U.S. President Donald Trump speaks during a signing ceremony for the U.S.-China “phase-one” trade … [+]
Media headlines are still fixated on a slowing Chinese economy. The latest data release of China’s 2019 GDP growth at 6.1% after adjusting for inflation immediately invoked a chorus of headlines sounding alarm that the Chinese economy is now growing at its lowest since 1990; many blaming the trade war for the slowdown, others are speculating dire consequences. I have argued that a Chinese economy growing at around 6% to 7% in real terms is perfectly normal given the current level of development of the Chinese economy, but apparently in vain (See The Reality Of China’s Economic Slowdown). Comparing China’s GDP growth rate today with what it was 30 years ago is as absurd as worrying about a 20-year old person who is no longer shooting up in height, juxtaposed now against his teenage years when he was growing an inch or more a year.
However, stock markets across the world have reacted differently from the alarming headlines. In the U.S., the S&P 500 was up 0.2% on February 17 after the release of the Chinese growth data, having closed at a record of above 3,300 the day before. In Europe, the Stoxx Europe 600 also rose by 1%. Similarly, Asia markets headed higher following the data release. What do the stock markets know that the media headline writers failed to notice? The stock markets are reacting to the Chinese economy in its current state, not making any false comparison with its past growth rates. And the Chinese economy today is actually performing very well.
To begin with, the trade war has had only a marginal impact on the Chinese economy. Exports to the U.S. has indeed fallen by some 8% in 2019. However, total Chinese exports have barely budged, down by a minuscule 0.03% in 2019. In other words, China has been able to export a lot more to other countries, especially Europe and ASEAN, which has almost fully compensated for the fall in exports to the U.S. This in turn suggests that many Chinese companies are sufficiently agile and competitive to win sales in new markets in a tough global economic environment, which is in sharp contrast to the stereotype of slumbering and unimaginative Chinese SOEs (state-owned enterprises). Furthermore, China’s growth rate in nominal terms has picked up strongly, reaching 9.6% year-on-year. This is important because it is the nominal growth rate that really counts when it comes to an economy’s ability to service its debts. With the average nominal interest rate in China at around 7% and its economy growing at close to 10%, the economy overall is able to service its debts comfortably.
If we really have to make comparisons with China’s GDP growth, it is far more instructive to compare how much China is adding to the world economy compared with the U.S. China’s GDP now stands at $14.2 trillion in nominal U.S. dollars. At a nominal growth rate of 9.6%, it is adding some $1.36 trillion to the global economy. In comparison, America’s GDP at $20.5 trillion is adding only $0.7 trillion to the global economy at an estimated 3.5% nominal growth. This is about half of China’s contribution.
Fixating on the “slowing” Chinese economy is not only misleading, it is detrimental to our understanding of the world’s second-largest economy, and how it is affecting the rest of the world. For example, it is far more important that we pay attention to how fast private consumption is (or is not) growing in China, and the extent to which it is propelling the expansion of the service sector, which is in turn substituting export and industrial production to become a stronger driver of the economy. This has direct implication on how and what China will be importing from the rest of the world in the coming years. Similarly, we need to understand better how China is reshaping manufacturing supply chains, especially with the ongoing implementation of the Make in China 2025 program, hence the impacts on countries across Asia and beyond that are part of the China-centric supply chains. All these deep developments will be taking place in an economy growing at around 6% in the future. The most profound transitions in the Chinese economy in the future will come from its changing composition, not double-digit growth. We need a new and better narrative on China’s GDP.