China Slowdown, a Necesity for China and the Globe

China Slowdown, a Necessity for China and the Globe

The impending China slowdown has encouraged doom and gloom across global markets. Oil is at extremely low levels, the Fed is eliminating its bond buying program, and Europe is back on the verge of recession. There has been much chatter about the consequences of this, but what about the benefits to China and the World?

http://www.businessweek.com/articles/2012-05-31/understanding-the-china-slowdown

econ_china23__01inline__405To be sure an abrupt slowdown would have significant effects on global growth. But China cannot continue rapid growth without structural reforms for the China economy. The country must transition from an export focused manufacturing base to a larger consumer market. This is the best way to ensure continued robust growth in the long run, not just a year or two down the line.

In the aftermath of the 2008 financial crisis China pushed a mountain of credit into the market to maintain output and employment growth. Credit increased from 150% to 250% by mid 2014. This program worked in creating 12-13 million new jobs a year, however over the same period overall economic growth has become too reliant on infrastructure construction and real-estate development. https://www.project-syndicate.org/commentary/china-s-risky-rebalancing-by-adair-turner-2014-10

The longer that easy credit exists in China the longer the risk of defaults and misallocated investments. However, just slowing new credit supply will do little to address the underlying issues facing the Chinese Economy. It is highly unlikely that china will cut interest rates or reserve requirements to address the current slowdown. If China misses the 7.5% growth goal it will implement some targeted stimulus measures without an economy wide program. In general China cares less about growth than it does job creation. Demographics suggest this won’t be as difficult as many are stating,

“The number of 15-30 year olds will fall 25% from 2015 to 2025…As a result, China’s labor market will tighten more rapidly than many expect. Rising real wages will support the shift to a more consumption-driven economy, and declining worries about unemployment will reduce reliance on credit-fueled construction to soak up labor supply.”-Adair Turner, Project Syndicate

While rebalancing is necessary just to avoid a credit bubble and bust it is already happening without government interference. The one child policy of old may be what constrains China’s labor market to the point of rising wages and higher consumption. China being a consumer as well as an exporter is very important for future global growth. Mature economies like the US and EU cannot be net importers of goods forever. As Chinese wages rise so will demand for all types of goods. These are potential future customers to firms around the world.

Will a slowdown in Chinese growth hurt global growth in the short run? Yes, absolutely, with commodity exporters like Canada, Russia, Australia, and Brazil feeling the worst of the consequences.

But if global growth is to be sustainable in the long run China needs to consume as well as produce.
References:

https://www.project-syndicate.org/commentary/china-s-risky-rebalancing-by-adair-turner-2014-10

http://www.un.org/popin/data.html

http://blogs.wsj.com/chinarealtime/2014/09/02/writing-china-nick-lardy-combats-conventional-wisdom-in-markets-over-mao/

http://www.businessweek.com/articles/2012-05-31/understanding-the-china-slowdown

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