China and World Economy

No other sizeable economy in history has ever experienced three unbroken decades of near 10% average economic growth as China did during the recent globalisation era, the legacy of economic reforms begun by its leader Deng Xiaoping. This growth in aggregate output was on average over three times greater per annum than its Western trading partners. (Tony Makin – Renowned Australian Economist)

China is undoubtedly the biggest success story in Asia in terms of economic growth, especially in recent decades. The economic growth of China has served as a driving force for world’s recovery from the global financial crisis of 2008. As the world’s largest manufacturing and trading nation, China is uniquely positioned to reverse the spreading economic malaise of trade protectionism and anti-globalization. On the global economic scene, China’s growth since the reform and opening up that started in 1979 has been remarkably unprecedented. Even today, China is making significant contributions to the global economy as identified by country’s Finance Minister, Lou Jiwei, who recently revealed, “Overall, emerging countries contribute over 50 percent to global economic growth. China contributes over 25 percent to world economic growth.”

Although China’s economic growth has slowed a bit in recent months, its contribution to the world economy still remains significantly more than that of other countries. Country’s GDP growth was recorded at 6.9 percent in 2015, the slowest in 25 years while it further fell to 6.7 percent in the first half of 2016, though it is still in line with the government’s official target and slightly above the International Monetary Fund’s latest prediction (6.6 percent). But the resilience the Chinese economy has shown signifies the vital role China has been playing, in maintaining global economic vitality. And, at present, it remains the single largest contributor to world GDP growth. For a global economy that is limping along is unable to withstand a significant shock, such contribution is all the more important.

Estimates vary but researchers generally agree that China’s contribution to global economic growth in recent years ranges from 25 percent to 40 percent. From 2011 to 2015, China’s average GDP growth was 7.3 percent while the global average was only 2.4 percent, with the United States, Japan and Germany registering 2.4 percent, minus 0.1 percent and 1.6 percent growth. In 2014 alone, China contributed 27.8 percent to global growth, making it the top contributor that year.

Although China’s economic growth rate has slowed, given its fast expansion of overall scale, the Chinese economy’s contribution to global growth has become even more significant. China has achieved such a growth against the backdrop of the fragile global economic recovery and domestic economic restructuring.

As mentioned earlier, Chinese GDP growth, in recent months, has fallen to 6.7 percent but even with this rate, China accounts for 1.2 percentage points of world GDP growth and it is still far better than the contribution of other major economies. For example, the GDP of the United States is expected to grow by just 2.2 percent in 2016, it contributes only 0.3 percentage points to overall world GDP growth—about one-fourth of China’s contribution. A ‘robust’ European economy is expected to add a mere 0.2 percentage points to world growth, and Japan not even 0.1 percentage point. China’s contribution is, in fact, 50 percent larger than the combined 0.8-percentage-point contribution likely to be made by all of the so-called advanced economies.

Moreover, no developing economy comes close to China’s contribution to global growth. India’s GDP is expected to grow by 7.4 percent—or 0.8 percentage points faster than China—this year. But the Chinese economy accounts for fully 18 percent of world output (measured on a purchasing-power-parity basis)—more than double of India’s 7.6 percent share. That means India’s contribution to global GDP growth is likely to be just 0.6 percentage points this year—only half the 1.2-percentage-point boost expected from China.

More broadly, China is expected to account for  73 percent of total growth of the BRICS. The gains in India (7.4 percent) and South Africa (0.1 percent) are offset by ongoing recessions in Russia (-1.2 percent) and Brazil (-3.3 percent).

There are three key implications of a persistent China-centric global growth dynamic.
First, and most obvious, is continued deceleration of Chinese growth which would have a much greater impact on an otherwise weak global economy than would be the case if the world were growing at something closer to its longer-term trend of 3.6 percent. Excluding China, world GDP growth would be about 1.9 percent in 2016—well below the 2.5 percent threshold commonly associated with global recessions.

The second implication, related to the first, is that the widely feared economic “hard landing” for China would have a devastating global impact. Every one-percentage-point decline in Chinese GDP growth knocks close to 0.2 percentage points directly off world GDP; including the spillover effects of foreign trade, the total global growth impact would be around 0.3 percentage points.

Defining a Chinese hard landing as a halving of the current 6.7 percent growth rate, the combined direct and indirect effects of such an outcome would consequently knock about one percentage point off overall global growth. In such a scenario, there is no way the world could avoid another full-blown recession.

Finally, there are global impacts of a successful re-balancing of the Chinese economy. The world stands to benefit greatly if the components of China’s GDP continue to shift from manufacturing-led exports and investment to services and household consumption.

Under those circumstances, Chinese domestic demand has the potential to become an increasingly important source of export-led growth for China’s major trading partners—provided, of course, that other countries are granted free and open access to rapidly expanding Chinese markets. A successful Chinese re-balancing scenario has the potential to jump-start global demand with a new and important source of aggregate demand—a powerful antidote to an otherwise sluggish world. That possibility should not be ignored, as political pressures bear down on the global trade debate.

All in all, despite all the focus on the US, Europe, or Japan, China continues to hold the trump card in today’s weakened global economy. While a Chinese hard landing would be disastrous, a successful re-balancing would be an unqualified boon. That could well make the prognosis for China the decisive factor for the global economic outlook.

While the latest indicators show China’s economy stabilizing at around the 6.7 percent growth rate recorded in the first half of 2016, there can be no mistaking the headwinds looming in 2017. In particular, the possibility of a further downshift in private-sector fixed-asset investment could exacerbate ongoing pressures associated with de-leveraging, persistently weak external demand, and a faltering property cycle.

But, unlike the major economies of the advanced world, where policy space is severely constrained, Chinese authorities have ample scope for accommodative moves that could shore up economic activity. And, unlike the major economies of the developed world, which constantly struggle with a tradeoff between short-term cyclical pressures and longer-term structural reforms, China is perfectly capable of addressing both sets of challenges simultaneously.

To the extent that the Chinese leadership is able to maintain such a multi-dimensional policy and reform focus, a weak and still vulnerable global economy can only benefit. The world needs a successful China more than ever.