The slowdown in China’s economy is a manifestation of natural trends associated with the transition to a new model of deep technological development. The consequence of moving along this path, previously already traversed by Japan and other Asian “dragons,” will be progressive growth in costs and complication of business rules in the Middle Kingdom.
The BRICS China economic transition reflects shifts in Asia-Pacific growth as China moves toward China innovation and advanced models.
Dragon’s Path in Focus
China is at the center of world attention. Everywhere, there are almost panic moods about the fact that the market of this country has changed, no longer works as before, or will completely collapse soon – due to internal contradictions, fiscal crisis, and many other negative circumstances.
The main fear provocateur is the dynamics of Chinese GDP. In recent years, the growth rates of the Middle Kingdom not only slow down. They plummet rapidly. If in the past decade the Chinese economy grew by double-digit values, then in 2014 – already by 7.3%, and in 2015 – only by 6.9%. And this against the backdrop of a record capital outflow, which, according to the Washington Institute of International Finance, last year amounted to $676 billion, in December 2015 and January 2016 – monthly more than $100 billion; an epic stock market crash in mid-summer, which in one day destroyed investors’ capitals by almost $4 trillion; a record devaluation of the yuan and a drop in currency reserves – according to the People’s Bank of China, last year they decreased by $482 billion, and in January – by another $99.5 billion, to $3.23 trillion. The decline in foreign trade for the year amounted to 9.8%, or $288 million, just for January, since the beginning of the year the Shanghai Composite index sank by 23%. And so on down the list.
From all this, the conclusion is drawn that China is in crisis and soon awaits the notorious “hard landing.” And moreover, it is the situation in China that can become the cause of the heaviest world economic crisis. Of course, completely ignoring the braking of the second economy of the world would be unreasonable. Nevertheless, it is not wise to refrain from hasty conclusions, starting with the fact that the dynamics of GDP itself is not the most eloquent indicator for assessing the real state of the country and its prospects. In the same Asian region, there are several countries at once whose GDP in recent years grew faster than Chinese. Including Mongolia (with 17.1% in 2011 with slowdown to “reasonable” 7.8% in 2014) or Burma (more than 8%). However, no one even today seriously looks at them as leading Asian powers or countries of “priority choice” for capital investment. On the contrary, despite the slowdown in growth rates and a mass of “side effects,” China is still perceived by the world community as one of the leading economies of the world. Be that as it may, it is important to figure out why this trend arose and whether the current braking is a manifestation of some cyclical crisis in the Middle Kingdom or just a “failure in the program” of its development.
Consumer Will Pay
The assessment of what is happening in China can significantly soften if you look at another important indicator – the dynamics of real incomes of the population. Contrary to the braking of nominal GDP, they have consistently grown over the past years, and this trend may persist at least until 2020, if panic moods in the market are avoided. Simply put, the Chinese are still getting richer. Moreover, the growth of household welfare is accompanied by a proportional growth of private savings. The problem is that so far their increase has not translated into an adequate increase in consumption, on which, not without reason, the authorities in Beijing are counting, should become another solid support for economic growth.
This phenomenon is partly explained by the stereotypes of Chinese behavior, by nature more inclined to save than to spend. But no less connected with the model of the local economy after the launch of market reforms. Due to the well-known bias towards investments in fixed assets and exports, China has not yet managed to launch full-fledged market mechanisms, to really make the consumer market work. In particular, today this is perceived as one of the serious miscalculations of the previous leadership of the country headed by Hu Jintao and remains a strong negative trend restraining growth.
Also with natural internal trends of the PRC development, one can link the decrease in export dynamics caused by a noticeable rise in the price of Chinese goods in recent years. Beijing carried out pension reform, which led to an increase in the contribution of social deductions to the price of the final product. The country is in full swing with the process of urbanization. If 20 years ago no more than 40% of the population lived in cities, today already about 55%, and by 2060 this indicator will approach 90%, which directly affects the structure of demand in the Chinese economy, which also began to gradually shift from industrial to consumer goods. Finally, unlike past years, in the PRC they began to really collect taxes, additionally raising the cost of goods produced here.
The rise in production costs, in turn, leads to the fact that today China is experiencing huge pressure from a number of other competitors that are cheaper in costs and no less quality, mainly from Southeast Asia. Here also lie the reasons for the slowdown in the dynamics of direct foreign investments inflow, at the expense of which the expansion of fixed assets has been going so far. Which, actually, gave a failure of the old Chinese model. This also explains the literally desperate attempts of the current Chinese leadership headed by Xi Jinping to launch the consumption market, since its share in the overall GDP structure of China is still very low – much lower than in any other Asian country.
