Keeping China’s recent stumbles in perspective
Despite President Xi Jinping’s cheery pronouncements on China’s economic health during his recent U.S. visit, doubts remain. In fact, those analysts and observers who have been warning for years that China’s stellar economic performance is a house of cards destined to come tumbling down now seem to be enjoying somewhat of an “I told you so” moment.
The steady stream of bad economic news coming out of China in recent months has been jarring, to put it mildly:
- Massive stock market losses (a 30 percent decline over three weeks), followed by ineffectual government interventions which seemed to only further erode confidence.
- A slowing growth rate of about 7 percent which has thus far been resistant to all efforts at revival-including five interest rate cuts since November.
- A surprise currency devaluation which raised concerns over the possibility of a destructive currency war in the offing.
Suddenly, Chinese policy makers who were previously viewed (at least by some) as economic superheroes who could do no wrong now seem to be over-matched amateurs. Some of the more drastically pessimistic prognostications for China’s economy are beginning to look more and more within the realm of possibility.
So, do the China doomsayers have it right? A bit of broader perspective is in order.
Over the past three decades, China has been immensely successful in executing an export-driven “catch-up” strategy designed to close the gap with the developed world economies. During that time, China has been transformed from a poor, isolated economic backwater to the modern, upper middle-income, export powerhouse it is today.
China’s leaders deserve an A+ for their economic management during this initial “catch-up” phase, in which China averaged nearly 10 percent annual growth rates for three decades. This staggering transformation was executed with nary a blip and stands as one of the greatest economic development stories in modern history.
But today, that chapter is finished. The export-led development strategy which has served China so well is now running on fumes. A less abundant labor force and rising hourly wage rates (increasingly by roughly 12 percent per year since 2001), combined with increasing competition from other low-cost producers means China can no longer drive growth simply by being the “factory of the world”. For China’s economic planners, the low hanging fruit has already been harvested. Now comes the hard part.
China has arrived at the cusp of the so-called middle income trap–the point at which the initial gains from industrialization and rapid technological up-take have been exhausted and the country’s growth threatens to potentially stagnate. China’s leaders recognize that in order to vault this hurdle, the country will have to transition towards a higher-value added, domestic consumption-driven economic model.
Getting there will require painful and difficult reforms, especially to the state-owned enterprise sector and the woefully inefficient financial system. Massive levels of debt (roughly 282 percent of GDP by some measures) will make the task even more difficult, as will the volatility spawned by precarious asset bubbles which were inflated during the go-go years. So things are not going to be easy.
Yet it would be premature for anyone to conclude that the China growth story is now coming to an end, or that it was somehow never for real in the first place. Given how far China has come in such a short period of time, the only surprising thing about the recent turbulence is that it hasn’t been more severe.
Despite the doom and gloom, the simple fact of the matter is that, although slowing, China’s economy continues to grow at a very healthy clip. For an economy the size of China’s, growth rates even approaching 7 percent is hardly something to look askance at. The list of countries that would happily trade places is long.
In any case though, China’s complex transition has just begun and it’s still far too early to predict success or failure.
One should be cautious about overreacting to the current stumbles and those that will almost certainly occur in the future. For any country at this stage in its economic development, the climb forward will be considerably steeper. A full-blown crisis or two cannot be ruled out and perhaps should even be expected. Keep things in perspective during any such turbulence.
To paraphrase Churchill, it is not the end of China’s growth story. It is however the end of the beginning.