Authors: Editors, East Asia Forum
Last week’s data out of China recorded half a year of 6.9 per cent GDP growth. China has nudged its relatively rapid growth up a notch on a year ago and continues to perform well above the global average. Whatever doubts there may be about the reliability of China’s GDP data, there is little doubt that this and all the other indicators confirm that Chinese growth is stronger.
Although China’s growth rate has come down from its heady 10 per cent in the three decades before 2010, the economy has continued to grow strongly driving it into top spot as a global economic power (measured in purchasing power parity terms) and confirming its position as by far the largest contributor to global growth. This is a position that it will continue to hold over the coming decade even if it grows much more modestly than it currently does. China has added an economy the size of Mexico to global output every year since 2008.
The scale and pace of China’s growth is widely acknowledged around the world. Last Thursday, Pew released a new report with the results of their 38-nation survey on the standing of China among the major economic powers. While the majority of those polled still believe the United States is the world’s biggest economy (which it is in nominal but not in real purchasing power terms), a majority of those polled in 12 nations — including Canada, Russia, and most of western Europe — believe China has the largest economy in the world. Only those polled in six nations said China was the world’s strongest economy when the same question was asked between 2014 and 2016. Since then, the number of countries that view the United States as playing second fiddle to China has doubled. In Asia, where countries are closer to the international impact of China’s growth, the story is a little different. US allies and partners, including Japan, South Korea, the Philippines, Indonesia, Vietnam and India all see the United States as the global economic top dog, with one regional exception: Australians now believe China is the biggest economic player.
The huge scale of the Chinese economy today, however, needs to be understood in the context of the ambitions for its growth in the future. China’s per capita income is still not high, being only 24 per cent that of the United States or 34 per cent that of OECD average incomes. Chinese policymakers face the challenge of managing the transition to higher incomes and closing this gap in the decades to come.
Growing at the current rate would see China double its income in little over a decade. What are the challenges to sustain growth at this rate and what are the risks that Chinese growth might fall in a heap sometime soon?
Certainly China’s growth has considerable potential to maintain momentum through spreading more widely across the Chinese hinterland. As Yao Yang and his colleagues argued at the China Update this week, China’s unprecedented growth over the last 30 years, particularly in the years before the global financial crisis, was concentrated in eastern (coastal) provinces. The vast inland areas have largely lagged behind. In 2015, GDP per capita in the eastern region was 1.8 times that in the central and western regions. But since the global financial crisis, growth rates in the eastern provinces have slowed and the growth rates of inland provinces have picked up. Regional development catching up to the richer eastern coastal areas could serve as a driver for China’s future growth. With growth rates in the east decelerating, inland growth rates are likely to outperform those of the eastern regions for the foreseeable future. In short, unbalanced development and inequality across the country could actually be a potential source of future growth, with diffusing investment and technology across the country playing an important role in buoying China’s overall growth potential.
Yet, as Yao and his colleagues imply, China will also need to raise incomes in the rich coastal areas to achieve the high income targets to which its leadership aspires. That requires entrenching the new growth model — a continuing shift away from investment and exporting towards services and consumption growth — and innovation that sustains higher productivity, not only the backward regions of China catching up with the rest.
Chinese growth has so far defied the myriad pundits who see the risks of Chinese growth collapsing for any one or more of many reasons, but how fragile is continuing Chinese growth? China bears have been consistently wrong for the past 30 years but past success does not guarantee future success.
There’s certainly plenty to worry about in judging whether long China’s gigantic, high-wire reform act will end more or less successfully.
In our lead essay this week, Yiping Huang notes that ‘in the past couple of years a range of financial market risks have emerged: in equity and bond markets, the explosion of shadow banking, in property markets, in digital finance and in foreign exchange markets. The Shanghai A-share Index rose from about 2,000 in May 2014 to 4,500 in May 2015, before collapsing below 3,000 in May 2016. The ratio of commercial bank non-performing loans has jumped by 75 per cent over the past two years. The property market has also gone through three cycles since 2009, of growing amplitude. There are also risks of capital flight and currency depreciation’.
The prevalence of these risks across the financial and other sectors, Huang suggests, is a signal of systemic problems. The debt overhang and ‘zombie’ state-owned enterprises are at its core and getting rid of the old industries that have lost their competitiveness is not an easy task politically, certainly not before the leadership changes coming up at the 19th Party Congress in November.
China remains the only major emerging market economy that has not experienced a serious financial crisis, protected by continued rapid economic growth and government guarantees. But it will be increasingly difficult to maintain that no-crisis record unless the ‘supply-side’ structural reforms to which China’s top leadership, including President Xi Jinping, have committed to are actually implemented.
This grand reform agenda, which promises more freedom in how Chinese individuals and firms can deploy their wealth at home and abroad, chafes hard against Xi’s own apparent political agenda — centralisation of power through an anti-corruption campaign and tighter political controls — and raises bigger questions about the ultimate reconciliation of national economic and political goals.
The immediate global growth outlook has brightened somewhat in the industrial economies, and increased demand for China’s exports will help a little in navigating these tricky problems. But, with Trump, the international policy environment has become a whole lot less congenial in helping China to manage its grand reform agenda.
As Huang makes clear, in the medium term on the economic front, meeting healthy growth targets won’t suffice: ‘getting tough on structural reform will be the only way to cut through in resolving China’s mounting economic woes’. And the litmus test on all fronts is clarity on the economics.
The EAF Editorial Group is comprised of Peter Drysdale, Shiro Armstrong, Ben Ascione, Amy King, Liam Gammon, Jillian Mowbray-Tsutsumi and Ben Hillman, and is located in the Crawford School of Public Policy in the ANU College of Asia and the Pacific.