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Why the slowing growth in China matters to all of us – University of Reading

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Why the slowing growth in China matters to all of us

Release Date 15 July 2013

Dr Stephane Girod, Assistant Professor in International Business and Strategy at Henley Business School, University of Reading, discusses the effect of China's lack of a robust welfare aystem and why its slow growth matters to us all

The Chinese government has just announced that GDP growth has slowed down for a second consecutive quarter to 7.5%. Some analysts even think that growth could slow to 6% per annum. When developed economies barely grow or still experience a recession, this statistic seems remarkably healthy. Yet, it is potentially troublesome for China, the West and other emerging nations for several reasons.

As the new Chinese government is keen to turn on a third growth engine, namely consumption (following the pre-2008 export-led model and the more recent investments-led model), it still has not accelerated the pace of key reforms that would finally unleash private consumption on a large scale.

Currently, China concentrates about a quarter of the world's savings compared to 1% in 1990; its savings to GDP ratio stands at a record-breaking 50%.  As long as Beijing does not introduce a robust welfare net that includes State pensions, basic medical insurance and unemployment guarantees, the Chinese will not start spending sufficiently to fuel the new engine.

Beijing could use its massive foreign currency reserves to create this social network. But by asking for more frugality from public servants, the government seems to already have hit the consumption of luxury goods; it may send the wrong signals.

For Beijing, a compounding challenge is the potential political resistance of the local and provincial governments to this new welfare plan. Beijing is never as omnipotent as foreigners think. As a result, as months pass, growth may further reduce.

This causes concern for another reason. In 2009, Beijing engaged in a stimulus policy which has resulted into a jump of the total leverage ratio of the economy to almost 200% of China's GDP and to unexpectedly large misallocations of capital. As growth slows down, many companies that contracted debt on the prospects of much higher growth rates, may now may face loan repayment defaults. This situation could devastate Chinese banks and reduce their willingness to lend to one another. This would further grip growth.

These challenges emerge at a time when China needs to climb to the next threshold of productivity, innovation and competitiveness. There are concerns that China is still too dependent on Western technologies and innovation. Unfortunately, her development efforts would be hindered by a double growth and financial crisis.

These challenges are also potentially socially explosive when concerns for the environment are increasingly sensitive among Chinese citizens. As the examples of Turkey and Brazil showed us recently, seemingly small blips can escalate into massive social unrest.

For Western economies, some good and bad news emerge from this important shift. Western consumer goods and service multinationals may benefit from the new orientation of China but B2B suppliers may suffer in China. The reduction of the Chinese savings glut may curb the flow of capitals that contributed to the 2008 financial crisis. This is good news. But it may also destabilise financial markets.

Moreover, as many emerging economies get directly hit by the reduction of commodities exports to China, at a time when Western central banks start phasing out quantitative easing, many Western multinationals may see in turn, their growth opportunities in emerging countries adversely affected. One can now even directly envisage a devastating credit bubble burst in Brazil.

The new Chinese statistics highlight how well China has integrated the world's economy. Any change in her growth model will have systemic implications for the rest of the world. For various reasons (mainly fear, envy, ignorance and political ideology), many Westerners would rejoice of a downturn in China. But for their sake and the sake of the Chinese people, they really should not.

The world needs counterbalancing powers. A halt in China's return to its pre-18th century might would just hinder that.

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