China’s economy grew 6.9 percent last year. Internationally, the performance was portrayed as the “slowest in 25 years”.
What the deceleration signals is not China’s demise, but the eclipse of Chinese industrialization.
Deceleration is normal
In the past, China enjoyed double-digit growth. Today, China’s growth is slowing relative to its past performance. Historically, that is the norm, not the exception.
During intensive industrialization, most advanced economies enjoyed relatively high growth. With the transition to post-industrial services, their growth has decelerated.
When the Industrial Revolution peaked in England in the early 19th century, the country experienced a “growth miracle”. At the turn of the 20th century, US growth accelerated dramatically.
After World War II, Western European economies had their growth miracles. A decade or two later, Japan followed suit.
As these countries completed their industrialization and began to move toward a post-industrial society, growth acceleration gave way to deceleration.
What makes China different is its massive scale and the purposeful effort it is taking to shift from boosting economic growth to raising living standards.
Rebalancing is not ‘hard landing’
As China is “rebalancing”, the economy is shifting from growth based on investment and net exports, which is not sustainable, to growth fueled by consumption and innovation, which is more resilient.
In the past, the property market drove the Chinese economy. Last year, however, real estate growth continued to decrease from almost 16 percent to 10 percent. The same goes for fixed-assets investment.
Last December China’s exports fell 1.4 percent on a quarterly basis, and imports slid 7.7 percent. On the other hand, services grew by almost 11 percent, faster than the industrial sector.
Meanwhile, retail sales of consumer goods – the key indicator of consumption – climbed over 11 percent on an annual basis.
The services sector now accounts for over 50 percent of the Chinese economy. In 2015, Chinese consumption accounted for nearly 60 percent of the GDP, compared with less than 40 percent only half a decade ago.
The contemporary Chinese economy is a dual story about the demise of industrialization and the rise of the post-industrial society.
As innovation and consumption fuel first-tier mega cities, investment-fueled expansion is still needed for rapid growth in lower-tiered cities.
Furthermore, Chinese deceleration must also be seen in the context of the international environment, which is characterized by diminished growth prospects.
Stagnation in the West
When Deng Xiaoping launched economic reforms and opening-up policies in China, he relied on the advanced economies’ ability to invest in foreign markets and absorb cheap exports.
For three decades, this international environment fueled China’s investment- and export-led expansion, supporting double-digit growth through industrialization.
World trade and investment accelerated. International demand soared. Oil and commodity prices climbed sky high.
After the global crisis of 2008-9 and subsequent recovery policies and stimulus packages, that old normal is history.
World trade has plunged. Demand has weakened. Prices of oil and other commodities have collapsed.
In the advanced West, growth is now possible only on the back of record-low interest rates or steady injections of liquidity, or both.
In the emerging economies, the crisis years translated to “hot money” (short-term, speculative investment) inflows, which contributed to asset bubbles, imported inflation and currency appreciation.
In China, the combination of domestic stimulus and foreign hot money inflows led to overheated property markets, huge local debts and overcapacity.
The government’s growth target of 6.5 percent for 2016 is ambitious but feasible. Assuming there will be a peaceful international environment and gradual domestic reforms, economic growth is likely to further decelerate to about 5 percent by 2020.
Internationally, that should be seen as a success. In the next decade, US annual growth is unlikely to exceed 2.5 percent (if a debt crisis is avoided), eurozone expansion will remain less than 1.5 percent (if the region doesn’t disintegrate) and Japanese growth will struggle at 0.8-1 percent (as debt climbs to 300 percent of GDP).
At the same time, the Chinese economy has the potential to grow two to three times faster than major advanced economies, if market-oriented structural reforms can prevail.
As the old China of manufacturing, investment and exports is fading, the new China of services, innovation and consumption is emerging.
For more of Dr. Dan Steinbock’s articles, see http://www.differencegroup.net
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