After more than 30 years of extraordinary growth, the Chinese economy is shifting onto a more conventional development path — and a difficult rebalancing is under way, affecting nearly every aspect of the economy.
China’s current-account surplus has shrunk from its 2007 peak of 10 percent of GDP to just over 2 percent last year — its lowest level in nine years.
In the third quarter of last year, China’s external surplus stood at US$81.5 billion and its capital and financial account deficits amounted to US$81.6 billion, reflecting a more stable balance of payments.
This shift can partly be explained by the fact that, over the past two years, developed nations have been pursuing reindustrialization to boost their trade competitiveness. For example, in the US manufacturing grew at an annual rate of 4.3 percent, on average, in 2011 and 2012, and growth in durable-goods manufacturing reached 8 percent — having risen from 4.1 percent in 2002 and 5.7 percent in 2007. Indeed, the US’ manufacturing industry has helped to drive its macroeconomic recovery.
Meanwhile, as China’s wage costs rise, its labor-intensive manufacturing industries are facing increasingly intense competition, with the likes of India, Mexico, Vietnam and some Eastern European economies acting as new, more cost-effective bases for industrial transfer from developed nations. As a result, the recovery in advanced economies is not returning Chinese export demand to pre-crisis levels.
These trends — together with the continued appreciation of the yuan — have contributed to the decline of Chinese goods’ market share in developed nations. Indeed, Chinese exports have lost about 2.3 percent of market share in the developed world since 2013, and about 2 percent in the US since 2011.
Incipient trade agreements, such as the Trans-Pacific Partnership, the Transatlantic Trade and Investment Partnership, and the Plurilateral Services Agreement, are set to accelerate this process further, as they eliminate tariffs among certain nations and implement labor and environmental criteria. Add to that furtive protectionism, in the form of state assistance and government procurement, and Chinese exports are facing serious challenges.
China is also undergoing an internal rebalancing of investment and consumption. As it stands, declining growth in fixed-asset investment — from 33 percent in 2009 to 16 percent this year — is placing significant downward pressure on output growth. Investment’s contribution to GDP growth fell from 8.1 percent in 2009 to 4.2 percent last year.
One reason for the decline is that China has yet to absorb the production capacity created by large-scale investment in 2010 and 2011. Aside from traditional industries, inlcuding steel, non-ferrous metals, construction materials, chemical engineering and shipbuilding, excess capacity is now affecting emerging industries, such as wind power, photovoltaics and carbon fiber, with many using less than 75 percent of their production capacity.
However, the decline in investment is also directly correlated with that of capital formation. From 1996 to 2012, China’s average incremental capital-output ratio — the marginal capital investment needed to increase overall output by one unit — was a relatively high 3.9, meaning that capital investment in China was less efficient than in developing nations experiencing similar levels of growth.
Moreover, the cyclical increase in financing rates and factor costs has brought a gradual restoration of the price scissors of industrial and agricultural goods. As a result, industrial firms’ profits are likely to continue to fall, making it difficult to sustain high investment.
Meanwhile, the expansion of China’s middle class is having a major impact on consumption. Last year, China surpassed Japan to become the second-largest consumer market in the world, after the US.
Chinese imports remain focused on intermediate goods, with imports of raw materials like iron ore having surged over the past decade. However, in the past few years, the share of imported consumption goods and mixed-use (consumption and investment) finished products, such as automobiles and computers, has increased considerably. This trend is set to contribute to a more balanced global environment.
The final piece of China’s rebalancing puzzle is technology. As it stands, a lag in technological adoption and innovation is contributing to the growing divide between China and the Western developed nations, stifling economic transformation and upgrading, and hampering China’s ability to move up global value chains.
However, as China’s per capita income increases, its consumer market matures, and its industrial structure is transformed, demand for capital equipment and commercial services is likely to increase considerably. Indeed, over the next decade, China’s high-tech market is expected to reach annual growth rates of 20 to 40 percent.
If the US loosens restrictions on exports to China and maintains its 18.3 percent share of China’s total imports, US exports of high-tech products to China stand to reach more than US$60 billion over this period. This would accelerate industrial upgrading and innovation in China, while improving global technological transmission and expanding related investment in developed nations.
China’s economy might be decelerating, but its prospects remain strong. Its GDP might have reached US$10 trillion last year. Once it weathers the current rebalancing, it could well be stronger than ever.
Zhang Monan is a fellow of the China Information Center and the China Foundation for International Studies, and a researcher at the China Macroeconomic Research Platform.
Copyright: Project Syndicate
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