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RECENTLY we have seen large， drastic movements in key exchange rates and commodity and asset prices. The market seems worried about continued crisis or sluggishness in developed economies. It also seems to be concerned about a significant slowdown in emerging market economies， China in particular. There has been talk in some corners about a possible “short circuit” in China’s economy. Is the Chinese economy slowing down？ Is a Chinese financial crisis looming？ What are the implications for our trading partners？
China’s real GDP grew at 7.8 percent last year， edging down slightly to 7.7 percent in the first quarter of this year. Compared with the country’s recent growth record， with an annual average of 10.6 percent in the 10 years from 2002 to 2011， growth seems to be decelerating.
The past decade， however， is very unusual and last year’s single-digit growth is not unusual in the long run. Prior to the 2008-09 financial crisis， asset bubbles in the U.S. and Europe pushed global output and trade to an unsustainably high level. Following the crisis， China responded with a stimulus package to boost domestic demand that led Asia to a V-shaped rebound in 2009-2011. These two factors were temporary and no longer in play.
Other indicators suggest a more positive direction of China’s economy. Overall domestic demand in China held up well in 2012 and has been resilient so far in 2013. This demand has been increasingly driven by private consumption and investment. The first four months of this year saw a pick-up in the real growth of imports excluding those related to processing trade. And as in 2012， consumption contributed to the bulk of the GDP growth in the first quarter this year， notwithstanding the government’s efforts to restrain its own consumption expenditure.
On the supply side， the service sector has lately outpaced industry， buoying the labor market and helping lower the resource intensity of economic activity. These developments are indicative of a welcome change as China’s industrialization and urbanization enter a new phase and the country strives for a steadier and more sustainable growth pattern.
In response to the Great Recession， the leverage of the Chinese economy has gone up. Credit from depository financial institutions to the non-financial （government， household and non-financial corporate） sectors increased from 107 percent of GDP in 2007 to 134 percent of GDP in 2012， based on central bank data. When credit intermediation outside the regular banking system （by socalled "shadow banking"） is reckoned， the leverage rises further. China arguably still has the ability and the room to sustain its growth record：
Chinese policy makers are clearly aware of the risks， and have been using a mixture of financial and macro-prudential instruments to deflate pressure in the bubble-prone sectors， such as the real estate sector.
Total debt of the non-financial sectors relative to GDP in China is still significantly lower than that of developed countries. By the author’s reckoning， China’s households and government debt， even taking into account implicit liabilities of local government-sponsored financial platforms， are way below the relevant thresholds. Unlike in developed countries， China’s public sector has large， income generating assets.
Regulatory oversight of "shadow banking" entities and activities has been strengthened. There has been no largescale securitization of mortgage debt， and housing mortgage has remained a relatively small part of bank balance sheets.
A large part of the developing bond market and "shadow banking" market channels savings to support infrastructure development， although there is some waste and inefficiency. Infrastructure investments help less developed areas to gain access to markets， lower transaction costs， and so increase the country’s long-term growth potential.
Sectors affected by cyclical downturns and protectionism in developed markets， such as iron and steel， shipbuilding， and solar photovoltaics industry， are under consolidation and adjustment， which would lower these sectors’ leverage.
While my answer to the question on looming financial crisis is no， I do be- lieve that rising leverage of the economy has reduced the scope for resorting to stimulus in the future. The country needs to rebuild fiscal space and press ahead with reforms in the financial sector and public finances， especially in developing a genuine corporate bond market， improving the tax system， sorting out the central-local financial relations and containing implicit liabilities.
Recent changes in China’s growth model may take time to get entrenched but their implications for its trading partners are unmistakable： The Chinese growth engine is being refitted to become more efficient. As a result， the surge of world market commodity prices over the last decade may be softening， entailing adjustment in primary com- modity exporters.
Perhaps more importantly， a more enduring Chinese growth engine is in the making. In this multi-speed world， high growth countries will trade more with each other. Following double-digit growth in 2010-2011， total trade between China and Latin America continued to outpace global trade， reaching US $261 billion in 2012. Moreover， as emerging markets develop， we will see more direct investment between developing countries along with the rise of emerging market multinational corporations.
