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Undressing The Chinese Economy

shoppers walking along a busy street in Beijing
Shoppers in Beijing. Photo by David Stanley

China has not had an emperor for 102 years, but the Conference Board has more or less announced that his replacement has no clothes.

The New York-based research group recently predicted that China’s economic growth will slow to about 4 percent annually after 2020, as reported by Bloomberg. The Conference Board also indicated that China faces a “deep structural slowdown and broad uncertainty” in the coming decade.

This prediction comes hand in hand with news that China’s gross domestic product grew only 7.3 percent in the third quarter, the slowest rate of growth in over five years. Analysts think that it is likely that China may fail to meet its annual GDP growth target, which has been set at 7.5 percent for 2014, for the first time since 1998.

China’s rapid growth over the last 35 years has been three parts catching up to the modern world from an almost preindustrial base, two parts massive government spending fed by the country’s export juggernaut and supported by a manipulated currency, and one part statistical shenanigans, since telling the truth in China is the sort of thing that can get you sent away for a very long time. For any of these reasons, let alone all of them, China’s growth rate was bound to drop eventually.

The gradual slowdown reflected in China’s GDP growth statistics is probably underestimated for the same reasons. China is not a place you look for accurate descriptions of news that its rulers would prefer not to acknowledge.

Yet this does not change the fact that China is not immune to the laws of physics, or those of economics. The business cycle in China is not, in the long term, controlled solely by the whims of the Communist Party, no matter how much party leaders prefer to think otherwise. As it catches up to more advanced economies, China is bound to fall victim to many of the same strains that affect them, including an aging population, debt-fueled overbuilding, lack of foreign demand and undercapitalized banks. But in China, these problems will be compounded by deep-seated corruption, state meddling at every level of the economy and an aggressive military that has damaged relations with many of the country’s neighbors.

In the business press, many argued that the Conference Board’s predictions were startlingly pessimistic, perhaps groundlessly so. Other economic observers have predicted a much less extreme decline. But my guess is that even the Conference Board forecast of much slower growth in the next decade may prove, on the contrary, too optimistic. Eventually, China’s economy is going to have to go through a period of consolidation and contraction - otherwise known as a recession.

The authors of the Conference Board report said that their predictions were not inevitable, but that avoiding the decline of growth would take proactive intervention soon. “China stands at a crossroads,” said Andrew Polk, one of the co-authors. “The government and foreign investors alike must be honest in acknowledging that the time has come for structural economic adjustment.” But Communist Party leaders have so far proven reluctant to take action on the reform measures under discussion, instead focusing on short-term solutions. If that trend continues, then China’s recession may come sooner rather than later.

A Chinese recession won’t be the end of the world, but it may feel like it, particularly for commodity producers who depend on what they thought was unquenchable Chinese demand. When the unquenchable is eventually quenched, we can expect to feel sharp blowback in worldwide financial markets. That day is coming, inevitably, even if economists disagree about how abruptly China’s growth will slow down.

Three decades ago, Japan was to the global economy what China is today, before it fell into its seemingly endless malaise. We have adapted, helped partly by China’s rise. We will adapt again when China inevitably starts behaving more like a normal economy - or even a struggling one - whenever that day arrives.

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