Ms. Dhanasree Jayaram, Project Associate, Manipal Advanced Research Group (MARG), Manipal University and Editorial Coordinator, Science, Technology & Security forum (STSforum) interviews Ms. Veena Nayyar on China’s troubled economic future. Ms Nayyar provides an overview of the economic indicators that point towards a decline in China’s economy as well the structural and societal barriers to its future growth. She throws light on the economic shifts in China and what these portend for the future of the country. Ms Nayyar also gives her opinion on China emerging as a leader of economic globalization.
In your view, is China’s economic future in trouble? If so, what are the indicators that show China is on a path of economic decline?
After China’s economic miracle from being one of the poorest countries in 1979 to being one of the fastest growing in three decades, China has slowed down, a fact supported by key indicators. It achieved a massive $10.3 trillion size economy. I do believe though that its economic future is in trouble nevertheless. Its achievement is indeed phenomenal. In purchasing power parity terms it has overtaken the United States (US) as the largest economy and globally the second largest in nominal GDP terms.
My hypothesis is that the decline of the economy is as much a fact, as is its troubled future. For instance, the real GDP growth trajectory has fallen from 10.4 percent in 2010 to 7.8 percent in 2012, to 6.7 percent in 2016 – the slowest in 26 years. The growth target set for 2017 is 6.5 percent. President Xi, in a February 2017 statement, said that it will be “difficult even to achieve 6.5 percent”. This level of growth slowdown has wider implications on employment, wage increases, productivity, credit growth et al. It will result in higher priced output, making goods and services less competitive. We can see how much growth has dropped – from nearly a 10 percent average prior to 2010. There are other economists who believe that even the slowing-down figures are not accurate. Real GDP growth is going to be 4.4 percent only. The declining growth is already being accepted by the Chinese government. It is now referred to as the ‘New Normal’, an expression first used by President Xi. Strategies are being put in place to deal with the new normal.
The real black hole is the debt load in the economy. The rapid growth in the economy was hugely debt-fuelled. The popular view is that China will run into a debt crisis. It could be the local government debt or the corporate debt. Half of the debt is owned by state-owned enterprises. It is basically a case of misallocation by state-owned banks to state-owned enterprises and not allocated to the private sector. The debt trajectory – the debt-to-assets ratio quadrupled since 2007-08. Debt has soared to 282 percent of GDP as of February 2015.
Shadow banking activity is the other challenge to China’s financial system. The real estate, debt-fuelled by shadow banking, rose to 28 trillion by mid-2014 from $7 trillion in 2007. Debt, as a share of GDP, is larger than that of the US or that of Germany. The larger challenge for China is to contain ‘future debt’. It is not really news that China’s pressures build up as $1.7 trillion in shadow funds unwinds. China’s rate of growth in fixed asset investment has been declining and this indicator has been responsible for a major contribution to the rapid rise of GDP. Its decline means that the GDP will have to come from alternative sources in the future. This will have a denting effect on resources in the future including for real estate, metals and machinery, which will compound the slowdown in growth. Stimulus provided by the government for infrastructure and construction were responsible for keeping China’s high GDP growth – but the returns on infrastructure have already declined and shadow banking loans have turned sour. These are labour intensive sectors and will result in unemployment, adding to further decline.
Slowing exports, a key constituent of its economy is a major source of worry. It dropped 20.6 percent in February 2016 and the declining trajectory has continued. The figures indicate China’s foreign trade is shrinking. Exports are down due to weak global demand and an increase of 3 percent in global production of those goods. Also Chinese goods are becoming less cost competitive as labour costs and pensions rise. Industrial output has reduced. The Peoples Bank of China has devalued its currency to boost exports.
China had phenomenal foreign exchange reserves – a hoard of $4 trillion. The reserves have been falling and have fallen below $3 trillion, a psychologically important development. It has recorded the biggest monthly drop in December 2015 of $108 billion, intensifying its troubles. The prospect of further decline in currency value has spurred Chinese people and companies to send money overseas. Beijing logged $100 billion per month in average currency outflow. The uncertainty that the Chinese people are facing is also leading to ‘capital flight’. They do not have any credible information sources. That uncertainty is making the foreigners who have heavily invested in China nervous. After three decades of growth they are thinking of pulling their money out especially those whose profit margins have dropped.
IMF expects China’s economy to grow by 6 percent in 2017. Economist Intelligence Unit (EIU) projects that China’s real GDP growth will slow considerably, averaging 5.4 percent from 2015 to 2024, 3.1 percent from 2025 to 2034 and 2 percent from 2035 to 2044.
According to you, apart from the economic indicators, what are the structural barriers to future growth of China?
Structurally, China’s economy faces head winds. Growth is a function of changes in labour, capital and productivity. When all the three increase, growth is high. But they are all slowing now in China. China’s declining workforce is a structural issue. This has been a consequence of the ‘One-Child-Policy’ of China. The bulge of the aging population is a structural burden of dependents on the economy. According to studies, China has about 160 million people who are currently above 60 years of age. They see that by 2020 China will have above 240 million and by 2030 they will have 360 million old people. It is not just that these old people cannot be part of the workforce but they also become dependents on the workforce that is available.
