. It is presented for informational purposes only. It is not intended to be a comprehensive or detailed statement on any subject and no representations or warranties, express or implied, are made as to its accuracy, timeliness or completeness.