3 Reasons Not to Freak Out About China’s Economy

A Chinese man adjusts a Chinese flag before Chinese Foreign Minister Yang Jiechi and US Secretary of State Hillary Clinton's press conference at the Great Hall of the People in Beijing on September 5, 2012. (Photo by Feng Li/Getty Images)
Feng Li/Getty Images

The news from China isn’t good.

After helping power the world through a recession, China’s economy is beginning to falter. The country’s double-digit GDP growth rates, which were present even through the recession, are expected to fall to single digits this year.

Earlier in March, Chinese Premier Li Keqiang said that the country expects its lowest gross domestic product since 1991 this year. As a result, he said the country will lean again on infrastructure development such as urban renewal, conservancy, and railway lines to spur growth.

Leading economic indicators for the country are also down. The Chinese property bubble is popping as real estate prices dipped by 4.5% last year and are expected to dip even further this year. The sector’s excess capacity and decreased demand came into sharp relief this year as more than 60 million apartments remained empty.

Inflation has dipped and government policies have pushed back on credit. The Producer Price Index (PPI), a measure of the average change in prices paid by domestic producers, has declined for 31 consecutive months last year, suggesting weak demand for goods.

Imports and consumption remain low. China is the world’s largest producer of steel, and low demand in the domestic market has led producers to dump steel into foreign markets.

To be sure, the Chinese economy is simply mirroring the broader performance of a world economy in recession. According to the World Bank’s economic forecast for 2015, overall global economic growth was slow in 2013 and picked up only marginally in 2014. But China’s economy is unique: It hasn’t reached full potential yet (almost 13% of the population still lives below the poverty line), but it still overtook the United States as the world’s largest economy (albeit only by some measures) last year. As such, even a blip on the Chinese economic radar could produce a sizable effect on the world economy.

So, should world leaders (and, indeed, you) be freaking out about low growth rates in China?

Not really. This is because the world economy is an interconnected puzzle, where pieces generally work in concert with each other, even though they may be mismatched at times, like during the recession. Here are three reasons not to panic.

Alternate centers of power

The primary reason for optimism about the state of affairs for the world economy is the emergence of economic counterweights to China. India, which has had disastrously slow growth rates recently, has picked up steam again. According to the International Monetary Fund, Indian economic growth rates are expected to overtake those of China by 2016.

In an interview with IBTimes, Barry Bosworth, senior fellow of economic studies at the Brookings Institute, said Asia is the strongest economic region of the global economy with a very positive global outlook for 2015 or later, and added that the numbers proved that Asia’s growth was self-sustaining.

Part of the reason for this surge in optimism about Asia are the reforms undertaken by various governments throughout the region to encourage foreign investment and growth. For example, India welcomed a new pro-trade prime minister last year who has vowed to cut down on bureaucracy and corruption and speed up foreign investment in the country.

As a result, there has been an increase in major economic indicator indices and international agencies have come out in favor of India’s structural reforms. Similarly, Indonesia’s new president Joko Widodo came to power on a pro-reform agenda. This will open up new markets to producers from Western economies and, in the face of weakening demand at home, enable them to turn profits in foreign markets.

A Chinese investor walks past an investment map showing suitable property markets for wealthy Chinese to invest in at the International Property Expo in Beijing on April 11, 2014. Wealthy Chinese will pour AUD$44 billion (US$39.4 billion) into Australian real estate over the next seven years, potentially pushing prices in one of the world's most expensive housing markets even higher. Chinese property investors have been on a international spending spree since the global financial crisis hit most of the world's economies. Photo by Mark Ralston/AFP/Getty Images
Mark Ralston/AFP/Getty Images

Think structure not growth

The Chinese economy has been in growth mode for much of the last two decades, and its contribution to world GDP has increased. But the surge in foreign capital has not kept pace with deep and more important structural reforms required from the Chinese economy.

For example, the real estate bubble in China was caused due to market distortions that were a mix of skewed land policies, interest rate caps on savings (which resulted in migration of savings toward real estate for better returns), and incentives for local governments to boost economic development (which resulted in housing construction projects that are now going begging). Low economic growth in the Chinese market is a result of government policies to tamp down on demand.

There is also the argument for China’s competitive advantage. The country’s main benefit comes from a combination of cheap labor and depreciated currency. Although it has seen appreciation in recent times, the Chinese yuan still remains a competitive bet.

According to a report by the Economist Intelligence Unit, the Chinese currency and, by extension, its labor market and manufacturing sector, are still strong. For example, the discovery of new manufacturing centers has taken the pressure off densely packed regions and, also, served to reduce pressure on wages.

According to the report, the country’s manufacturing earnings averaged $2.11 per hour in 2012. This figure is extremely competitive, when you compare it to the $35.71 per hour rate for workers in the States.

A better structural footing will enable the Chinese government to play catch up with other, better managed and regulated economies. Indeed, some analysts have argued that the size of the economy also matters. For example, as Steven Barnett from the International Monetary Fund points out, the Mongolian economy, which grew at 12% last year, still contributes much less to the overall world GDP as compared to the U.S. economy, which grew at a rate of 2%. A similar logic can be applied to the Chinese economy.

Even at reduced growth rates, the Chinese economy’s contributions to the world economy still remain substantial.

Photo by STR/AFP/Getty Images
Photo by STR/AFP/Getty Images

Trade lifts multiple economic boats

There are two theories regarding this.

The first one has to do with the effect of the U.S. economy on the overall global economy. According to the World Bank’s Global Economic Outlook for 2015, developing countries with high exposure to the U.S. economy are expected to gain momentum.

This is because the U.S. economy is expected to perform relatively well as compared to other global economies. Countries which are in economic reform, such as India, are expected to benefit for the domino effect of exposure to the U.S. economy. Similarly, Myanmar, which was a closed state earlier, is also expected to benefit from openness and trade with the U.S. economy. Some analysts are predicting growth rates that will top 7% for the economy in 2015.

The second one has to do with the effect of oil prices on the world economy. Low oil prices are expected to affect growth in oil-exporting countries. On the flip side are countries that do not produce oil and are net importers of the fuel. They benefit from reduced prices. For example, Thailand, which does not produce oil, will benefit from reduced oil prices.

But there are a few benefits for oil-exporting countries, which can still benefit from low prices by channeling subsidies to other sectors. For example, Indonesia, which exports oil, has eliminated fuel subsidies and is instead planning to channel funds into infrastructure investment. This will increase employment and, also, increase spending power of average consumers.

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