Kenneth Rogoff writes: While virtually every country in the world is trying to boost growth, China’s government is trying to slow it down to a sustainable level. As China shifts to a more domestic-demand driven, services-oriented economy, a transition to slower trend growth is both inevitable and desirable. But the challenges are immense, and no one should take a soft landing for granted.
As China’s economy grows relative to the economies of its trading partners, the efficacy of its export-led growth model must inevitably fade. As a corollary, the returns on massive infrastructure investment, much of which is directed toward supporting export growth, must also fade.
Consumption and quality of life need to rise, even as China’s air pollution and water shortages become more acute in many areas. But, in an economy where debt has exploded to more than 200% of GDP, it is not easy to rein in growth gradually without triggering widespread failure of ambitious investment projects. Even in China, where the government has deep pockets to cushion the fall, one Lehman Brothers-size bankruptcy could lead to a major panic.
Think of how hard it is to engineer a soft landing in market-based economies. Where is China’s economy now? Most evidence suggests that the economy has slowed significantly. One striking fact is that annual growth in electricity demand has fallen sharply, to below 4% for the first eight months of 2014, a level recorded previously only in the depths of the global financial crisis that erupted in 2008. For most of China’s modernization drive, electricity consumption has grown faster than output, not slower.
Weakening electricity demand has tipped China’s coal industry into severe distress, with many mines effectively bankrupt. Exports have also slowed, given sluggish growth in the rest of the world. Commodity exporters such as Australia, Indonesia, and Brazil have already felt the effects of slowing Chinese growth, as have countries, such as Germany and Switzerland, that depend on satisfying China’s voracious demand for capital-intensive goods.
Can China’s government engineer a soft landing while weeding out corruption, reducing pollution, and liberalizing markets to ensure long-term growth?
China’s growth rate remains perched at a very high level, so there is a great deal of room to fall. The potential vulnerability of Western exports and equity prices is massive. Of the two major instances of policy tightening occurring in the world today, the US Fed’s may be the easier one to understand, but it is not necessarily more consequential for the world than what is happening in China.
