China’s growth rate of 7% today means something even more positive than its 12% growth rate in 2005.
What does China’s growth slowdown mean to you?
I ask here not about the New World Order, global power shifts or whether the United States retains its position as a global hegemon. Nor do I mean the impact on the world economy, a colossal actual thing, but still a relatively abstract concept.
No, I mean, what does this slowdown in 2015 mean for you, in the rest of the world, looking to China as an export market; or you, in China, seeking employment as your economy’s labor market adjusts to its new normal.
In 2014, China’s gross domestic product (GDP) grew by 7.4%, its slowest rate of increase since 1990. This seems to be a monumental change from when it regularly turned in double-digit growth. The effect of this slowdown on those who sell to China and on those working in the country must be extreme.
But maybe not. Why? Let’s do the arithmetic.
Suppose the year is not 2015 but 2005, exactly a decade ago, and you’re an exporter, somewhere in the rest of the world, predicting China will grow by around 12% over the coming 12 months. China’s GDP then was $2.3 trillion at market exchange rates; Purchasing Power Parity correction did not matter. What determined the size of China’s footprint in the global market place — and still does so today — was the rate of exchange that saw actual financial value changing hands.
You expect China’s marketplace would have increased by $274 billion (12% of $2.3 trillion). Whatever fraction of that market you sell to, that’s what counts for your bottom line.
Now fast forward to 2015. China’s growth might be as low as 7% in the next 12 months, but it has also become a lot larger than it was in 2005. The International Monetary Fund‘s (IMF) World Economic Outlook October 2014 forecast that for 2015, China’s economy, at market exchange rate, will come in at $11.3 trillion. At this scale, growth of a “mere” 7% will increase the size of China’s footprint in the global economy by $790 billion over the next 12 months.
To put matters in perspective, this increase of $790 billion is 2.8 times the size of the increase of $274 billion ten years ago. Thus, even at an expected growth rate, a full five percentage points lower than someone a decade ago might have optimistically forecast, China will generate economic growth in absolute magnitude almost three times larger than it did then.
The Global Context
But, wait, the world today overall, not just China, has changed. A representative exporter will gauge prospects for selling to China based not just on the country’s scale, but also that of their own economy.
Suppose you’re an exporting business in the US. Ten years ago, GDP in America was $13.1 trillion; the IMF reckons that in 2015, the US economy will produce GDP equal to $18.3 trillion. Relative to the size of the US economy, China’s expected 7% expansion in 2015 will be an increase in a potential export market of 4.3%; ten years ago, that same ratio was just 2.1%. Put differently, China’s expansion over the next 12 months – even at only 7% – will represent for a typical US exporter, relative to the economy he lives in, more than a doubling of the increase in size of this potential export market.
And what if you’re not in the US? If you’re in the European Union, China’s expansion is even more of an increased opportunity. Only if you’re a fast-growing economy like the ASEAN-5 does China’s 7% growth mean something not quite so large. But even then, the worst you can say is that China’s 7% growth means you can expect simply the same relative increase in export business with China as you did a decade ago. That’s hardly a catastrophe.
Impact on Employment in China
But finally, what about the capacity of China’s economy to create jobs? In 2013, the latest year reported in the World Bank’s World Development Indicators, China’s labor force numbered 793 million. China’s average productivity (using IMF World Economic Outlook GDP numbers) was therefore $11,900; this had grown by 12% from the previous year.
If productivity were to continue to grow at that same rate, then an expansion of China’s GDP by $790 billion will generate 53 million new jobs. Since China’s rural population is about 500 million (slightly less than half of its total population), if all those 53 million new jobs were urban, this would still absorb 10% of the rural population as migrants.
Simply put, China in 2015 is a very different economy from even just ten years earlier. China has changed far more than the world has in this time. A 7% growth rate is obviously lower than an 8% one. So, whatever good comes from a 7% growth rate, at the margin, a growth rate a little higher will be even better. But quantifying the changes that have taken place in the global economy, a 7% growth rate for China today means something even more positive than did a 12% growth rate ten years ago.
One can of course imagine scenarios where China’s slowdown ends up much worse for, say, ASEAN, than that indicated here. If spillovers — not from trade connections but something else — unfurled across the rest of the world as a consequence, then a Chinese shock would come with far more damaging effects on the ASEAN economy.
But just as plausibly, a Chinese slowdown might itself be caused by a resurgence in US manufacturing. Then, the overall effects on ASEAN or anywhere else in the world will depend on the relative strengths of the two opposing effects: the US driving ASEAN exports, against China slowing them. However that unfolds, the final effect on ASEAN will not be caused by just a slowdown in China’s growth.
Finally, if China’s growth slows from having switched to greater reliance on domestic consumption, then export opportunities for the rest of the world will be correspondingly larger.
*[A version of this article was originally published by Brookings Future Development.]
The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.
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