Chinese economic growth continues to slow faster than expected, and it is becoming ever more obvious that debt levels are too high and must be brought down quickly. Because China has comprised a significant share of total global growth during the past few years, many economists and business leaders are trying to understand the impact of slower Chinese growth.
Observers assume that the slowdown will be painful for the world. But this is only partly true. China must restructure its economy in order to achieve more balanced growth. This will require a number of very important and difficult changes that will be strongly resisted by politically powerful groups within the country. That makes it hard to predict how quickly and successfully Beijing will be able to implement the necessary reforms.
But, whether or not the restructuring is managed well, it is clear that Chinese growth rates will slow sharply over the next few years.
This will create problems for some sectors of the global economy, but opportunities for others. As China slowly attempts to shift its focus away from its excess reliance on investment to drive growth, it will sharply reduce its consumption of hard commodities like copper and iron ore.
Although China represents only 12 percent of the global economy, the country consumes between 35 and 60 percent of total global supply. One consequence of the change in China’s growth model will be a drop, perhaps even a collapse, in the price of such commodities.
But aside from commodity producers, a more slowly growing China is not necessarily bad for the world. For one thing, lower commodity prices will create an economic boost for businesses that consume a lot of these commodities in their own production process. As the price of iron, copper, and other key commodities drop, households around the world will benefit from lower prices. That will enable them increase their consumption of other products.
Far more important is what the change in China’s economy will mean for global manufacturers. During the past twenty years—and especially over the past ten—China has become the world’s largest exporter of manufacturing products. These include not only small goods, like shoes and toys, but also capital-intensive ones, like steel and ships.
This surge in Chinese manufacturing has occurred at the expense of manufacturers around the world, especially in countries like Mexico. For much of the past decade, Mexico’s manufacturers were devastated by Chinese exports into both Mexico and its most important clients, such as the United States.
Why were Chinese exports so competitive? It turns out that China’s growth model was a major factor in forcing down the relative price of Chinese exports. In order to keep growth rates high, Beijing kept its currency significantly undervalued, its wages low, and, most importantly, provided unlimited artificially cheap credit to China’s large manufacturers.
Besides making Chinese manufacturers extremely competitive in the export markets, these policies also had another impact. They transferred resources from Chinese households to subsidize rapid growth. This put upward pressure on manufacturing growth by lowering costs and increasing production. But it also put tremendous downward pressure on Chinese household income, which for the last thirty years has grown much more slowly than the country’s GDP.
The less money Chinese households have, the less they can spend on consumption. It is no surprise that one result of China’s growth model is that Chinese households consume about one-third of everything the country produces, the lowest share in the world. In other countries the proportion is almost twice that.
It is for this reason that China is so dependent on exports and investment to generate growth. Chinese households comprise too small a share of the country’s economy to consume much of what it produces.
If China is to rebalance its economy away from investment and exports, the policies that subsidized Chinese exports must be reversed. Wages must rise much more quickly than they have in the past, the currency must appreciate, and, above all, interest rates must be allowed to rise. That would allow Chinese households to earn a positive return on their savings.
China’s slowing growth is great news for manufacturers around the world. Rebalancing the Chinese economy cannot occur without a sharp erosion of the country’s export competitiveness. As this happens, manufacturing in the rest of the world will surge.
We are already seeing this in Mexico, but the process has only just started. Over the next decade, manufacturing in many countries will see an unexpected revival.