Monday, June 2, 2014

China slowdown will affect world economies

China is the world’s second-largest economy, even if it remains an economic pygmy, with $6,091 in per-person gross domestic product in 2012, compared with the US’s $51,749. Its global importance was magnified when North America and Europe shifted their manufacturing to the Middle Kingdom. That shift made China the primary importer of raw materials and exporter of manufactured goods.

China’s size and impact on the global economy mean that China’s problems are now the world’s problems. No single issue is likely to cause a major crisis, yet in combination they certainly could.

The first and biggest problem is slowing economic growth. Until 2008, China had accelerating double-digit real GDP growth. Then the recession and retrenchment of US and European buyers knocked growth down to 6 percent — a recessionary rate for China.

The coming economic transition the government is planning is the second big challenge. After the recession, Chinese leaders realized their earlier growth model — with an emphasis on exports and the infrastructure that supported it — wasn’t working. Most of its exports were bought by Americans and Europeans. But as those economies continue to deleverage and grow slowly, the game has changed.

Now, Chinese leaders want to shift from export-driven to domestic-led growth.

But in promoting a consumer-led economy, China is way behind the goal post. The latest data from 2012 show that consumer spending only accounted for about 36 percent of GDP, far behind the developed countries. Even emerging economies are faring better: Russia’s consumers make up 48 percent of GDP; India’s are 60 percent and Brazil’s 62 percent.

The government knows that to increase consumer spending it must increase incomes and reduce savings. Chinese households don’t have much of a safety net to fall back on, so they save almost 30 percent of their income to cover health care, retirement and education.