Looking ahead， with the rising income of 1.3 billion consumers the Chinese market is expanding rapidly. As Chinese President Xi Jinping noted during the recent BRICS summit in Durban， over the next five years China’s merchandise imports could amount to US $10 trillion， outbound direct investment is expected to reach US $500 billion and outbound tourists 400 million. China’s development provides great opportunities for its trading partners.
China’s real GDP grew at 7.8 percent last year， edging down slightly to 7.7 percent in the first quarter of this year. Compared with the country’s recent growth record， with an annual average of 10.6 percent in the 10 years from 2002 to 2011， growth seems to be decelerating.
The past decade， however， is very unusual and last year’s single-digit growth is not unusual in the long run. Prior to the 2008-09 financial crisis， asset bubbles in the U.S. and Europe pushed global output and trade to an unsustainably high level. Following the crisis， China responded with a stimulus package to boost domestic demand that led Asia to a V-shaped rebound in 2009-2011. These two factors were temporary and no longer in play.
Other indicators suggest a more positive direction of China’s economy. Overall domestic demand in China held up well in 2012 and has been resilient so far in 2013. This demand has been increasingly driven by private consumption and investment. The first four months of this year saw a pick-up in the real growth of imports excluding those related to processing trade. And as in 2012， consumption contributed to the bulk of the GDP growth in the first quarter this year， notwithstanding the government’s efforts to restrain its own consumption expenditure.
On the supply side， the service sector has lately outpaced industry， buoying the labor market and helping lower the resource intensity of economic activity. These developments are indicative of a welcome change as China’s industrialization and urbanization enter a new phase and the country strives for a steadier and more sustainable growth pattern.
In response to the Great Recession， the leverage of the Chinese economy has gone up. Credit from depository financial institutions to the non-financial （government， household and non-financial corporate） sectors increased from 107 percent of GDP in 2007 to 134 percent of GDP in 2012， based on central bank data. When credit intermediation outside the regular banking system （by socalled "shadow banking"） is reckoned， the leverage rises further. China arguably still has the ability and the room to sustain its growth record：
Chinese policy makers are clearly aware of the risks， and have been using a mixture of financial and macro-prudential instruments to deflate pressure in the bubble-prone sectors， such as the real estate sector.
Total debt of the non-financial sectors relative to GDP in China is still significantly lower than that of developed countries. By the author’s reckoning， China’s households and government debt， even taking into account implicit liabilities of local government-sponsored financial platforms， are way below the relevant thresholds. Unlike in developed countries， China’s public sector has large， income generating assets.
Regulatory oversight of "shadow banking" entities and activities has been strengthened. There has been no largescale securitization of mortgage debt， and housing mortgage has remained a relatively small part of bank balance sheets.
A large part of the developing bond market and "shadow banking" market channels savings to support infrastructure development， although there is some waste and inefficiency. Infrastructure investments help less developed areas to gain access to markets， lower transaction costs， and so increase the country’s long-term growth potential.
Sectors affected by cyclical downturns and protectionism in developed markets， such as iron and steel， shipbuilding， and solar photovoltaics industry， are under consolidation and adjustment， which would lower these sectors’ leverage.
While my answer to the question on looming financial crisis is no， I do be- lieve that rising leverage of the economy has reduced the scope for resorting to stimulus in the future. The country needs to rebuild fiscal space and press ahead with reforms in the financial sector and public finances， especially in developing a genuine corporate bond market， improving the tax system， sorting out the central-local financial relations and containing implicit liabilities.
Recent changes in China’s growth model may take time to get entrenched but their implications for its trading partners are unmistakable： The Chinese growth engine is being refitted to become more efficient. As a result， the surge of world market commodity prices over the last decade may be softening， entailing adjustment in primary com- modity exporters.
Perhaps more importantly， a more enduring Chinese growth engine is in the making. In this multi-speed world， high growth countries will trade more with each other. Following double-digit growth in 2010-2011， total trade between China and Latin America continued to outpace global trade， reaching US $261 billion in 2012. Moreover， as emerging markets develop， we will see more direct investment between developing countries along with the rise of emerging market multinational corporations.
Looking ahead， with the rising income of 1.3 billion consumers the Chinese market is expanding rapidly. As Chinese President Xi Jinping noted during the recent BRICS summit in Durban， over the next five years China’s merchandise imports could amount to US $10 trillion， outbound direct investment is expected to reach US $500 billion and outbound tourists 400 million. China’s development provides great opportunities for its trading partners.