The scale and rate of economic development in China over the past few decades is unprecedented. While living standards outside a few major cities are still well below those common in the West, China will soon be the world’s largest economy by size, overtaking the US. Indeed, depending on how you measure it, it already is.
China can grow fast, as its living standards and productivity rates simply catch up with more advanced economies. As China further opens up its markets, its rapid growth presents a huge demand opportunity for the rest of the world. For instance, as Chinese consumers grow richer, they will increasingly demand the high-end luxury goods that Europe specialises in.
But with opportunity comes risk. China, along with the US and the eurozone, is now part of the small group of massive – systemically important – economies. Now, China can give the global economy a cold whenever it sneezes.
A mere soft patch in Chinese economic data is enough to worry financial markets. As in late 2015, China is going through one such soft patch now. Despite its still-strong growth potential – of around 6.5% annually, as per the Communist Party’s official growth target – its underlying problems are growing. Markets are wise to keep one eye on the Asian giant.
Steering an economy is expensive. Years of growth, driven by major government intervention and a rising debt pile, have led to imbalances. Periodic corrections usually sort this stuff out. But China has not yet had a major one. Its capital misallocation problems may be quite severe. But its fast growth rate masks them for now. An ageing population adds to China’s long-term challenges.
Eventually, these problems will come to a head. But that is not likely to be any time soon. Unlike the more market-based economies of the West, where governments only do enough to dampen the economic cycle, China’s authorities are committed to postponing a correction.
The answer to the question ‘how long can it last?’ is simple: as long as China can afford it. Three characteristics of the Chinese economy suggest policymakers can delay the pain for a while yet:
China can thus use its policy levers to unleash its high pent-up demand as and when needed. This can suffice to give growth a timely boost whenever it starts to sag. After the recent soft patch of economic data, Chinese policymakers have started to turn on the taps bit by bit. Eventually, growth will stabilise and markets will relax about the China-related risks for a while. This happened in 2015 when the market last panicked about China. By 2016 and in 2017, China was booming again.
Round and round we will go until eventually, China no longer has the cash to delay the pain. It is probably a bit early for new year predictions – but that markets will have largely dropped their worries about China by mid-2019 seems like a good bet.
Kallum Pickering is senior economist at Berenberg Bank