Managing China's Economic Transformation
China’s economy slowed slightly in the third quarter of this year, but nevertheless, the world’s second-largest economy managed to beat expectations during that period. After a strong performance in the first half of this year, a slowdown had been expected in the second half. This was due to the fact that the Chinese government is becoming increasingly concerned about some of the risk factors that are threatening to derail China’s recent run of strong growth.
Many of these risk factors are associated with the transformation of the Chinese economy from one that was driven by manufactured exports to one that is increasingly driven by domestic consumer spending. As this transformation continues, and as China becomes a wealthier middle-income economy, the Chinese government is hopeful that it can oversee a controlled slowdown during which economic growth rates continue to meet government targets.
In the third quarter of this year, the Chinese economy expanded by 6.8% on a year-on-year basis. This was just slightly below the 6.9% GDP growth rates recorded in each of the first two quarters of this year. Nevertheless, this was a far cry from the 10% GDP growth rates that China managed to average over a 30-year period that lasted until just a few years ago. While these growth rates are no longer at the level they once were, China is still growing faster than nearly all other economies in the world.
Most notably, a recent slowdown in India has allowed China to once again overtake that country in terms of economic growth, and only a small number of Asian emerging markets (for example Vietnam and the Philippines) are managing to grow as fast as China at the moment. When one considers that China is now a middle-income economy with a working-age population that is no longer growing, it is clear that, despite some recent turbulence, China remains one of the world’s best-performing economies.
Over the past few years, a number of factors have combined to reduce the level of economic growth in China from the soaring growth rates achieved in previous decades to the more modest growth rates of today. These factors included rising production costs in China, lower levels of demand growth in many of China’s key export markets, and rising levels of overcapacity in many sectors of the country’s economy. Today, many of these factors remain in place, but a number of new factors have joined them. First and foremost, the Chinese government is taking a leading role in attempting to reduce the rising levels of risk facing the Chinese economy.
Of these risks, rising debt levels rank as the most dangerous, with government, business and consumer debt all rising sharply in recent years, giving China a level of overall debt that is comparable to that of much wealthier countries. Another threat that the Chinese government is attempting to mitigate is the one posed by the country’s red-hot real estate sector, with fears of a bubble persisting in that sector of the economy. Finally, despite the country’s transformation to a consumer-driven economy, the threat of protectionism remains a potential destabilizing factor for the Chinese economy, hence Beijing’s efforts to assume the mantle of the global champion of free trade in the wake of the Trump Administration’s attacks on free trade since taking office in the United States.
Despite some troubles a few years ago, the Chinese government has done a respectable job of managing the Chinese economy and its transition from a low-cost manufacturing center to a consumer-driven modern economy. This transformation has helped consumer spending levels to continue to grow at a double-digit rate in recent years, a key factor in China’s ability to avoid much of the turbulence that hit other emerging markets during this period. Furthermore, after a lengthy slump, demand levels in many of China’s key export markets are improving, further bolstering growth prospects in China over the remainder of this year and into next year.
Still, vigilance is required, and Beijing must still find a way to balance a reduction of the risks facing the Chinese economy with the generation of the growth rates that the Chinese populace expects. In particular, rising debt levels remain a dangerous threat to the Chinese economy and Beijing will have to do more in the coming years to bring this threat under control, even if it means reducing GDP growth rates more than they are currently willing to do. If China can manage to do this, then there is little likelihood of a hard-landing in China at any time in the coming years. Moreover, China will be able to reinforce its position as the leading driver of global economic growth for many years to come, a position that will allow China to attract more investment and to play a greater role in the management of the global economy.