CHINA: A STRUCTURAL OR CYCLICAL SLOWDOWN?

THE MEANING OF CHINA’S ECONOMIC SLOWDOWN

Barry Eichengreen

The Diplomat, July 31, 2012

More than a year ago I, along with several colleagues, published a paper entitled “When Fast Growing Economies Slow Down.” In it we predicted that a significant slowdown in Chinese growth was coming. While it was not possible to be precise about the timing, we warned that the number of years for which China’s GDP would continue to grow at high single-digit rates could likely be counted on the fingers of one hand.

We got considerable pushback from critics in China and elsewhere. We had underestimated China’s enormous growth potential, these commentators warned. We failed to appreciate that the country’s growth model was unique and that it was not possible to extrapolate China’s future from the experience of other fast-growing economies.

Well, the slowdown is here.

Chinese growth in the second quarter slowed to 7.6 percent, down significantly from the double-digit norms of the past. Indeed the official figures may understate the magnitude of the change. The growth of electricity consumption has been falling even faster; at its most recent reading it has fallen to virtually zero. Unless the Chinese steel and aluminum industries have discovered how to make do without electricity, it would appear that their growth has virtually ground to a halt. That producer prices are falling is more evidence of weak demand.

The question is how much of this deceleration is structural, reflecting the fact that no economy can grow by ten percent per annum forever, and how much is cyclical, reflecting the weakness of the global economy. Clearly part of what we are seeing is structural. The Chinese population is aging. Labor force growth is slowing. Workers, especially in the urban centers, are demanding higher wages, which are being granted to ensure social stability and in response to pressure from foreign companies concerned with matters of image, all of which raises production costs. Other lower-cost national producers, in East Asia and elsewhere, are nipping at China’s heels. At the same time, part of the deceleration is cyclical. The tepid recovery in the United States and crisis in Europe augur poorly for Chinese exports, which were up by only 9 percent in the first half of 2012. When – it is tempting to say “if” – Europe and the U.S. begin to do better, exports and the growth of the Chinese economy should pick up again.

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