A Changing China in an Unsettled World

by: Cliff Waldman, Chief Economist

Outside of the United States, there are few countries in recent times that have provoked as much global policy discussion as China. As heated debate and growing concern about the disparate impacts of trade have come to something of a crescendo, the issues with China have merited singular focus, becoming a metaphor for the entire trade debate.

I recently participated in a panel discussion at the Atlantic Council that was motivated by their August 2016 report on the role of China in Latin America’s industrial development. The report makes a persuasive case that the Latin American and Caribbean region is suffering from deindustrialization. They note, for example, a sharp decline in the region’s share of industrial exports. The authors argue that there are “well-founded reasons” to believe that China has played a role in the region’s industrial decline.

Consideration of such a report naturally gave rise to one of many discussions of China’s history of being a global trade outlaw, unwilling to play by the rules and trade in a fair manner. While such conversations are necessary, it is vital for all parties to understand that the facts on the ground in China are shifting dramatically. This commentary suggests that a balanced view of the Middle Kingdom that incorporates an understanding of the ongoing shifts in its economic picture is increasingly essential for productive discussions on economic relations with this increasingly important global player.

China’s Trade Deficit With the U.S.
As shown in Figure 1, the U.S. trade deficit in goods with China continues to widen. Recent monthly trade data, however, suggest that the growth rate of the deficit may be slowing. While the Chinese currency has fallen of late in response to slowing growth, its significant appreciation since 2004 at some point was likely to hinder the expansion of the trade gap.

Figure 1 – U.S. Trade Balance in Goods With China

Source: U.S. Census Bureau

Source: U.S. Census Bureau

Nonetheless, the trade imbalance remains a summary metric of sorts for global frustrations with China. Such frustrations have given rise to everything from protectionist sentiments to calls for global currency reform.

Slowing Growth
Trade frustration with China is a critical issue for global economic stability. But in approaching the matter in a way that benefits the world as a whole, it is important to recognize the parameters of the current period of considerable transition.

Chinese economic growth has been slowing since 2007. There has been a considerable deceleration in the growth of fixed asset investment for equipment and tools, a rough proxy for capital spending. Further, export and import growth have largely been in negative territory since late 2014. Collectively, slowing investment and contracting exports have, as shown in Figure 2, generated a protracted slowdown in the growth of industrial value-added, a proxy for manufacturing output.

Figure 2 – China’s Growth of Industrial Value-Added

Source: National Bureau of Statistics of China

Source: National Bureau of Statistics of China

But the slowdown itself is far from the full story. China’s economy is changing in more fundamental ways. Manufacturing no longer accounts for the largest share of Chinese GDP. The new China will have slower growth, be more consumer driven, be more domestic, and need a vibrant small business sector. A key question is whether the Chinese power structure can respond to such overt change with rational policies.

Aging
Beyond slowing and change in economic composition, China is challenged by an aging dynamic that is unusual for a developing economy. Many fear that China will “grow old before it grows rich.” Figure 3 shows that China’s median age is above the average for Asia and the world, and the gap has been consistently widening. This has significant implications for labor force growth and thus for potential economic growth. It likely suggests that economic growth will slow even further in the years to come. Aging also affects public pensions and thus the public budget.

Figure 3 – Median Age

Source: United Nations, World Population Prospects

Source: United Nations, World Population Prospects

Conclusion: The Challenge With China and the Challenge for China
Trade tensions with the world’s second-largest economy remain a key feature of the global economic landscape. The Atlantic Council’s recent report raises serious questions about the damage from China’s trade practices.

While there is no debating that China must engage in acceptable trade practices, the world must recognize significant shifts in the Chinese landscape. Far from just slowing, China is seeing changes to its growth composition and to its potential growth that might turn the economic policy focus more inward, although, without a doubt, China will remain a critical player on the global economic stage. A broad understanding of such shifts in the nation is needed for an optimal answer to the “China question.”

ChinaKristin Graybill