Chinese economy robust for next decade

A worker at a textile company in Shandong, Oct 21, 2014. [Photo/Xinhua]

After more than 30 years of extraordinary growth, the Chinese economy is shifting onto a more conventional development path - and a difficult rebalancing is underway, affecting nearly every aspect of the economy.

For starters, China's current account surplus has shrunk from its 2007 peak of 10 percent of GDP to just over 2 percent last year - its lowest level in nine years. In the third quarter of 2014, China's external surplus stood at $81.5 billion and its capital and financial account deficits amounted to $81.6 billion, reflecting a more stable balance of payments.

This shift can partly be explained by the fact that, over the last two years, developed countries have been pursuing re-industrialization to boost their trade competitiveness. In the United States, for example, manufacturing grew at an annual rate of 4.3 percent, on average, in 2011-2012, and growth in durable-goods manufacturing reached 8 percent - having risen from 4.1 percent and 5.7 percent, respectively, in 2002 and 2007. Indeed, the US' manufacturing industry has helped to drive its macroeconomic recovery.

Meanwhile, as China's wage costs rise, its labor-intensive manufacturing industries are facing increasingly intense competition, with the likes of India, Mexico, Vietnam, and some Eastern European economies acting as new, more cost-effective bases for industrial transfer from developed countries. As a result, the recovery in the advanced economies is not returning Chinese export demand to pre-crisis levels.

These trends - together with the continued appreciation of the renminbi - have contributed to the decline of Chinese goods' market share in developed countries. Indeed, Chinese exports have lost some 2.3 percent of market share in the developed world since 2013, and about 2 percent in the US since 2011.

Incipient trade agreements such as the Trans-Pacific Partnership, the Transatlantic Trade and Investment Partnership, and the Plurilateral Services Agreement will accelerate this process further, as they eliminate tariffs among certain countries and implement labor and environmental criteria. Add to that furtive protectionism, in the form of state assistance and government procurement, and Chinese exports are facing serious challenges.

China is also undergoing an internal rebalancing of investment and consumption. As it stands, declining growth in fixed-asset investment - from 33 percent in 2009 to 16 percent this year - is placing significant downward pressure on output growth. Investment's contribution to GDP growth fell from 8.1 percentage points in 2009 to 4.2 last year.

To be sure, Chinese imports remain focused on intermediate goods, with imports of raw materials like iron ore having surged over the last decade. But, in the last few years, the share of imported consumption goods and mixed-use (consumption and investment) finished products, such as automobiles and computers, has increased considerably. This trend will contribute to a more balanced global environment.

A lag in technological adoption and innovation is contributing to the growing divide between China and the Western developed countries, but as China's per capita income increases, its consumer market matures, and its industrial structure is transformed, demand for capital equipment and commercial services will increase considerably. Indeed, over the next decade, China's high-tech market is expected to reach annual growth rates of 20 to 40 percent.

If the US loosens restrictions on exports to China and maintains its 18.3 percent share of China's total imports, US exports of high-tech products to China stand to reach more than $60 billion over this period. This would accelerate industrial upgrading and innovation in China, while improving global technological transmission and expanding related investment in developed countries.

China's economy may be decelerating, but its prospects remain strong. Its GDP may have reached $10 trillion in 2014. Once it weathers the current rebalancing, it could well be stronger than ever.

The Author Zhang Monan is a fellow of the China Information Center.