China's Economic Outlook and its Impacts on the world

Darson Chiu

Introduction

Besides the plunging crude oil price since mid-2014, the slowing Chinese economy would be a main reason why the International Monetary Fund (IMF) has continued to downward adjust its global economic growth forecast for the past one year.[1] Emerging market and developing economies have constantly outperformed advanced economies in terms of GDP growth. Among all emerging market and developing economies, China has had higher growth during the period of its 11^th and 12^th five year plans providing strong momentum to the emerging and developing Asia. With its tremendous economic size, all eyes have been on China and its business potential. However, the most recent global financial crisis caused certain serious and negative impacts on China’s economic structure.

The consequences resulted from the crisis have dragged down China’s growth to a certain extent. It seems that China is now striving to avoid a hard landing, while a likely soft landing is often stressed by the market as inevitable. As a result, the emphasis must be on the implications for the global economy, as the growth rates between the world and China are becoming more correlated. Nevertheless, the impacts on global economy can be mitigated if the Chinese economy is able to fulfill its goals of the 13th five-year plan.

China’s Economic Performance during its Previous Five-Year Plans

The most recent global financial crisis occurred in 2008-2009 during the period when China underwent the process of its 11^th five-year plan. Many believed that the financial crisis caused a paradigm shift in China forcing the country to kick off a much needed structural reform. The reform in response would take place in the following five-year plans.[2]

In addition to the global financial crisis, China’s GDP surpassed Germany first and Japan later on becoming the second largest economy only next to the United States of America at the 11^th five-year plan phase as well. China’s economic significance at its 11^th five-year plan phase paved the way for surpassing the US and being the world’s largest exporting country at the 12^th five-year plan phase.

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[1] The most recent downward adjustment was issued on April 12, 2016 lowering the forecast for 2016 global GDP growth from 3.4% to 3.2%.

[2] 11^th five-year plan was from 2006 to 2010. 12^th five-year plan was started in 2011 and ended in 2015. 13^th five-year plan is planned to launch in 2016 and stop in 2020.

Figure 1. World GDP Growth Comparison

Source: IMF World Economic Outlook Database, April, 2016.

Emerging market and developing economies have constantly outperformed advanced economies in terms of GDP growth. Among all emerging market and developing economies, China has had higher growth during the period of its 11^th and 12^th five year plans providing strong momentum to the emerging and developing Asia.

Source: IMF World Economic Outlook Database, April, 2016.

The IMF has further categorized the emerging into diverse geographic cohorts: a) emerging and developing Asia, b) emerging and developing Europe, c) Latin America and the Caribbean, d) Middle East, North Africa, Afghanistan, and Pakistan, and e) Sub-Saharan Africa. Obviously, the emerging and developing Asia had much higher GDP growth than the other four cohorts from 2006 to 2015. In the year of 2009 for example, as the GDP of emerging and developing Europe declined by 2.99%, and GDP of Latin America and the Caribbean decreased by 1.25%, whereas the emerging and developing Asia still managed to pull off an economic annual growth of 7.23%.

Figure 3. Economic Size of China vs. Emerging and Developing Asia[1]

(Unit: billion USD)

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[1] Emerging and developing Asia composed of 29 countries: Bangladesh, Bhutan, Brunei Darussalam, Cambodia, China, Fiji, India, Indonesia, Kiribati, Lao P.D.R., Malaysia, Maldives, Marshall Islands, Micronesia, Mongolia, Myanmar, Nepal, Palau, Papua New Guinea, Philippines, Samoa, Solomon Islands, Sri Lanka, Thailand, Timor-Leste, Tonga, Tuvalu, Vanuatu, and Vietnam.

 

Source: IMF World Economic Outlook Database, April, 2016.

Emerging and developing Asia composed of 29 countries stood at US$ 4,849.31 billion in 2006 and US$ 15,570.72 billion in 2015 in terms of total GDP. By comparison, China’s GDP was in total 2,751.92 billion in 2006 and 10,982.83 billion in 2015. It means that the size of China’s economy was 53% of emerging and developing Asia in 2006 and 71% of the cohort in 2015. Among all 29 emerging market and developing economies, China has not only had higher growth but also the biggest economic size during the period of its 11^th and 12^th five year plans providing strong and major thrust to the emerging and developing Asia.

By comparing nominal GDP, the US, Japan, and Germany were all bigger than the Chinese economy in 2006. However, China surpassed Germany in 2007 and Japan in 2009 becoming the second largest economy with its strong pace of economic growth. Since the year of 2014, China’s nominal GDP has grown to be more than double of Japan’s economic size. It can be concluded that during the period of China’s 11^th and 12^th five-year plans, China’s economic performance had been remarkable turning the global spotlight on the country.

 

Figure 4. Nominal GDP Comparison

(Unit: billion USD)

Source: EIU Country Data, April 2016.

During the period of two five-year plan, the Chinese economic growth had relied heavily on the external demands. The annual nominal exports of China stood at US$ 1,333.35 billion beating Germany’s US$ US$ 1,292.58 billion and becoming the second largest exporting country in 2009. In 2013, China’s annual exports were accounted as US$ 2,355.08 billion surpassing the total exports of US amounting at US$ 2,263.65 billion. China has become the largest exporting country in the world since then. In 2010, China’s annual imports were accounted as US$ 1,380.92 billion beating Germany’s US$ 1,263.54 billion and becoming the world’s second largest importing country only next to the US since then.

