The costs of slowing
Needless to say I think Xie is right, and we should not be trying to revive “growth” because that simply means reviving the credit bubble. But won’t slower growth create social dislocation in China and economic dislocation around the world? No, not if it is managed well. Remember that Chinese rebalancing requires that household income grow faster than GDP for many years, and if Chinese growth slows even to 3%, as I expect it will within the next few years, but household income continues growing at 5-6%, this is far from being socially disruptive. Households don’t care what GDP growth is, they care about the growth in their spending power.
The key to how painful this will be domestically is likely to be employment. So far this year rising unemployment doesn’t seem to have been a serious problem, but unemployment is a lagging indicator, and there is some evidence that we are starting to see strains in the job market. According, for example, to an article July 11 Financial Times,
China’s job market has started to show signs of stress, putting pressure on the government to intensify fiscal spending to prevent the economy from weakening further. Like politicians the world over, Chinese leaders’ biggest single economic worry is whether unemployment is under control, and analysts say the job outlook will help determine whether they launch a big stimulus effort as they did nearly four years ago.
So far the labour market has held up much better than in late 2008 when 20m migrant workers lost their jobs. But cracks are appearing and that experience showed how the situation can change virtually overnight in China. “Depending on how deep the growth slowdown is, unemployment can deteriorate very suddenly,” said Ding Shuang, an economist with Citi.
We will need to watch unemployment numbers closely in the next few months. As for the rest of the world, Chinese rebalancing under conditions of much slower GDP growth shouldn’t elicit panic. What the global economy needs from China is not faster GDP growth, but rather more net demand, i.e. a contracting trade surplus. Chinese rebalancing will eventually provide exactly that, although the trade surplus will probably rise first before it begins to decline. We are already beginning to see that happen. Here is the Financial Timeson the subject:
Chinese export and import growth both slowed in June, showing that the world’s second-largest economy faces strong headwinds. Exports rose 11.3 per cent from a year earlier, down from May’s 15.3 per cent pace. Imports increased 6.3 per cent from a year earlier, half of May’s 12.7 per cent and well below expectations.
With imports so weak, China was able to pull in a trade surplus of $31.7bn, nearly double May’s total and the country’s biggest in more than three years.
Earlier this year there was a debate about whether China’s then-declining trade surplus was likely to rise or to continue falling. At the time I pointed out that as long as the global environment allowed it, we should see China’s trade surplus rise substantially before it began declining.
Why? Because it would prove much easier to reduce Chinese investment than to reduce Chinese savings, and the difference between the two, of course, is simply the trade account (or, more accurately, the current account, of which the trade account is by far the biggest component).
By the way, and as an aside, we need to make two adjustments to the trade surplus in order to understand what is really going on within the balance of payments. First, one of the causes of last month’s weak imports has been a sharp decline in commodity purchases. I have many times argued that commodity stockpiling artificially lowers China’s trade surplus by converting what should be classified as a capital account outflow into a current account inflow. If China is now destocking, then China’s real trade surplus is actually lower than the posted numbers.
Second, we know that wealthy Chinese businessmen have been disinvesting and taking money out of the country at a rising pace since the beginning of 2010. One of the ways they can do so, without running afoul of capital restrictions, is by illegally under- or over-invoicing exports and imports. This should cause exports to seem lower than they actually are and imports to seem higher. The net effect is to reduce the real trade surplus.
Since these two processes, commodity de-stocking and flight capital, work in opposite ways to affect the trade account, it is hard to tell whether China’s real trade surplus is lower or higher than the reported surplus. But once de-stocking stops, we should remember that the trade numbers probably conceal capital outflows.
How does all this affect the world? In the short term rebalancing may increase the amount of global demand absorbed by China, but over the longer term it should reduce it. Rebalancing will inevitably result in falling prices for hard commodities, and so will hurt countries like Australia and Brazil that have gotten fat on Chinese overinvestment. Rising Chinese consumption demand over the long term and lower commodity prices, however, are positive for global growth overall, and especially for net commodity importers. Slower growth in China, it turns out, is not necessarily bad for the world. The key is the evolution of the trade surplus.
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About the Author
Michael Pettis is a Senior Associate at the Carnegie Endowment for International Peace and a finance professor at Peking University’s Guanghua School of Management, where he specializes in Chinese financial markets. He has taught, from 2002 to 2004, at Tsinghua University’s School of Economics and Management and, from 1992 to 2001, at Columbia University’s Graduate School of Business. He is also Chief Strategist at Shenyin Wanguo Securities (HK). Pettis has an impressive work history on Wall Street, Latin America, Europe and Asia (see his blog China Financial Markets for a complete bio).