China’s slowing economy
When China spits, Asia swims, and the world gets wet feet
The growth of the Chinese economy has slowed to the lowest in three decades, suggesting peril to world security by the secondlargest economy and principal trader. When China spits, as the proverb goes, Asia swims. The rest of the world gets wet feet, too.
Weaker growth of Chinese exports has reduced demand for imports of intermediates and raw materials, reflecting losses on iron ore and copper trading and like products mostly in emerging markets of key global commodities.
But the bigger worry of policymakers is that the latest data shows a loss of momentum in the three engines of the world’s second-largest economy — exports, investment and consumption.
Beijing’s “Socialism with Chinese Characteristics” has chilled liberalization, heightened mercantilism, raised bureaucratic hurdles to trade and investment, weakened the rule of law, and strengthened resistance from vested interests that impede more dynamic economic development.
The economic slowdown may be more severe than official statistics indicate, and poses serious challenges to a government whose legitimacy depends on its ability to raise living standards. Much will depend on how successful President Xi Jinping maneuvers to consolidate power for a third term. He makes it difficult to analyze measures that could be taken in the tightly controlled economy. His strategy to achieve Chinese dominance of high-tech sectors has engendered pushback from global rivals.
All land in China is state-owned and protection of foreign intellectual property is, to use Chinese delicacy, “inadequate.” The judicial system is dominated by government agencies and the Chinese Communist Party. Corruption is endemic, and the leadership has rejected fundamental reforms, such as requiring public disclosure of assets by government officials, organizing genuinely independent oversight bodies, and eliminating restraints on the newspapers and networks.
Eliminating minimum capital requirement has made it easier to open new business companies, but the overall regulatory framework remains an obstacle to development. The requirements of getting started are complex and uneven. The labor market remains tightly controlled with guidelines that often differ from agency to agency, and labor laws are applied differently in different localities. The government subsidizes numerous state-owned enterprises and is still committed to price controls for essential goods and services.
Economic models that suggest a 2 percent decline in Chinese growth would cut world growth by 0.5 percent, leaving it at 2.3 percent, the slowest since 2009, not far from global recession. The slowdown coincides with the trade dispute with the United States, weakening domestic sentiment and global demand, and alarming local governments using large-scale off-thebalance sheet borrowing.
The Shanghai Stock Exchange Composite Index was the world’s biggest loser in 2018, posting a fall of 24.6 percent. Beijing authorities were trying to chip away at one of the highest debt mountains in the world, a stunning 253 percent of GDP. But their strategy coincided with the slowing of the big European export market and President Trump’s tariff initiative.
China’s economic growth has been steadily decelerating over the past decade, from a 14.2 percent in 2007 to 6.5 percent in the third quarter of last year. The 6.4 percent growth in the fourth quarter was the lowest since China began publishing quarterly GDP data.
There’s no reliable indication of when a recovery will come. Beijing has successfully played a dominant role in the economy, and it will be exceedingly difficult to wean policymakers from that.
But that model inevitably leads to confrontation between China and the West. Current trade talks dramatize their differences. The American small-government, free-market ethos is very different from the Chinese command-and-control model. China awards significant financial and nonfinancial support to major companies, those it owns or controls. In the United States, companies in trouble must trade, merge or die.
The Chinese economy has one positive element, the worldwide plunge in energy prices which will offset some of China’s difficulties.
But an off-set is not a cure.