Videos

Conversation: Managing China's Economic Slowdown

6 MINS READSep 16, 2014 | 20:32 GMT

Mark Fleming-Williams: My name is Mark Fleming-Williams, and I'm an economic analyst here at Stratfor, joined by John Minnich, East Asia analyst. Today we're going to talk about figures released yesterday by China that seem to indicate a drop in electricity demand, manufacturing and investment. John, should we be taking these figures seriously? What do they indicate about the Chinese economy right now?

John Minnich: China's had 30 years of consistent 10% annual growth without going through some kind of destabilizing crisis or correction. Well, now that correction is arriving and what we are going to see over the course of the next six months and the next 12 months is the government attempt to manage that crisis. They are forced to begin the process of rebooting the economy, trying to figure out what the next foundation of that economy is. What it really comes down to is that for most of the last 30 years, the economy was based on low-cost exports. The low-cost export boom really came to an end in 2008 with the global financial crisis. Since then, the government has kept the economy on life support through primarily massive credit expansion and state-led investment into infrastructure and, in particular, housing. Now that housing vehicle, which sustained employment and economic growth for six years, is really running its course, so the government is having to shift toward the next paradigm, the next foundation. That's going to be a very difficult process, but that's what they're beginning.

Mark: So what you're saying is China's about to undertake a big rebalancing of what the economy's going to look like? That sounds like a very difficult thing to undertake.

John: To get a sense of how significant this transformation that China's economy is about to take really is, just look at the components of China's GDP today. Today, 47 percent of China's GDP comes from investment, fixed capital formation into infrastructure development. The majority of that is either directly or indirectly related to housing construction. Compared to that, 34% of China's GDP comes from household consumption, private consumption. That's about half of the United States, much lower than Japan, much lower than most developed countries. What China's trying to do is reform those figures, trying to take that very low consumption base and boost it very high. It's trying to take that very high reliance on investment and begin to lower it. The problem is that's a very long and gradual process. Other countries have done it, but it took them decades. It took them half a century. China's trying to do it in a very short amount of time. Now, it's not just an economic problem. It's also a geopolitical problem in the most classical sense because we're talking about something that's not just a shift in the components of GDP but also shifting the way the regional components of China's economy function together. For most of the last 30 years, we've had an economy that was grounded primarily in exports from coastal provinces. In the last six years, the government has made a very strenuous effort to rebalance towards and have a more-developed urbanized interior because you have a massive interior population of 700 million people who, for a lot of the post-reform era in the last 30 years, weren't really actively involved in the economy. Now, what the government is trying to do — and what they've been doing over the last six years — is invest in the infrastructure, in the interior primarily, that eventually they hope will lay the basis for a more nationally-unified higher value-added and also consumption-driven economy. So they have this goal out there, they know that that's what they're approaching, this nationally integrated economy, one that's based on consumption. They can see that out there is a distant goal. The question is how do they get from where they are now to that and how they do that without going through a potentially very disruptive and difficult process. How do you go from an economy that for 30 years has been driven by factor inputs to an economy that's driven by the purchasing power of ordinary Chinese without passing through some destabilizing correction that retools the economy so that it's focused on profits, so that it's focused on efficiency, so that it's focused on reducing waste. That's going to be not only a challenge economically, but a challenge for the Chinese government politically, and it gets into issues of security.

Mark: So it sounds like we're entering into a potentially difficult period for China. Obviously, the world is looking at China because China has been the engine of the global economy for at least the last 5-10 years. What are the implications for the world of this slowdown, this period of uncertainty that might lie ahead.

John: I would begin by saying the implications are huge, but they're also very diverse and internally very gated. For example, one thing we've already noted is the beginning of a shift in Chinese overseas investment patterns. So, for a lot of the last 30 years when China's economy was based on these factor inputs with a heavy focus on exports, a heavy focus on construction, Chinese overseas investment very much reflect the needs of that kind of economy, so it had lost of investments in large-scale mining projects in Australia or parts of South Africa, in parts of Latin America. Now, what we are beginning to see is Chinese overseas investment evolve to meet the new needs of the new economy the Chinese government is trying to construct. So, higher focus on value-added manufacturing, high tech industries, higher focus on anything from power grids to television communications, things the government sees as befitting the more advanced, middle-income economy they are approaching. Other implications of China's economic transformation would be the flight of low-end manufacturing from some coastal Chinese cities, something we've already seen begin in Southeast Asia, begin in the Indian Ocean basin, and that's going to accelerate over the next five to six years. That creates risks but also pretty substantial opportunities for a lot of countries, but of course, this doesn’t even answer the question of the impact of a real crisis, a destabilizing crisis in China. It also doesn’t even get to the question of "how will China's economic transformation affect its global security, it’s global diplomatic role?" Those are things we've seen explored in written pieces pretty extensively at Stratfor, but these remain effectively open questions.

Mark: Thank you very much John.

John: Thank you.

Mark: For more on this and other topics, please visit Stratfor.com. 

Subscribe to Intelligence Over News

Independent Strategic Analysis | Objective Geopolitical Insights

Connected Content

Regions & Countries

Article Search

Copyright © Stratfor Enterprises, LLC. All rights reserved.

Stratfor Worldview

OUR COMMITMENT

To empower members to confidently understand and navigate a continuously changing and complex global environment.