Chinese Premier Li Keqiang proposed a 7.5% growth rate for 2014 in his government report to the National People’s Congress on March 5, 2014. It shows that, amid various concerns in the US and elsewhere on the downside and even “hard landing” risks in the world’s second largest economy, China will continue to manage a relatively fast growth rate.
The recent G20 meeting of financial ministers and central bank governors in Sydney set a quantitative goal for its members: to strive for 2 per cent higher GDP growth in 5 years over the trajectory indicated by current economic policies, or add over 2 trillion dollars to the world economy for creating additional jobs. It is a completely new step, as no quantitative goals have ever been set in previous G20 meetings. It shows that growth and job creation is clearly on the top of the G20 agenda, with fiscal austerity as a secondary choice. It also shows that the current world economic recovery, albeit stronger than a year ago, is still fragile and far from being strong.
China Slowdown vs. World Pick up
While the world strives for GDP growth 2% higher than before, China is running 2% lower growth than before the global financial crisis. For decades, China was able to maintain double digit GDP growth, and still managed 9-10% growth until 2010. Growth slowed to 7.7% in 2013 and is envisaged at 7.5% for 2014, with little chance of returning to 8% for the rest of the decade. Lou Jiwei, the Chinese Financial Minister said at the meeting that China is unlikely to contribute more than 30% of total world growth.
Is China shedding its responsibility of supporting world economic growth?
No. The only responsibility that a country has for world economic growth is to maintain strong, sustainable and balanced growth at home.
First, strong: The world GDP growth rate was 3.0% in 2013 according to the IMF. G20 financial ministers and central bank governors meeting envisaged a 2 per cent higher growth rate, meaning 5% growth. China’s 7.5% annual growth rate is strong enough.
Second, sustainable and balanced: a double-digit growth rate is no longer sustainable because was, to a large extent, based on excessive investment and excessive liquidity supply. In 2009, when China managed 9.1% growth, investment contributed 8.06% points. Until 2013, investment grew twice as fast as GDP. Total investment hit RMB 44.7 trillion that year, 78.6% of the total GDP, by far the world’s highest investment rate. However, its contribution to GDP decreased to 4.44% . The reason is simple. The feverish investment had exceeded real market needs, caused an imbalance between supply capability and ultimate demand, and resulted in over-capacity. Therefore, it could no longer serve as a strong growth engine. In 2013, investment in mining, manufacturing went up by 10.9% and 18.5%, respectively. It also aggravated the already serious air pollution. And its net contribution to GDP growth is falling. China’s excessive liquidities supply is also at a most serious level, with the accumulative M2 supply hit RMB 110.7 trillion by the end of 2013, or 194.6% that of GDP in 2013, as compared to 66.5% in the US. Hence, it contributed to bubbles in property markets and thus posed a real threat to China’s long-term growth. Therefore, the former model of growth is not sustainable and balanced. China has to shift its growth model to one that is quality-based, environment-friendly, and consumption-driven. In other words, out of the total GDP growth, investment should only contribute 2.5%, consumption 3.5-4%, and net exports 0.5-1.0%. It means that the desired growth rate will be around 7% for the rest of the decade.
China Can still Make Significant Contributions
In 2012, China’s GDP was 8.23 trillion according to World Bank data, which is 11.4% of total world GDP. In 2013, Chinese GDP grew by 7.7%, contributing 29% of world growth. In 2013, China’s GDP was roughly $ 9.23 trillion, about one eighth of the total world GDP. With 7.5% growth in 2014, China could contribute 0.93-0.94% to world growth, or a quarter of total world growth (estimated at 3.9% by IMF) this year, twice its world GDP share. With a higher growth rate than the world average, China’s share of the world GDP might rise to one seventh in 5 years. In other words, 7% growth could also contribute 20% of the total world GDP growth.
Before the global financial crisis, China, at a double-digit growth rate, actually made a smaller contribution to world growth, due to the much smaller size of her economy. From 2005-2008, China’s GDP grew at 9.0%, 9.7%, 13.0% and 9.0% respectively. Due to a higher world growth rate during that period, China contributed only 9.2%, 10.6%, 16.7%, and 22.3%. 2009 was an exception. The world GDP fell by 0.7% while China grew by 9.2%. It is unlikely to repeat this in the foreseeable future.
More Contributions than Share in GDP Growth
The share of GDP growth is not the only measurement. Trade and investment growth are also key indicators. In 2013, China replaced the US as the world’s largest merchandise trading power, with total import and export of goods reaching $4.16 trillion. Contrary to the general perception that China is an export-driven economy, China has had a faster import growth than export ever since the global financial crisis. Its import volume in 2013 reached $ 1.95 trillion, 104.0% up over 2007, or the pre-crisis level, with a net increase of $ 994.2 billion, higher than its export net increase of $989.5 billion, with the latter increased by 81.1% over the past 6 years. In comparison, the US registered a net import increase of $ 309.9 billion, or 15.8% growth over the same period. China’s import market expanded 3 times as fast as the import market in the US.
China’s outbound direct investment is also growing fast. Total direct outbound investment was $ 90.17 billion (non-financial), 16.8% up y-o-y. Its investment in the US went up by 125%, hitting $ 4.23 billion, and in ASEAN countries up 29.9%, at $5.74 billion. It is expected that China’s outbound investment will overtake its inbound investment and thus become a net capital exporter in a few years, reaching over $100 billion annually, thus creating tens of thousand jobs and boosting GDP growth in over 100 economies around the world.
He Weiwen is co-director, China-US/EU Study Center, China Association of International Trade.