In China, Change—and Uncertainty—Are in the Air

Sara Hsu, Guest Blogger

Concerns over China’s economy are all over the news—stories like “Feeling the Heat from China Slowdown,” “China’s Economic Hard Landing,” and “China’s Slowdown Digs a Hole for US Industrials” are now everywhere. One of the most pressing questions is, will China face a massive slowdown in economic growth? Here, we explain why this is such a concern and consider what possibilities exist for continued growth.

First, a primer on growth and the way it is tabulated. Growth simply refers to the change in GDP, usually from one year to the next. GDP is calculated any of three different ways—the income approach (how much individuals and entities earn in a period), the expenditure approach (how much is spent in a period), or the production approach (how much value is added during the production process). If we focus on a single approach—say, the expenditure approach—we can look at the individual components to determine how China can improve its GDP—and therefore growth—outlook.

Expenditures include spending on consumption, fixed investment, government spending, and net exports (exports minus imports), that is:

Y = C + I + G + (X-M)

Until the global economic crisis hit in 2008, China had performed well in terms of net exports and consumption, producing a prodigious amount of goods for itself and the rest of the world. After the crisis hit, China bolstered its level of GDP growth even in the face of slowing export demand from abroad by increasing government stimulus. Over this period, too, fixed investment in real estate and manufacturing continued to rise.

Fixed asset investment is still growing: Fixed Assets Investment by Industry, Accumulated to This Month (100 million yuan)

Source: China Data Online

As government stimulus declines (with new stimulus limited in size), fixed investment faces a likely slowdown, and export demand struggles to regain its pre-crisis level, China faces a rush to “rebalance.”

Exports are not back to pre-crisis levels: Exports Minus Imports (100 million yuan)

Source: China Data Online

The new administration was to focus on building domestic consumption within a period of five to ten years—now the pressure is on to make it appear immediately. This is a nearly impossible task. With fewer jobs being created and no additional ongoing sources of income for citizens, consumption is doomed to slow in the short run. This would increase unemployment and poverty, and reduce Chinese trade demand from the rest of the world. Global growth would fall.

The current experiment with boosting on pushing up domestic consumption is China’s urbanization policy that has moved rural residents to urban areas, with a small chunk of cash (not enough to cover housing costs) and no jobs in place. The process has started in Shaanxi Province and will likely be announced formally in the October Third Plenary Meeting of the Central Committee of the Chinese Communist Party. Domestic consumption has (surprise!) not been boosted by the urbanization process since residents lack a steady source of income.

So what can be done? There are two sources of growth that may “save” China from a woeful pace of growth. The first is further government stimulus. The government has committed to some stimulus to shore up the economy to make up for a shortfall in GDP. Further stimulus will bolster this commitment and keep the economy going. The second is a rebound in export demand. If Europe can pull out of its ongoing crisis and increase its demand for Chinese products, all may not be lost. This would be the easiest way to support China’s flagging economy until the administration is able to restructure China’s economy toward domestic consumption. Restructuring, after all, takes time, and time, if it can be bought, will be worth every penny. In the meantime, some analysts believe that a sudden contraction in GDP may be in the works. Although Premier Li’s government is not expected to allow for a “hard landing,” its dedication to restructuring will usher the Chinese economy into new territory. Change—and uncertainty—are in the air as we anxiously await the formalized plans.

Sara Hsu is an assistant professor of economics at the State University of New York at New Paltz.

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5 Responses to “In China, Change—and Uncertainty—Are in the Air”

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  5. Bill Rich says:

    Anyone who has watch how urbanisation has changed a economy would be able to tell you that urbanization is a consequence of economic growth, especially job growth, and, after people decided to migrate to seek employment, and with increased income, increase consumption. Migration alone, as in migration of homeless with no job skills, there is minimal consumption growth, as there is no income to spend. The high correlation between rural to urban migration and consumption does not indicate causal relationship, but just an indication of a common cause, job growth.