And it is with the desire to make consumers spend more that some experts link the actual inaction of Chinese regulators during the inflation of the bubble on the stock market. Even at the beginning of last year, many predicted its rapid collapse – the question was only when it would happen. Investors were admitted to trading not just without special education, but sometimes without any education at all; anyone could buy a broker’s license for just 1 million yuan (a little more than $150 thousand).
Crisis Inside Although the Chinese economy demonstrates a remarkable reserve of strength and stability, there are trends whose development can indeed lead the PRC to a real crisis. Rapid growth of the state debt to GDP ratio. The magnitude of this indicator – 42% – is not yet critical. Nevertheless, the share of state debt, at the expense of which the debt of regions has been financed all this time, is increasing. Continuation of this trend can lead to cascading non-payments and serious growth of social imbalances, which are already great. Between the developed coastal south, where about 400 million people live and advanced productions are concentrated, and the north. The majority of the local population – 900 million people – do not have high labor skills and, accordingly, incomes. For this reason, Chinese authorities are doing everything possible to stimulate the transfer of advanced productions from coastal areas inland. The main tool of this policy – tax benefits, up to complete exemption from taxes for producers of high-tech or strategically important products. Rapid aging of the population. The average age of the Chinese is growing, and this trend is intensifying. Simultaneously, the rates of growth of the Chinese population in working age are slowing down, which has already led to a significant reduction in labor resources. With this is connected last year’s decision to cancel the policy of birth restriction on the principle “One family – one child,” which has been in force since the 1970s. Also, practically without error, one can assume that in 10–15 years the PRC will switch to stimulating birth rates to withstand competition with countries such as India.
However, while the Chinese carried their own savings and bank loans to the stock exchange, the authorities turned a blind eye to obvious risks. And intervened only when, against the background of the emerging correction of stock indices, cascading non-payments and panic began to grow, which became a real threat to the stability of the entire financial system of the country. Only then did the authorities say “stop,” essentially stopping trading, after which they had to spend hundreds of billions of dollars to stabilize the situation.
Actual inaction of Chinese regulators during the inflation of the bubble on the stock market many experts link with the desire to make consumers spend more. Even at the beginning of last year, many predicted its collapse – the question was only when it would happen.
From Factories to Laboratories
Such actions of the Chinese authorities are an attempt to treat the disease with understandable methods of manual control. In this sense, the PRC is still unable to play by market rules. But this is growth pains, behind which one should not miss another significant circumstance. In essence, last year we became witnesses to the beginning of a real transition of the Middle Kingdom to a new development model. It is no secret. Its essence is clearly formulated by the Chairman of the State Council Li Keqiang: China is transitioning from extensive production to a model based on deep technological development. In practice, this means that the Middle Kingdom will focus on the development and sale of new advanced technologies.
At its core, this is movement along the path of Japan (and other “Asian dragons”), which throughout its postwar history consistently passed all stages. Starting with the production of inexpensive industrial goods, it turned into a developed technological power capable of developing and producing high-class – though no longer cheap – products.
According to the historical pattern (which, however, cannot be taken for an economic law), the period of rapid growth of all Asian countries lasts about 15 years. After that, rapid braking and crisis begin, to exit which each finds its own recipe. An important component of the Chinese “anti-crisis plan” should be a significant strengthening of technological cooperation with other states. Including the creation of joint laboratories, participation in joint developments and their commercialization in different world markets. Of course, movement along this “thousand li” road will take time. More important is something else: China is already taking its first steps along it.
No Alternative
All this allows looking differently at the negative trends, which, as it turns out upon verification, are by no means harbingers of an imminent economic collapse in the Middle Kingdom. In particular, this is true regarding the notorious capital flight, behind which is the process of relocation of productions from the PRC to other countries, including by the Chinese themselves.
Buy-Sell The structure of foreign trade is an indicator capable of saying a lot about the direction of the vector of development of the Chinese economy. It is accepted to consider that China has a greater need for energy resources and food products, which is true. However, import dynamics to the PRC is led not by oil or gas at all. Purchases of art objects and jewels are growing fastest today. What does this say? In China, a middle class has emerged, which numbers no less than 225–250 million people. It has different needs. It is no accident that it is precisely on it that the most successful sectors of Chinese industry and services are “sharpened” today. Increased
For more on Asia-Pacific growth, explore [Link to related BRICS article].
According to IMF reports on China innovation, transitions affect BRICS economic models .
In conclusion, the BRICS China economic transition embodies Asia-Pacific growth trends, focusing on China innovation, technological development, and evolving economic model shift.
