The China Bubble Pops
WASHINGTON -- The China bubble has burst. No longer are the country's economic managers viewed as magicians who can orchestrate rapid growth whatever the obstacles. No one ever believed that China's economy would grow 10 percent annually forever, but the retreat from double-digit growth has been faster than expected and underlies the country's stock market turmoil and its global repercussions.
China is such an economic colossus that a few percentage points shaved off its growth can have enormous effects. Consider the numbers. From 2007 to 2011, China's annual economic growth did average 10.6 percent, says the International Monetary Fund. For the next three years, the average was 7.6 percent. The figure for 2015 is widely estimated at 6.9 percent. The fallout is now spreading.
Although China has a massive trade surplus, it's also a huge importer -- almost $2 trillion worth in 2014 -- and so its slackening demand is a major cause of the global crash in oil and commodity prices. (China accounts for an eighth of global oil consumption and half the world's steel consumption, reports The Wall Street Journal.) Commodity exporters (Australia, Brazil, Chile) have suffered. So have Asian suppliers of electronic components to China (South Korea, Thailand).
The worst outcome -- a doomsday scenario -- would have China fostering worldwide deflation. Its growth would continue to deteriorate sharply, extending the decline in commodity prices and the weakness of global trade. Around the world, there would be more production cuts, layoffs and bankruptcies.
Without predicting this sort of calamity, some observers see the present slowdown as the start of a long descent. "China is going to stagnate," says Derek Scissors, a China expert at the American Enterprise Institute. That doesn't mean a collapse, he says, but rather a slow drift to growth rates of 1 percent to 2 percent. These would equal today's American and European rates, even though China won't have caught up with U.S. and European living standards.
China faces two problems, says Scissors, that dampen economic growth: high debts and an aging and stagnant population. The older population will shrink the size of the labor force; fewer workers will crimp the economy's output. (Between 2015 and 2040, China's working-age population 15-to-64 will fall by about 14 percent, projects the U.S. Census Bureau. That's nearly 140 million people.)
Meanwhile, debt -- for households, businesses and government -- soared by $20 trillion in the past eight years, says Scissors. Debt service will squeeze borrowers' ability to spend and propel economic growth.
In theory, more innovation could overcome both problems. But Scissors dislikes China's prospects, because the Communist Party won't fully embrace free markets and doesn't protect "intellectual property" (patents, copyrights: the fruits of innovation).
By contrast, other observers see China maintaining fast growth, though not as fast as in the past. Part of the slowdown reflects temporary problems -- over-investment in housing, heavy industry and infrastructure -- that, presumably, will be worked off with time. "The property [housing] sector is still a drag on growth," says economist Nicholas Lardy of the Peterson Institute. "There are huge inventories of unsold apartments in major cities. Housing starts are down 25 percent."
Nor is the rise in debt as frightening as it seems, says Lardy. Though household debt has risen rapidly, it's still at relatively low levels compared with other nations. The same is true of government debt. The main problem lies with business borrowing.
What's happening is a historic shift from manufacturing to services (health care, travel, banking, entertainment) as a driver of economic growth. Critics pay too much attention to manufacturing, which has been weak, and too little to services, where spending has been strong, Lardy argues. Services now represent 51 percent of the economy, up a sixth since 2010. One reason, he says: China has improved its safety net -- about 95 percent of the population has some health insurance -- allowing consumers to spend some savings put aside for emergencies.
The fundamental question is whether China will be a source of stability and strength for the world economy -- or the opposite. The government's annual growth target for the years 2016 through 2020 is 6.5 percent. Achieving that would be a sign of strength, unless it occurs through currency depreciation or debt-financed infrastructure spending. These, says economist David Dollar of the Brookings Institution, would simply repeat past mistakes and shift problems to the future. They would also call into question China's underlying economic vitality.