Till now China has relied more on primary education and medium skilled workers. Access to secondary and tertiary education is unequal. The human capital shortage 2017 onwards will be a hurdle as it shifts to service economy. The other structural imbalance is income inequality. It is very difficult to fix income inequality and it is time intensive. Also, the credit binge takes years to correct. China’s financial system presents, for some time, a structural barrier.
One argument is that with increasing automation the problem of the lack of workforce that you mentioned could be resolved. What is your take on this?
It is not as if technology has unlimited potential to solve all the problems. To an extent, yes, but even this requires substantial investment. The people have to be skilled to operate that technology. Moreover, technology costs money and they have to import it because they are not great at innovation, especially in strategic sectors. They have to import either from Japan, with whom their relations are very adversarial or from elsewhere. The West is not willing to give technology as they are talking about intellectual property rights and so on. President Xi has called for a ‘robot revolution’ but machines and men need to work together – not just robots working alone.
It is only lately that we are seeing a lot of movements against the Communist Party of China (CPC), including against corruption and environmental destruction. China has historically been brutal when it comes to establishing infrastructure projects without much reverence to the environment or the people living in those regions. Do you think this is one of the structural changes building up in the Chinese society? Are the people getting tired of the power structure of CPC and would they probably demand a change in another 10-20 years? Is that a possibility?
People in China are protesting restrictions both in freedom of association ad speech. Also there is increasing number of protests against corruption, forced evictions, ethnic protests (like in Xinjiang province). Chinese Academy of Social Sciences estimates the number of annual protest incidents exceed 90,000 even when its Constitution asserts citizens enjoy those freedoms. There are pro-democracy dissidents and demonstrators in multiple Chinese cities. Chinese launch concerted crackdowns on dissidents, journalists, rights lawyers etc periodically. This is a structural change building up for sure. Chinese authorities’ strategies include measures of suppression which makes for further protests. With media, with travel, with FDI, as information increases these will only become more frequent.
The rapid economic development has created environmental degradation. China has emerged as the largest emitter of greenhouse gases. It was responsible for 27 percent of global emissions in 2014. The extent of the environmental problem is of such dimensions that the Asian Development Bank (ADB) granted $300 million loan to help address the choking smog of Beijing.
China is slowly trying to transition into a service economy because of the decline in manufacturing sector and the other reasons you mentioned. How do you see this transition from manufacturing to services in China?
As the manufacturing economy slows, China is flagging the transition from the industry to services. The latest snapshot of economic performance suggests that the shift is going to be difficult and time consuming. The restructuring is more a reflection of the downturn and not a sharp expansion or upswing in the quality of services.
Rebalancing is certainly the new economic thinking as the industrial sector slowed sharply to 6 percent in 2015 from 7.3 percent in 2014. A whole new set of skills are required – mere cheap labour cannot be the basis as it was for manufacturing. Sectors such as financial services, business services, engineering management services, and logistics require special and higher skills. Trade in services as percentage of GDP was 6.1 percent in 2009; 6.2 percent in 2010 and 5.8 percent in 2011. China’s service sector is still in its infancy and cannot grow fast enough to turbo-charge the economy.
China is one country that has benefitted from Globalization. How do you think China can lead the Globalization agenda by being politically and otherwise very conservative but economically wanting to build economic relations with most of the countries in the world, especially in the light of anti-globalisation rhetoric of US President Trump?
China, having become the factory of the world with US sponsored globalisation, its eagerness to continue with the strategy is clear. Its Silk Road initiative is an attempt to create a new era of globalisation.
It was the US that helped China’s ascendance by promoting globalisation. Its foreign trade soared from $21 billion in 1978 to China becoming the number one trading nation in the world in 2006. While trade benefitted economic development it also impeded China’s industrialization by locking enterprises at the low end of the global value chain preventing it from upgrading along the technological ladder.
President Trump’s position is not against globalisation. He is not just for: free trade but ‘fair trade’ not free-any-way trade. The US is against dumping and against China’s currency manipulation. At Davos, President Xi clearly expressed China’s desire to lead globalisation if the US stands for protectionism. Most countries would like the US to lead it. China has meanwhile entered the race by following the policy of signing free-trade bilateral agreements with 20 countries around the world – that China has benefitted enormously from globalisation and as an exports dependent country it wants to continue this strategy.
The trade-to-GDP ratio has been falling. Also, the worldwide production of goods and services is rising by 3 percent. Environmental crises are rampant. China is the largest emitter of greenhouse gases. China for reasons of the existing political system cannot be a leader of global economy but will be a lead player.
Disclaimer: The views expressed in this article are personal.
Ms. Veena Nayyar, Executive Director, Policy Foundation, New Delhi.
