Do you agree that the Chinese economy is likely (say more than 50% probability) to maintain in the medium term (say, for at least ten years) a rate of annual growth exceeding 6%.
Do you agree that if the Chinese slowdown turns out to be persistent, it will have a significant impact on UK growth (say, in the order of a few tenths of a percentage point) and/or it will justify a material change in monetary policy (for example, in terms of the timing and speed of a return to ‘normal’ interest rates) and fiscal policy (for example, in terms of the timing and speed of fiscal contraction).
What are the prospects for the Chinese economy and its international impact? Three quarters of the experts in the Centre for Macroeconomics (CFM) monthly survey believe that China’s annual growth rate will be less than 6% over the next ten years or so. But the panel is divided on whether the slowdown will have a significant impact on the UK economy.
The Chinese economy grew at an average annual rate of 9.75% between 2000 and 2014, according to the World Bank’s World Development Indicators. This performance has been widely hailed – not only for its impact on poverty alleviation in the world’s most populous country, but also as a driver of the global economy. Positive spillovers from Chinese growth are thought to include the availability of cheap producer and consumer goods, benefiting consumers and firms in developed countries, and increased demand for commodities, benefiting emerging markets. Some blame the Chinese growth model for creating imbalances in the global economy.
China’s growth rate has fallen since the beginning of this decade. Official annual growth was 9.5% in 2011, 7.8% in 2012, 7.7% in 2013 and 6.9% in the first three quarters of 2015. The Chinese government forecasts a growth rate of 7% for 2015; the IMF forecasts 6.8%; the World Bank’s Global Economic Prospects forecasts 7.1%; and the Asian Development Bank’s Asian Development Outlook forecasts 6.7%. Some private sector forecasters are markedly more pessimistic. In any case, while there is disagreement on the extent of the slowdown, its existence is not in dispute.
The slowdown has been variously attributed to: excess capacity as a result of a growth model too focused on investment; the accumulation of excessive leverage in several sectors of the economy; and the exhaustion of the engine of growth represented by rural-urban migration, as rural-urban income differentials have narrowed and cities have become increasingly congested. Some of these factors point to a deeper slowdown, while others imply that the growth rate should now stabilise or, if properly managed, even revert to higher levels.
Persistence of China’s growth slowdown
The first question of this month’s survey is about whether we have seen the full extent of the slowdown, or whether further lower annual growth rates are in store for the medium term.
Q1: Do you agree that the Chinese economy is likely (say more than 50% probability) to maintain in the medium term (say, for at least ten years) a rate of annual growth exceeding 6%?
Thirty-two of our panel of experts responded to this question, of which 75% disagree or strongly disagree. All of the remaining 25% agree or strongly agree. These shares are virtually unchanged when weighted by the confidence with which respondents hold their opinions.
The reasons cited for thinking that growth will be persistently less than 6% include:
- The fact that the gap in real GDP per head with developed countries has shrunk, leaving less space for catch-up growth – for example, John Driffill (Birkbeck), Charles Bean (LSE) and Akos Valentinyi (Cardiff) and Costas Milas (Liverpool).
- The adverse demographic dynamics – John Driffill and Charles Bean.
- The problems in the financial sector – David Bell (Stirling) and Martin Ellison (Oxford).
- The diminishing flows of rural-urban migrants – Charles Bean.
- The ‘intentional’ rebalancing from high-growth industry to moderate-growth services – Richard Portes (LBS) and Michael Wickens (Cardiff and York).
- And the downward risks from ‘secular stagnation’ in developed economies or continued problems in the Eurozone – Wouter den Haan (LSE).
Those who feel that Chinese growth can remain high disagree that the scope for catch-up growth is being exhausted. For example, Andrew Mountford (Royal Holloway) points out that 30% of the labour force is still in agriculture, and Morten Ravn (UCL) reminds us that ‘GDP per capita is still far below the level of the industrialised countries’. Nicholas Oulton (LSE) also points to ‘huge investments in infrastructure and R&D’.
The most unconventional comment is in this camp: according to Patrick Minford (Cardiff), ‘the main factor creating belief in the forecast is that the Chinese will rally around because they fear disorder more than injustice and incompetence’. Minford himself, however, warns us that ‘there is substantial uncertainty about this forecast because the Chinese leadership under Xi Jinping is attempting simultaneously to do a lot of things: liberalise markets, constrain regional authorities from investing in their local champions, stop corruption, prevent rebellion by general detentions, stop a banking collapse while also enforcing tough budget constraints on borrowers, promote an aggressive foreign policy but remain a good member of the World Trade Organization, and so on’.
Consequences of the slowdown
Since Chinese growth has often been viewed as a driver for growth elsewhere, it would seem to follow that any persistent slowdown in China will have an adverse impact on global growth. This conclusion seems particularly hard to avoid in the case of commodity-dependent emerging markets.
In the case of developed economies, there is more scope for disagreement about the extent of China’s importance. Direct and indirect (that is, via third countries) trade links must be taken into account. Furthermore, the impact on developed economies may depend on the scope for these economies to switch commercial ties to other countries at a similar level of development to China. In addition, the attendant decline in commodity prices may be good for commodity importers. On the other hand, the Bank of England has signalled that it is concerned with global developments as risk factors for the UK.
Our second question this month is about the impact on developed countries and specifically the UK.
Q2: Do you agree that if the Chinese slowdown turns out to be persistent, it will have a significant impact on UK growth (say, in the order of a few tenths of a percentage point) and/or it will justify a material change in monetary policy (for example, in terms of the timing and speed of a return to ‘normal’ interest rates) and fiscal policy (for example, in terms of the timing and speed of fiscal contraction).
Thirty-four of our panel of experts answered, with 44% disagreeing or strongly disagreeing, 35% agreeing or strongly agreeing, and 21% neither agreeing nor disagreeing. Taking into account panellists’ self-reported confidence creates a stronger majority for disagreement: 52% disagree or strongly disagree, 36%, agree or strongly agree, and 11% do neither.
Panellists on either side of the issue disagree on whether the direct effect on UK exports would be large (due to China being one of the UK’s main trading partners) or small (due to no individual trading partner accounting for more than a small share of UK exports/GDP).
But some of the respondents who agree emphasise indirect effects. For example Michael McMahon (Warwick) stresses the effects the Chinese slowdown is already having on Australia, Indonesia and Germany (a large exporter to China) and argues that the knock-on effects on the UK could be non-trivial. Another concern (voiced by Charles Bean, who, however, neither agrees nor disagrees) is the possibility of ‘unexpectedly large losses for those UK banks with large exposures in Asia’. Finally, Wouter den Haan cites possible negative effects on confidence.
On the other hand, some of the respondents who disagree (Patrick Minford and Nicholas Oulton) reject the notion that UK growth in the medium and long run can be driven by factors other than structural features of the UK economy. Several of those who disagree also cite the favourable impact of terms of trade gains associated with lower commodity prices, and Richard Portes sees opportunities ‘from the Chinese switch towards consumption – in particular, foreign travel and educating Chinese students abroad’ as well as ‘Chinese financial liberalisation and the development of their financial sector’.