Why China’s struggles are a signal of problems to come for emerging markets and the global economy.
- By Paola SubacchiPaola Subacchi is director of international economics research at Chatham House.
As the new year convulsively kicks off, China seems like a microcosm of the many problems that afflict the world today: sluggish growth (as is the case in many advanced economies), financial imbalances and consequent instability (like in many emerging markets), and a political leadership that seems increasingly at odds with the needs and aspirations of the general public (like in the other BRICS countries).
None of these come as a surprise. The deceleration in GDP growth is part of the general plan to adjust China’s economic model — more focused on private consumption and less on exports and investment — that was announced in November 2012 at the Chinese Communist Party’s 18th congress, which marked the beginning of Xi Jinping’s leadership. Then, an annual 7 percent GDP growth rate was indicated as a threshold for achieving the goal of doubling per capita income by 2020 — from approximately $6,000, in nominal terms. More recently, Xi signaled annual growth of 6.5 percent as the minimum required to achieve that goal.
In 2015 the Chinese economy grew 6.9 percent — the lowest rate in 25 years — and most independent economists expect annual GDP growth to range between 5.8 and 6.3 percent in the period from 2016 to 2020; the International Monetary Fund forecasts a more optimistic 6.0 to 6.3 percent. Even so, China’s economic fundamentals are far from being hugely problematic. And the much anticipated structural reforms — or “supply-side reforms,” as they are now called in Beijing — should result in much more balanced growth. If everything goes according to plan, China should continue to grow stronger than the average rate for emerging markets and developing countries. More importantly, it should avoid being stuck in the income trap.
But China’s slowdown — or rebalancing — comes at a difficult juncture where uncertainties about the outlook for the world economy and geopolitical pressures are converging. One need only look at the first few weeks of 2016’s Dow Jones industrial average to see the anxiety. Memories of the global financial crisis, which began in a muted way in the U.S. subprime-mortgage market only to infect the rest of the world a year later, are still vivid. And, like in the pre-crisis years, money is abundant and debt is rampant — total debt (government, household, corporate, and financial) was almost $200 trillion in 2014, or 286 percent of global GDP; it was $142 trillion, 269 percent of GDP, in 2007.
Unlike the pre-crisis years, the world has become much more economically divided, more politically fragmented, and more dangerous. If, in 2008, we could still soothe ourselves with the idea that the world was “flat” and we all lived in a global market unaffected by “petty” politics — and indeed the response to the crisis was to summon the G-20 to work together toward a common solution — 2016 is the year when geopolitics is likely to come back with revenge. Unlike in 2008, the fragility of the world economy now adds to and risks exacerbating existing geopolitical tensions.
China’s slowdown is problematic especially for developing countries that are wedded to an export-driven model of growth. Buoyed by China’s voracious appetite for commodities — from 2010 to 2014, China’s economy grew at an average annual rate of 8.6 percent — emerging economies managed to grow strongly in the years after the global financial crisis. They also experienced strong capital inflows in the post-crisis years, as investors looked for better returns than those provided by more mature markets. These inflows strengthened emerging markets’ currencies, prompting Brazilian Finance Minister Guido Mantega in 2010 to complain about an “international currency war.”
But the tide has changed. The first indications of the problems we face now came in 2013 when Ben Bernanke, then chairman of the U.S. Federal Reserve, hinted at the then-imminent, but modest change in U.S. monetary policy. With the dollar on the rise and the prospect of better rates in the United States, investors returned to the safety of the U.S. market. Many emerging-market economies, Brazil included, once thought to be the markets’ darlings, were suddenly out of favor. If they had been struggling to contain the strength of their currencies a few years earlier, now they were faced with the prospect of a currency crisis.
Fast-forward to 2016. As U.S. interest rates are expected to rise this year, there are concerns about whether emerging markets — like Turkey, Brazil, and Indonesia — can withstand the pressure. Brazil has seen its real depreciate against the dollar by 47 percent since 2013, while the value of its exports declined 20 percent between 2013 and 2015. Similarly, the Indonesian rupiah has depreciated 37 percent against the dollar since 2013, while the value of Indonesia’s exports has declined (by 14 percent) and growth has slowed down. Amid concerns about global growth and oil prices, Indonesia decided to cut interest rates — by 25 basis points — even if this move could further depress the rupiah.
Indonesia’s move epitomizes the dilemma that many developing countries face between sustaining growth and maintaining financial stability. For those in critical regions — the Middle East, Southeast Asia, and Africa — there are significant risks from a prolonged low-growth scenario. Low growth, constraints on public spending, and rising unemployment would have a more direct impact than a currency crisis, exacerbating existing conflicts and risks for political stability and national security.
It would be problematic for China too if the softening of stock market prices and the weakening of the renminbi against the dollar further undermined confidence (both domestically and internationally). China’s public is worried about the state of the economy and the state of society, as the shift in asset allocation and large capital outflows — $676 billion net capital outflows in 2015 — seem to indicate. For a nominally communist country, income distribution is widely skewed: The Gini coefficient, which measures income inequality, stands at 0.462, close to that of the United States. As people link inequality to corruption, discontent is on the rise. As a good friend and prominent economist said to me: “We are now eating the toxic fruit of fast growth and disparity.”
“Strong, sustainable, balanced, and inclusive growth” — as the G-20 has pledged several times in its communiqués — seems essential to keep many regions on track. And yet it seems particularly elusive in 2016. Against a scenario of low growth and heightened geopolitical risk, will advanced economies be willing to use fiscal policies to stimulate growth and maintain momentum (especially in Europe) and so indirectly support the rest of the world? And, speaking of which: Are there limits to this continuous reliance on monetary policy as a way to support growth? Perhaps China, as the current chair of the G-20, and the other emerging-market economies should start asking these questions.
Photo credit: GREG BAKER/AFP/Getty Images