China Power

When the Dragon Rolls Over: Spillovers From China’s Economic Transition

Recent Features

China Power

When the Dragon Rolls Over: Spillovers From China’s Economic Transition

Both Beijing and the world have a hand in managing the risks stemming from China’s economic transition.

When the Dragon Rolls Over: Spillovers From China’s Economic Transition
Credit: Catherine Putz

In a new study, economists at the International Monetary Fund (IMF) say the spillovers from China’s economic transition post short-term changes but may, if harnessed correctly, ultimately benefit the global economy.

China’s growth has been nothing short of astounding. According to the World Bank, since 1978 China’s economy has averaged 10 percent growth per year. For the last two decades, that high pace of growth has catapulted China into the world’s second largest economy, behind the United States. China’s GDP doubled between 1990 and 1995 (to $732 billion), then doubled again by 2002 ($1.5 trillion), again by 2007 ($3.5 trillion), and again by 2011 ($7.5 trillion). In 2014, China crested the $10 trillion mark.

Of course, there are nuances the big numbers don’t explain. While Beijing’s dynamic economy has, in the words of the World Bank, “lifted more than 800 million people out of poverty,” there remains massive inequalities between the country’s richest and poorest.

Like a tide that lifts all boats, global growth has generally tacked along with China’s rise. China’s investment- and industry-driven growth “fostered a remarkable expansion of global trade and boosted commodity prices.” China was at once a massive consumer of resources — oil, gas, minerals — and a huge exporter of all kinds of goods, from computers to toys. According to the IMF, in the past decade China has become a major source of export demand for more than 100 economies accounting for 80 percent of global GDP.

Therefore, it comes as no surprise that, as the IMF notes, China’s slowdown “has coincided with a very sharp decline in global trade growth.”

Put simply, China could not continue growing indefinitely in the fashion it was and the world economy cannot count on piggybacking off the economic dragon forever. When the dragon rolls over, the global economy feels the crush. The IMF study is clear that China’s transition to a more sustainable, but lower, growth rate and a different kind of economy is necessary. But “possible bumps” during that transition are a risk to the global economy.

The risks are not spread evenly. China’s transition “up the value chain” and toward more domestic consumption will be a boon to countries filling the gap: commodity importers who won’t need to elbow China for access and pricing and producers of labor-intensive goods who won’t need to compete with China’s unbeatable population advantage. On the other hand, countries which have predicated their own economic growth on supplying China machinery and materials are feeling the effect of lagging Chinese demand for their inputs. China’s “onshoring,” increasing domestic production of intermediate goods Beijing once imported, hurts previous sources of such goods and overcapacity, producing more steel and cement than demanded, for example, may have the effect of driving down global prices.

Managing the risks associated with China’s transition rests in a large part in China’s own hands. “China can help by managing its transition well, notably by accepting the slowdown and by clearly communicating its policy intentions,” the IMF study says. Beijing has perfected a stable, autocratic, political system that is perpetuated in part because the system works: over the last few decades Chinese have seen their incomes rise, their opportunities grow, and their country’s status soar. What becomes of the social contract when the economic dynamism subsides? The IMF believes the best course would include clear policy directions from Beijing, which would necessitate greater transparency. Whatever the powers-that-be in Beijing do, they need to be honest and clear about it. Uncertainty makes markets nervous.

The world also has a hand in managing the risks associated with China’s transition; namely, by avoiding reactionary, protectionist policies. The IMF touches on this in its larger economic outlook report, but with regard to China:

Spillovers from China’s transition may prompt countries to pursue trade restrictions to protect domestic producers against weaker external demand or perceptions that China is contributing to oversupply in some markets. Such protectionist measures — not necessarily in response to developments in China — have likely played some role in depressing global trade over recent years, and could deter it over the long term.

The IMF doesn’t mention specific trade agreements (like the Trans-Pacific Partnership) but states in general that world leaders should collectively “promote trade agreements that would counteract movement toward protectionism.” The urge to meet China’s transition, and its attendant spillover effects, by hunkering down is counterproductive in the grand view. It may sate populists in the United States, for example, to hear Republican presidential candidate Donald Trump proclaim he would slap Chinese goods with a massive tariff, but it won’t bring manufacturing jobs back to Ohio.