China's big slowdown

The engine of global growth for 30 years is slowing

The growth of gross domestic product (GDP) in the People’s Republic of China (PRC) has slowed to 6.6 per cent in 2018 — which is a remarkable low for that country; in fact, it is the lowest that GDP growth has been since as long ago as 1990. Fourth-quarter growth (year-on-year) was 6.4 per cent, indicating that the economy was decelerating. The GDP growth figure was flattered by a decision to revise 2017 growth downwards, meaning there was a positive base effect. In any case, Chinese growth numbers have always been questioned. As such, this relatively low figure might conceal even greater weaknesses than the headline numbers suggest. Even though a $12 trillion economy growing at over 6 per cent is still a powerhouse, and by far the biggest contributor to global growth, the latest numbers are cause for concern.

The PRC’s slowdown is less cyclical and more structural. Three decades of super-charged growth in mainland China was delivered by a very specific investment- and export-driven model. Financial savings and foreign investment were routed to large, capital-intensive projects and export-focused manufacturing. This allowed employment and incomes to grow; eventually, the PRC became the world’s factory, running large trade surpluses with most countries. After the global financial crisis of 2008, the government made the choice to double down on this model, turning on the tap of cheap credit to various capital-intensive sectors. While growth remained robust, the productivity of capital declined severely. In the past year, three-fourths of growth has come from consumption, indicating that the consumption-focused sectors of the economy have now become the engines of progress. 

Beijing is well aware of this structural problem, and has been for some time — there has long been talk of “rebalancing” China’s economy away from exports and an investment fetish towards innovation and consumption. The logic is sound: To move from upper-middle income to high-income status — to avoid the “middle income trap” — the PRC would have to raise productivity, which will come from moving up the value chain and embedding greater innovation in all its processes. This rebalancing process would naturally lower growth during the transition. However, implementing the changes is harder than many hoped. For one, political concerns have interfered. It is important politically for the Communist Party of China to ensure that growth remains high and incomes keep on rising — or the implicit compact with the Chinese people that keeps the party in power would be broken. Thus, the credit tap to unproductive sectors of the economy cannot be turned off entirely. Further, empowering the private sector — a necessary next step in the rebalancing — is contradictory to the direction of recent CPC policy. And while Beijing has thrown resources into research, with some very positive results, integrating the product of this research into final output has been much harder.

Beijing’s stated intention to reconstruct its economy will be severely tested. In some ways, trade tensions with the United States may actually help in its attempt to de-emphasise exports’ importance. But for India, the question is how much this structural slowdown will affect this country’s own growth trajectory. While it is true that an opportunity has opened up to insert India further into global supply chains, it is also true that without substantive domestic reform that will remain a hopeless dream.