China’s economy is entering a “new normality” of 7% growth rate. “New normality” is not determined by any exterior reference, but by the economic growth pattern and internal restructuring of China.
Zhang Monan
The cost of this restructuring is slower economic growth. As such, China is undergoing a new normality and new balance. Over the past five years, China’s current-account surplus plummeted from 10% of GDP in 2007 to 2.1% in 2013, 0.5% lower than in 2012; this is the lowest level in 9 years. In the first quarter of 2014, the current-account surplus was USD 7.2 billion, much narrower than USD 55.2 billion over the same period and also much narrower than the surplus of the fourth quarter in 2013. The proportion of total current-account surplus in GDP is expected to keep falling in 2014.
Over the last two years, developed countries intended to retake the lead in the international trade competition through reindustrialization. Some developing countries and regions are becoming new destinations of shifted international manufacturing because of their lower cost of manufacturing than China, thus weakening the driving force of net exports in Chinese economic growth.
The economic recovery in the US, Japan and Europe did not have much impact on Chinese exports. Since 2013, developed economies have shown a widespread recovery: The world economic growth pattern has seen different adjustments and the recovery of U.S. manufacturing has provided an impetus for its real economic recovery. For instance, manufacturing in the United States grew at an average rate of 4.3% between 2011 and 2012, outpacing the average rate of 4.1% between 2002 and 2007. The average growth rate of durable-goods manufacturing went up to 8%, much higher than 5.7% in 2002-2007. In comparison to China’s higher cost of domestic factors and continuing substantial appreciation of RMB, Chinese commodities began to take a smaller share in the US market. The same thing happened in China’s relationship with other developed economies. In 2013, the ratio of Chinese exports in the traditional developed markets fell to 37.6% from around 40% in 2012. This trend also continued in the first quarter of 2014.
Trade competition among newly emerging economies further intensified, but the shift of labor-intensive manufacturing to China has slowed down as of late. Vietnam, India, Mexico, East European countries and other regions have become new destinations of shifted manufacturing from developed industrial countries because of their lower cost compared to China. Goods manufactured by ASEAN, India and Mexico have begun to replace Chinese-manufactured goods at a much lower cost.
The Trans Pacific Partnership (TPP), Transatlantic Trade and Investment Partnership (TTIP) and Passenger Vessel Services Act (PSA) are currently transforming the global trade pattern and order. International manufacturing competition and cooperation are changing greatly. The US- and Europe-led TPP, TTIP and PSA present three features in restructuring global trade rules: 1. Zero tariffs; 2. Job opportunities and environmental protections are the access conditions to talk; 3. Regional free trade is strengthened.
New trade barriers create serious challenges to China. In addition to the old trade remedies, trade protection is disguised in the form of state aid, government procurements, etc., creating a new challenge to Chinese exports. There is still a long way ahead for China to upgrade its trade.
The structure of China’s domestic investment and consumption is undergoing a phase of “rebalancing”. In the first quarter, the growth rate of fixed-asset investment continued to edge down and the nominal growth rate was 17.6%, which is 0.3% lower than the previous month and 2% lower than the end of last year. This lower investment growth is related to the capacity cycle and the leverage cycle. China is currently absorbing the capacity released by the large scale of investment in 2010-2011. The real estate and local government investment and financing platform continues to squeeze the economy. At present, industries with overcapacity and higher capital intensity have a higher asset-liability ratio, particularly those industries such as manufacturing, shipbuilding, real estate, building material, basic chemical, steel, etc. These industries are deleveraging and will surely reduce their output.
Consumer demand has changed as well. Urban residents had RMB 26,955 per capita disposable income in 2013, with an inflation-adjusted growth of 7.0%. The per capita net income of the rural residents was RMB 8,896, a real growth of 9.3%. China’s per capita GDP in 2013 was close to USD 7,000, making China a lower middle-income country. Given this, China will inevitably rebalance investment and consumption. The middle class in developed countries cover a large number of people. For example, the proportion of middle class in the overall households remains at above 70% in the US, Japan, EU, etc.
Between 2000 and 2012, China contributed 15% to the world export growth and 11.86% to the world import growth, compared to 6.63% and 8.53% by the US, respectively. From 2000 to 2013, Chinese accumulated imports valued at USD 13 trillion. Additionally, World Trade Organization (WTO) data indicate that from 2008 to 2012 the ratio of Chinese import in the world total import rose from 6.9% to 9.5%. In China, the middle class is the backbone of its economic development.
Chinese traditional imbalanced development model is changing, so it will cause a downward economic pressure within a short time and will be hard to change through stimulating policy. Therefore, China should focus on further deepening reform and restructuring the economy, thus enhancing economic quality and efficiency. Through enhanced economic quality and efficiency, China can expect sustainable and healthy economic growth.
Zhang Monan is an Associate Research Fellow at the Chinese Center for International Economic Exchanges.
