China's economy grows steadily amid global turmoil
- By John Ross
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E-mail China.org.cn, December 19, 2016
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The Work Conference's domestic context is that China's economic growth in 2016's last quarter was comfortably within the government's 6.5-7.0 percent GDP growth target. [File photo/Xinhua] |
China's annual December Economic Work Conference inevitably attracted greater than usual international attention, due to the fact that it met while two powerful economic processes were occurring simultaneously: first, a positive development of China's domestic economy in line with government targets; second, the economic storm gathering across the Pacific – the consequences of Trump's election as U.S. president.
This article therefore looks at the context of the Work Conference, first by examining the satisfactory domestic progress of China's economy in the second half of the year, then by the consequences for the global economy of Trump's policies, and finally why China is able to deal with the latter.
China's domestic economy
The Work Conference's domestic context is that China's economic growth in 2016's last quarter was comfortably within the government's 6.5-7.0 percent GDP growth target.
Following 6.7 percent GDP growth in 2016's 3rd quarter, in January-November compared to the same period in 2015 China's:
• Industrial value added rose 6.2 percent;
• Urban fixed investment rose 8.3 percent;
• Inflation adjusted retail sales rose 9.2 percent;
• Consumer price inflation was moderate at 2.3 percent
• A 3.3 percent producer price increase confirmed deflation had ended and created conditions for increased company profitability.
• Profits by large industrial enterprises rose by 8.6 percent.
This followed November's year on year trade turnover increase of 8.9 percent in RMB terms.
China's "supply side" policies since mid-year, such as reducing surplus capacity and enhancing infrastructure investment, clearly brought positive results. Claims by the Western media earlier this year that China was approaching a "hard landing" therefore appeared ridiculous. Bloomberg, for example, now analyzes "optimism" regarding China while not explaining its earlier errors.
The new challenge facing the global economy, and therefore China, is Trump's proposed economic program – the consequences of which are more powerful than December's Federal Reserve interest rate rise.
Trump's borrowing program
Trump's consequences for the global economy and China are not confined to campaign threats to designate China a "currency manipulator" and impose tariffs. Whether these are implemented is a political rather than economic decision and is not analyzed here. But the fundamental character of Trump's proposed economic program is already clear: major tax cuts focussed on the rich plus higher U.S. military and infrastructure spending. This combination necessarily requires higher U.S. government borrowing with major consequences for the global economy – including for exchange rates, interest rates and other issues affecting China.
The international economic situation
The international context facing China's Work Conference is that the world economy's reality is the exact opposite of rhetoric presented in parts of the Western media of "strong growth" in the U.S. and the threat of a China "hard landing." In reality, between the first quarter of 2015 and the 3rd quarter of 2016 China's per capita GDP growth declined only marginally from 6.5 percent to 6.2 percent, while U.S. per capita GDP growth fell by two thirds from 2.5 percent to only 0.8 percent.
Slow U.S. growth, U.S. median household incomes below 1999 levels and rising inequality explained Trump's election. Trump in turn proposes a major change in U.S. policy, creating changes in the international economic context for the Work Conference.
Higher U.S. borrowing, interest and exchange rates
Trump's proposed higher U.S. state borrowing and an increased demand for capital necessarily means higher U.S. interest rates unless the U.S. supply of capital can be increased – which in turn would require either increases in U.S. savings or large-scale U.S. foreign borrowing.
But U.S. domestic savings are below historic levels and recently fell. Reagan's famous strategy to finance U.S. budget deficits was foreign borrowing, but Trump's international circumstances differ from Reagan's. In 1981 the U.S. balance of payments had no major deficit, whereas today it is 2.6 percent of GDP. An equivalent U.S. balance of payments deterioration to Reagan's would mean U.S. extra annual international borrowing of $650 billion and a U.S. balance of payments deficit of 6.1 percent of GDP – higher than on the eve of the 2008 financial crisis. It is unclear whether such international resources are available for the U.S. to borrow.
However, the Economic Work Conference cannot stop the global economy from being affected by Trump's program, leading to higher U.S. interest rates with upward pressure on the dollar's exchange rate. Even before the Federal Reserve interest rate increase, U.S. 10-year Treasury bond yields rose from 1.83 percent on the day before Trump's election to 2.47 percent on December 13 while the dollar's trade weighted exchange rate rose 3.4 percent.
Such shifts can suck funds out of developing economies. Therefore, independently of what action Trump takes on tariffs, China's Economic Work Conference had to prepare for trends negatively affecting most developing economies. Fortunately, analysis of the key risks for China shows why it can deal with them far more successfully than other countries. The fundamental reason for this is that while most economies only have demand side tools to respond to Trump's policies, China, as President Xi Jinping has stressed, has a socialist economic structure allowing it to concentrate its key policies on the "supply side."
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