Part 1 of this post, which asked 'What's the story with China's growth?' and 'Why has growth slowed?', is here.
Q3. OK, but does all that mean that China's high growth days are over?
A. The honest answer is: we don't know yet. The mix of factors at work means that we can't really be sure what proportion of the current slowdown is cyclical, and what part is structural. Given that uncertainty, the China bulls and bears will both be eager to stick with their own stories, not least since there is a very human tendency to place a lot of weight on not only our priors but also on the most recent data point.
For the optimists, the story is one about a cyclical downturn prompted by the combination of tough global conditions and a perhaps too-slow shift by Chinese authorities from a restrictive to a stimulative stance. In the longer term, they can fairly point out that there is still plenty of scope for more catch-up growth given the persistent and sizeable gap in output and capital per head between China and the countries of the developed world.
For the China (über) bears, on the other hand, this is a chance to emerge from the cave they retreated to after repeated past predictions of disaster failed to materialise, and predict that the crash they have been waiting for has finally arrived.
For the more cautious pessimists, the current downturn is likely to prompt worries that China may be falling into the so-called middle income trap, and face a future of substantially lower growth even once the current cyclical downturn has passed.
Two points to finish with.
First, while we won't know for a while exactly what the current slowdown is telling us, hardly any forecasters have assumed that China would maintain the kind of double-digit growth rates we have seen for the past three decades over the coming ones. As China moves from enjoying demographic tailwinds to pushing against demographic headwinds, as the growth mix shifts, and as the convergence gap with the developed world narrows, the assumption has always been that China's growth rates would decline.
See for example the recent major study on China by the World Bank, which among other things projected that, even on a best case scenario, Chinese growth could ease to below 6% within the next decade. Slower growth was always on the cards: it's the size and the timing of that shift that's uncertain. And that matters: there's a big difference between a gradual slide to a slower growth rate and an abrupt deceleration.
Second, it's important to remember that lower growth rates will still be operating on a Chinese economy that is much, much bigger than it was even a decade ago. That means that China's global economic footprint – absent the sort of complete meltdown that the über-bears worry about – will remain incredibly important for the world economy.
Photo by Flickr user toehk.
