Slower growth consistent with post-industrial era
AFTER intensive industrialization, growth deceleration is natural. No nation has enjoyed sustained double-digit growth after industrialization. The real test of resilience is the continued increase of Chinese living standards. In 2015, China's economy grew by 6.9 percent. Internationally, the performance was portrayed as the "slowest in 25 years." Some argued that the slowdown reflected the eclipse of domestic demand. Others claimed it heralded China's "hard landing." And yet, the performance was within range of the government's official target of "about 7 percent."
What the deceleration signals is not China's demise, but the eclipse of Chinese industrialization. Deceleration is normal In the past, China enjoyed "double-digit growth." Today China's growth is slowing relative to its past performance. Historically, that is the norm, not the exception. During intensive industrialization, most advanced economies have enjoyed relatively high growth. With the transition to postindustrial services, their growth has decelerated.
When the Industrial Revolution peaked in England in the early 19th century, the country experienced a "growth miracle." At the turn of the 20th century, US growth accelerated dramatically. After World War II, Western European economies had their growth miracles. A decade or two later, Japan followed in the footprints. As these countries completed their industrialization and began to move toward a post-industrial society, growth acceleration gave way to deceleration.
What makes China different is its massive scale and the purposeful effort to shift from economic growth to rising living standards. As China is "rebalancing," the economy is shifting from growth based on investment and net exports, which is not sustainable, to growth fueled by consumption and innovation, which is more resilient. In the past, property markets drove the Chinese economy. However, last year real estate growth continued to decrease from almost 16 percent to 10 percent. The same goes for fixed-assets investment. Moreover, last December China's exports fell 1.4 percent on a quarterly basis, and imports slid 7.7 percent. Instead, services grew by almost 11 percent, faster than the industrial sector. Concurrently, retail sales of consumer goods - the key indicator of consumption - climbed over 11 percent on an annual basis. The services sector now accounts for over 50 percent of the Chinese economy. In 2015, Chinese consumption, which accounted for less than 40 percent of the GDP only half a decade ago, contributed nearly 60 percent to GDP.
The contemporary Chinese economy is a dual story about the demise of industrialization and the rise of the post-industrial society. As innovation and consumption already fuels the first-tier mega cities, investment-fueled expansion is still needed for rapid growth in lower-tiered cities. Furthermore, Chinese deceleration must also be seen in the context of the international environment, which is characterized by diminished growth prospects. Stagnation in the West When Deng Xiaoping launched economic reforms and opening-up policies in China, he relied on the advanced economies' ability to invest in foreign markets and absorb cheap exports. For three decades, this international environment fueled China's investment and export-led expansion, supporting double-digit growth through industrialization.
World trade and investment accelerated. International demand soared. Oil and commodity prices climbed sky high. After the global crisis of 2009-9 and subsequent recovery policies and stimulus packages, that old normal is history. World trade has plunged. Demand has weakened. Oil and commodities have collapsed. In the advanced West, growth is now possible only on the back of recordlow interest rates or steady injections of quantitative easing, or both.
In the emerging economies, the crisis years translated to "hot money" (short-term portfolio) inflows, which contributed to asset bubbles, imported inflation and currency appreciation. In China, the combination of domestic stimulus and foreign hot money inflows led to overheated property markets, huge local debts and overcapacity. In China, the government's growth target of 6.5 percent for 2016 is ambitious but feasible. Assuming there will be a peaceful international environment and gradual domestic reforms, it is likely to further decelerate to about 5 percent by 2020. Internationally, that should be seen as a success. In the next decade, US annual growth is unlikely to exceed 2.5 percent (if a debt crisis is avoided), eurozone expansion will remain less than 1.5 percent (if the region doesn't disintegrate) and Japanese growth will struggle at 0.8-1 percent (as debt climbs to 300 percent of GDP).