While many investors and policymakers are losing sleep as they watch nervously China’s once mighty growth machine slowing down, many commentators think they should in fact welcome it.
In “Cheer up, Wall Street—China’s correction is welcome news,” two analysts of the Brookings Institute argue that China’s breakneck economic growth was not sustainable, and the slowdown is brining about much-needed readjustments to its economy – which would lead to a healthier global economy.
Analyzing the economic factors, the article says that overall China and the rest of the world is better off with China’s deceleration because of decreased demands for raw materials – industrial metals fell 60% from their peak – and that China’s services and consumption sector continues to grow.
The report states: “China needed to adjust away from an investment-heavy growth model to more sustainable growth-based one, focused more on innovation on the supply side and consumption on the demand side… The old growth model vastly overemphasized investment. That approach propels rapid growth in the short run, but excess capacity eventually grows.”
China’s empty apartments, excess manufacturing capacity, and the bridge to nowhere as reported by the Financial Times, reflect the natural outcome of over investment in capital stock.
Brookings article states: “At recent investment rates, the capital stock is doubled in six to seven years; but there is simply not enough demand to make those investments profitable.”
To be sure, many investors and economists are pessimistic about the future and alarmed about its repercussion for the world economy. “Signs of growth bottoming out are nowhere to be seen,” Li-Gang Liu, the chief economist for greater China at the Australia and New Zealand Banking Groups, is quoted in the New York Times. “Instead, we will see at least another two years of further growth slowdown.”
On the other hand, others see a momentum in the right direction, not least of all because consumption remains healthy in the world’s most populous country.
Analyzing China’s economic data from 3Q2015, Andy Rothman, an Investment Strategist at Matthews Asia, writes in Barron’s about his optimism about China as “The World’s Best Consumption Story.”
Consumption and services reached 51.4% of China’s GDP in the third quarter, accounting for more half of the economy for the first time. “We are pleased to see that the rebalancing of China’s economy toward consumption and away from exports and investments continues to make significant progress. This rebalancing is key to our investment strategy.”
Moreover, he points out that consumption accounted for 58% of the growth in China’s GDP growth in the first three quarters of last years. While the rate of growth in retail sales has slowed during those quarters to 10.5% from 10.7% during the same period in 2014, the deceleration is gradual. Rothman writes: “The health of the services and consumer sectors—now the largest part of the economy—should ensure that macro deceleration is gradual.”
Another writer who paints China’s downturn with the optimism brush is Grep Ip of The Wall Street Journal. In “Why China Should Welcome More Volatility,” Ip writes that Chinese leaders’ obsession with stability has allowed investors to “take on too much risk in the belief nothing will change.” The downturn has refocused investors on the risk. Moreover, policymakers are accepting to allow greater market-driven volatility than state’s directives, he says.
For example, China’s central bank allowed China’s currency, the yuan, to drop over the summer and left it to market forces to prop it up. Ip quotes an official of the People’s Bank of China: “A fixed exchange rate looks stable, but it hides accumulated problems,” which reflects the new approach.
Aside from the new market opportunities from China’s economic readjustments, the Brookings Institute piece states that a rising services sector would “help China manage its environmental problems;” and its decelerated economics growth would also slow the rise of its military and national desire “of greater bullishness and assertiveness.”
“The superhuman leaps that China and its military have been taking needed to decelerate, for lots of reasons. Investors around the world might be taking a short-term hit as the Chinese slowdown comes into clearer focus. But whether they yet realize it or not, they will benefit in the end from a moderate slowing of the Chinese behemoth that puts it on a more sustainable and stabilizing path,” David Dollar and Michael E. O’Hanlon say in conclusion.