Don't Fret Over China's Slowdown
In the long term, its gradual deceleration may hold more upside potential than risk to the U.S. economy.
How sharply is China’s growth slowing? And does that spell trouble for the U.S.? These two questions, which keep cropping up in conversations with U.S. business executives and investors, are a source of worry. Here’s our take on what’s happening and what it means.
Since December there has been a clear downturn in the pace of China’s growth. Compared with a year earlier, gains in retail sales, industrial production, real estate investment and private investment in fixed assets are all weaker.
But, in and of itself, that shouldn’t be especially worrisome. Slower gains are inevitable. Any economy will see growth slacken as it matures, and China is no exception. Average annual gains of over 10% last decade have slipped to 7.5% so far this decade, and by 2020, a pace of 6%-7% a year is likely. A gradual deceleration is also deliberate—part of Beijing’s plan to shift the country’s economy from one powered largely by government investment in capital goods and by exports, to one that is fueled, more modestly but more sustainably, by consumers.
Beijing won’t let growth slip too fast, jeopardizing the government’s pledge to keep incomes rising and joblessness down. In fact, China’s government is already reversing course, exactly as it did in 2011, 2012 and 2013, when figures for early months of those years hinted at a too-rapid slowdown. To halt the slide and pump growth back up a bit, the government adjusted fiscal and monetary policy, and it will do so again.
And unlike the U.S. government, China’s faces few hurdles—political or financial—to implementing economic stimulus plans. Government debt is just 26% of GDP. And there’s no opposing political party to block whatever Beijing officials decide to do. Thus, odds favor an expansion of 7.2% to 7.5% this year—at or slightly below Beijing’s official target and down only modestly from last year’s 7.7% pace. The fact is, meeting Beijing’s promise of 10 million new jobs a year will take growth of 7.2%, and the party cadres won’t let that slip out of reach.
A slowdown of that magnitude is not enough to damage the U.S. economy. At most, it would shave just a tenth of a percentage point from GDP. Though China is the fourth-largest market for U.S. exports (behind Canada, Mexico and the European Union), it accounts for less than 8% of total exports. The slowdown, however, is likely to steal some wind from various exporters’ sails—makers of aircraft, motor vehicles, power generation and transmission gear, heavy construction and metalworking equipment, for example.
Others among China’s trading partners will be less fortunate. China accounts for 25% to 30% of Australia’s and South Korea’s exports and 20% of those from Japan and Brazil. Since the Asian behemoth will gobble up fewer commodities, any major slowdown in China will also dent nations, such as Chile, that depend on commodities exports. Indeed, for the U.S., China’s slowdown may hold more upside potential than it does downside risk: Slowing growth arises from the maturation of its economy. That means the development of a huge, largely untapped market for the U.S.’ advanced goods and services.