China’s growth and the US

This post from Steven Roach is short but very interesting.

First he highlights the fact that, despite alarming headlines, China’s economy is NOT slowing down.  The GROWTH of China’s economy is slowing down.  Big difference.  A recession is when the economy actually shrinks.  This is nowhere near the case in China:

Yet a superficial fixation on China’s headline GDP growth persists, so that a 25% deceleration, to a 7-8% annual rate, is perceived as somehow heralding the end of the modern world’s greatest development story.

He also addresses all the current sky is falling scenarios under consideration:

This knee-jerk reaction presumes that China’s current slowdown is but a prelude to more growth disappointments to come – a presumption that reflects widespread and longstanding fears of a broad array of disaster scenarios, ranging from social unrest and environmental catastrophes to housing bubbles and shadow-banking blow-ups.

While these concerns should not be dismissed out of hand, none of them is the source of the current slowdown. Instead, lower growth rates are the natural result of the long-awaited rebalancing of the Chinese economy.

In other words, what we are witnessing is the effect of a major shift from hyper-growth led by exports and investment (thanks to a vibrant manufacturing sector) to a model that is much more reliant on the slower but steadier growth dynamic of consumer spending and services. Indeed, in 2013, the Chinese services sector became the economy’s largest, surpassing the combined share of the manufacturing and construction sectors.

But to me, the interesting part is how he sees the US relationship with China changing and evolving, and what that means for US:

China’s rebalancing will enable it to absorb its surplus savings, which will be put to work building a social safety net and boosting Chinese households’ wherewithal. As a result, China will no longer be inclined to lend its capital to the US.

For a growth-starved US economy, the transformation of its codependent partner could well be a fork in the road. One path is quite risky: If America remains stuck in its under-saving ways but finds itself without Chinese goods and capital, it will suffer higher inflation, rising interest rates, and a weaker dollar. The other path holds great opportunity: America can adopt a new growth strategy – moving away from excess consumption toward a model based on saving and investing in people, infrastructure, and capacity. In doing so, the US could draw support from exports, especially to a rebalanced China – currently its third-largest and fastest-growing major export market.

The term “emerging economy” sounds like something small, a seedling emerging from the ground.  But China’s economy, although defined as emerging, is huge, and profoundly impacts our own.  Most economic forecasts regarding China’s economy, and the US for that matter, analyze them as separate entities.  Viewing them as codependent, intertwined economies, as they actually are, requires more thought.  Actions within each economy have effects in the other.  Large, important effects.

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