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November 21, 2012 at 07:00 PM
When the financial crisis struck the United States back in 2008, China gloated over the “failure” of the Western World’s free market system. At the time, it appeared Beijing’s model of controlled intervention was right. But almost five years later, China—the world’s “growth engine”—is stalling. The nation’s growth rate slowed to 7.4% during the third quarter, and Chinese stocks have lost around 30% over the past five years. Can China lead the world back to growth?
China 101
The People’s Republic of China is home to 1.3 billion people and governed by the Communist Party of China—a single party state. Beijing is the capital city and the government exercises its power over 22 provinces, five autonomous regions, four directly controlled areas (Beijing, Tianjin, Shanghai, and Chongqing), and two self-governing regions (Hong Kong and Macau).
China is the world’s second largest economy and is renowned for its ability to produce goods cheaply. Its low labor costs, favorable government policies, and undervalued exchange rate have helped it to stay a fierce competitor. As of 2012, the International Monetary Fund (IMF) estimates that China’s GDP was approximately $7.298 trillion.
Global steel production is dominated by China, which accounts for around 44% of all output. For energy production, coal produces about 70% of China’s energy needs and in 2010 the country became the world’s largest producer of wind energy.
Perhaps no trend more closely illustrates China’s development into an economic juggernaut than its shift from a nation of bicycles to cars. The country is now the world’s largest auto market, recently supplanting both Japan (2006) and the United States (2009).
No Decoupling
Although the theory of economic decoupling forecasted that fast growing emerging market countries would be largely shielded from economic problems in developed nations, reality hasn’t followed theory.
Three years after the U.S. financial crisis and the start of Europe’s sovereign debt crisis, China, like other emerging countries is stalling. The IMF projects China’s economy to average 5.8% in the half-decade through 2016, almost two percentage points less than the five years before the 2009 slump.
A one percentage point drop in China’s growth rate often leads to a 1.5 point decline in commodity prices over a couple of quarters. Here too, there’s no decoupling, because large natural resource producers like Australia and Canada get hit.
Domestic Demand Model
Can China’s domestic economy make up for the global slowdown?
Like the theory of economic decoupling, certain economists promoted the idea that domestic consumption by China’s large population would minimize the impact of slowing demand for Chinese exports. But thus far, it hasn’t worked out that way. China’s weak third quarter economic expansion takes it back to 2009’s level.
