Is more moderate growth in China good for everyone?

In 2013, China appeared to grow by just over 7.5%, based on the reported data covering the first three quarters and consensus views for the fourth quarter. Most forecasts are for something similar in 2014.

It seems as though the days of persistent double-digit growth for China are behind us. This has led some to express thoughts that the Chinese miracle is over and for others to worry about the consequences for the rest of the world, which has benefited from the era of 10%-plus growth in China.

What does seem to be clear to me is that China is heading in a different direction, and the winners and losers of the new China are likely to be different than the winners and losers of the old China.

Export reliance

Before I turn my discussion to the new China, let me discuss first why China has stopped growing at the 10.25% rate it did for the three decades until 2011. Many observers lay much of the blame for China’s slowdown on the negative consequences for its exports in the aftermath of the 2008-09 global credit crisis and the subsequent subdued recovery in the US and Europe, major export markets for China.

While these external events obviously played a role, I think they are usually overstated. I believe that the whole shock of 2008-09 made Chinese policy-makers realise that their previous growth model had been excessively reliant on exports to the developed world, the US in particular. In 2008, about 12% of China’s gross domestic product [GDP] appeared to be exports to the US. It is instructive to note that the slowdown in Chinese exports didn’t stop Beijing from allowing continued appreciation of the renminbi, which, together with a significant rise in wages, ensured that China could not compete as much on price as before. This suggested to me that policy-makers seemed quite content for exports to play a lesser role in growth.

Fiscal expansion

It is also important to reflect back on 2009-10, when Chinese policy-makers initially responded to the big export-driven slowdown by engineering a massive easing through monetary and fiscal policy, with the latter driven by a major infrastructure boost around the country.

By early 2010, the short-term success of this policy led to a huge recovery in growth, and with it, rapidly rising inflation and signs of a number of associated challenges. These included: continued pressure on commodity resources and prices, accelerating deterioration in the quality of the environment, considerable pressure on property prices, and, linked to all of these, as well as an elite few garnering many of the benefits, widening income differentials and rising inequality. I suspect policy-makers concluded that if left untouched, such development could end up threatening the country’s social stability, and with it, political stability.

Outside of China, lessened competition from Chinese exports was probably not easy to notice at first. But the ongoing rise in energy and other commodity prices was certainly a challenge for post-credit crisis-challenged consumers in much of the developed world.

It seemed quite clear to me that by 2010, Chinese policy-makers wanted to embark on a new path in which they would focus on better quality of growth. Since then, I have not been surprised that growth has been on a softening trend. Indeed, the last five-year plan set the stage for awareness that policy-makers were targeting 7.5% real growth, a level that had been previously regarded as too low to provide the jobs and stability an urbanising China needed. I have been assuming that in the decade from 2011, growth will be about 7.5%.

New China: get used to it

For many observers, companies and foreign countries alike, getting used to this 'new' China has been quite an adjustment. For Western companies and countries used to buying cheap imports from China, and for many industrial commodity-producing countries, it is a big change. It does seem that for a number of other emerging economies that are dominated by commodities, the adjustment is a struggle. This can be seen in the slower growth rates for the likes of Brazil and Russia and some other hyped miracle countries such as Indonesia, where some cracks have started to appear.

In my view, this should not necessarily be bad for these countries, as it forces them to realise what others have learnt before: you cannot expect commodity prices to go in the same direction always, and, more importantly, you cannot base your future on such an assumption.

Hopefully, although these three countries show few signs of it yet, it will force policy-makers to come up with stronger economic reforms as well as to reduce their dependency on commodities. For some other commodity-importing countries, notably India and Turkey, reduced pressure of commodity prices should be of significant benefit.

In Africa, many economies are showing few signs of slowing, despite the turn in commodity prices, which lends support to the view that there is something more fundamentally positive occurring in these countries that is driving their growth, probably a combination of better governance and the use of technology. It was encouraging on a recent visit to hear African policy-makers say that their future depended on themselves and not China.

Slowdown benefits others

I also have a suspicion that, indirectly, the 'new' China is helping the developed world, through the softening in commodity prices. Since the middle of 2013, there have been signs in high-frequency business and consumer confidence surveys that the mood in Japan, Europe, the UK and the US has been improving, something that has not happened simultaneously since before 2008.

This could reflect specific factors in each region but it is quite feasible that the lessening of commodity price pressures is helping take some pressure off consumers and businesses. It is also increasingly clear that many domestic businesses in these countries and elsewhere are finding it easier to compete with this new China as the strong renminbi and higher Chinese wages take their toll. In some countries, it is particularly clear that this gives a new lease of life to manufacturing, with Mexico perhaps being the best example.

For China itself, this new environment is creating pressure for more successful policies to boost the role of domestic private consumption and to give support to policies aimed at providing more support to the rural dwellers and migrant workers, so they can share more in the country’s future. Policies to encourage and support the use of less polluting energies, and to boost the role of creative and knowledge-based industries, are likely to prosper.

It is in all of our interests as well as China’s that it is successful with this strategy. Even though the days of double-digit growth are behind it, with a $9000bn economy, 7.5% real GDP growth translates into an additional $700bn for the world economy each year.

Jim O’Neill is a former head of asset management and economics research at Goldman Sachs.