The global stock market turbulence since the beginning of the year serves as yet another reminder of China’s growing influence on the world economy. China, which emerged as a key engine of global growth after the 2008 collapse of Lehman Brothers triggered a worldwide recession, now poses a major risk to the world economy with its rapid slowdown. To fulfill its responsibility as the world’s second-largest power, China needs to steadily implement structural reforms of its economy, a process that may be painful but is crucial for stable growth over the longer term.
The 6.9 percent increase of China’s gross domestic product in 2015 over the previous year may indeed be “moderate but stable and sound” growth, as its National Bureau of Statistics put it in releasing the data this week. What was the slowest growth in 25 years since the 3.9 percent rate of 1990, when China was under international sanctions in the aftermath of the 1989 Tiananmen incident, is certainly within the range of the government’s target of “around 7 percent” for the year. But the credibility of China’s economic statistics itself is widely doubted, with some experts suggesting that its economic growth may in fact be around 5 percent.
What’s clear is that China’s investment-driven growth model is fast crumbling and a new one has yet to take hold. Investments in real estate development, which had expanded 10 to 30 percent annually over the decade to 2014, decelerated to a mere 1 percent growth due to the housing market slump. Fixed-asset investments, including capital spending by businesses, also slowed from a 15.7 percent rise in 2014 to a 10 percent increase. Exports fell 2.8 percent for the first year-on-year decline since 2009. Retail sales grew 10.7 percent but fell short of the 12 percent increase of 2014. The rise in consumer prices stood at 1.4 percent, less than half the government’s forecast of 3 percent and the lowest since 2009.
China’s current model of growth dates back to the 4 trillion yuan stimulus that it introduced in the wake of the 2008 Lehman shock. The massive fiscal spending helped China weather the impact of the global recession and sustain worldwide demand as the the financial crisis that originated in the United States spread to Europe and the rest of Asia. But the rapid growth that relied heavily on investments in manufacturing and real estate has left a serious hangover in the form of excess production capacity, unsold housing stocks, and debt-ridden local governments and state-owned enterprises. The falling exports are a sign of declining manufacturing competitiveness under the weight of surging labor costs.
China’s slowdown is sending jitters across advanced and emerging economies. Countries whose resource exports drove China’s economy have been hit hard, and China’s woes have also contributed to the drop in global oil prices.
The International Monetary Fund forecasts that China’s growth will decelerate further to 6.3 percent this year and to 6.0 percent in 2017. It warns that growth might tumble even lower if the economy stumbles in its transition to a model driven by domestic demand, such as consumer spending and the service sectors.
The Chinese government seeks to achieve a soft landing for the economy by transitioning from investment-driven growth to consumption-led growth and reforms of inefficient state-owned enterprises. Eliminating excess output capacity and streamlining of “zombie companies” that survive on life support from local governments will involve pain, including job cuts, a slump in regional economies and a surge in bad loans for banks. Such reforms are crucial but need to be pursued carefully to avoid causing social and economic disturbances.
Optimism about the course of China’s economy persists in Japan. Some top executives of major Japanese companies say a 6 percent growth rate is still significant and that the stock market is overreacting to the Chinese slowdown. But as China is its largest trading partner, Japan must remain on guard against the possibility of a China-triggered global crisis.