Figure 5. Growth Rates of China’s GDP, Fixed Investment, and Exports

Source: EIU Country Data, April 2016.

The Global Financial Crisis and Consequences

Despite the significance of China’s economic performance in the global arena during the period of its 11^th and 12^th five-year plans, China like all other countries is hardly immune from the most recent global financial crisis. The weakened global demand caused by the crisis had impacted on China’s exports in 2008-2009. For example: China’s growth rate in exports was negative 5.6% in 2009. In response, China issued a US$ 586 billion stimulus package and pushed up the growth rate of gross fixed investment to 24.2% in 2009. The stimulus package has been criticized for not only causing a severe surge in Chinese debt among local governments and state owned enterprises (SOE) but also serious overcapacity ever since.

Figure 6. Economic Structure of China 2006-2015

Source: EIU Country Data, April 2016.

Besides issues of soaring debt and troubles of overcapacity, the crisis also triggered a structural shift in Chinese economy. The net exports accounted 6.39% on average over China GDP from 2006 to 2010, the period of 11^th five-year plan. However, the averaged ratio dropped to only 2.81% from 2011 to 2015, the period of 12^th five-year plan. The Beijing government realized that it had to promote private consumption and cope with over investment, while the external demands shrank.

The averaged ratio of private consumption over GDP was 36.84% from 2006 to 2010, and the averaged ratio stood at 37.58% from 2011 to 2015. Furthermore, the ratio on average of gross fixed investment over GDP was 41.01% from 2006 to 2010, whereas the ratio stood at 43.82% from 2011 to 2015. The readings actually mean that China’s 11^th and 12^th five-year plans were not very successful in promoting private consumption and reducing over investment despite the fact that China’s economic performance was in general outstanding by the year of 2012. China’s GDP grew by 7.7% in 2012, the lowest rate since 1999. As the European sovereign debt crisis happened in 2012, and the European Union (EU) was China’s top exports destination; weakened demands in EU caused negative impacts on China’s growth. In 2015, the Chinese annual GDP only grew by 6.88% that is the lowest growth rate so far since 1990.

China’s 13^th Five-Year Plan

Beijing top officials gathered in a four-day Central Economic Work Conference in December 2015 to confirm the goals of 13^th five-year plan and concluded that the needed measure would be “supply-side structural reform”.[1] In contrast to the demand-side including consumption, investment, and exports, the supply-side is about coordinating labor, land, capital, and innovation in a more efficient fashion. Beijing identified 5 major tasks: a) cut excessive industrial capacity, b) destocking, c) deleveraging, d) lower corporate costs, and e) improve weak links.

Besides developing industries towards high-end outputs, modernizing the agricultural sector, advancing manufacturing industries, and exploring strategic emerging industries, the 13^th five-year plan specifies specific goals: a) annual GDP growth rate of over 6.5% on average and b) service sector accounting for 56% of GDP.

Figure 7. GDP Growth Forecasts of China 2016-2020

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[1] China ‘s government work report, issued on March 6, 2016, emphasized strengthening supply-side structural reform by reducing low-end manufacturing and increasing high-end production.

Source: IMF World Economic Outlook Database, April, 2016 & EIU Country Data, April 2016.

Beijing’s 12^th National People’s Congress adopted the outline of the 13^th five year plan and stressed its goals in March 2016. However, GDP growth forecasts conducted by major international agencies, IMF and EIU, in April 2016 showed that China could only fulfill its goal for economic growth for 2016. China’s future economic growth can only reach on average 6.138 according to the IMF forecast and 5.3% as said by the EIU.

Figure 8. Expected Structure of China Economy

Source: EIU Country Data, April 2016.

As for expected structure, China’s private consumption over GDP ratio is expected to reach 41.24% on average during the period of 13^th five-year plan. In addition, China’s gross fixed investment over GDP ratio is expected to stand at 38.32% on average during the same period. In terms of promoting private consumption and reducing over investment, China’s next five-year plan is believed by EIU to be more successful than the previous two five-year plans.

Figure 9. Expected Origin of China Economy

Source: EIU Country Data, April 2016.

However, the EIU forecast predicts that China will not be able to expand its service sector as planned in its 13^th five-year plan. EIU trusts that China’s service sector will account at most as 52.8% of GDP in 2020, lower than the target ratio of 56%. Despite international agencies have no faith in China to fulfill its goals, the size of Chinese economy will remain significant and is still likely to cause the global economy to slow down as well.

Conclusion

The Chinese economic performance was overall good during the period of its 11^th and 12^th five-year plans. Since the year of 2012, the Chinese economy has started to slow down due to diminishing global demands. The slowing process is expected to continue by referring to the forecasts conducted by international agencies. Although China set specific goals for its 13^th five-year plan, international agencies consider that the goals can hardly be fulfilled.

The implication is that China may grow much slower in the future and that will also slow down the recovery of the world. Nevertheless, the Beijing government seems confident in fulfilling its economic goals. That actually means that the potential impacts on the world can be mitigated if the Chinese economy is able to fulfill its targets of 13^th five-year plan.

(Dr. Darson Chiu is the Director General of CTPECC.)