China’s economic downturn: The facts behind the myth

In a new report for ECFR François Godement, director of ECFR’s Asia & China programme, asserts that recent economic issues in China should be seen as part of China’s transition to a service-driven economy, rather than a deep-rooted economic downturn.

The report highlights variances between different economic sectors within China, where the service sector continues to expand strongly – particularly e-commerce, with web retail sales growing 36 percent in the first three quarters of 2015. Meanwhile, declines in sectors such as steel and housing are desirable due to overproduction, and their environmental impact. Godement argues that these patterns reflect China’s long-trailed economic structural changes.

Godement also asserts that ideas of China’s impact on the global economy are exaggerated, claiming that its effect is essentially “psychological”. He cites limited non-Chinese exposure to the Chinese stock market and its positive current account and trade balances as factors limiting any real contagion to the global economy.

Nevertheless, he highlights some possible effects of China’s economic changes on parts of the world economy, which do impact on Europe. Worst hit by the transition will be big exporters to China, including commodity providers like Brazil and Venezuela. For others, the effect may, in fact, turn out to be positive, as falling commodity prices help other importers and reduced price Chinese exports benefitting living standards. However, countries with high levels of indebtedness may suffer from the effects of price deflation.

For Europe, the impacts of China’s economic transition will be mixed. For Eastern Europe it will be mostly positive (lower primary prices and cheaper consumer products from China, while exports to China are not significant). The effects are negative for Germany (which is more energy efficient, and relies on China as an export market) and for southern European economies, including France, for whom price deflation may well increase their relative debt burden.  

François Godement, author of “China's economic downturn: The facts behind the myths”, said:

“After years in which China’s economic hyper-growth was taken for granted there has been a dramatic reversal of international sentiment. The Chinese economy is now widely believed to be faltering. This is an exaggeration”

China is not facing a deep-rooted economic crisis, however, but rather a crisis of expectations, on the part of Chinese and international observers alike. There is truth in the trends identified by pessimists, but they are not new. Each of them, save the overvaluation of China’s currency, has been clearly recognised in Chinese economic debates or even specifically called for for several years.

“China has now begun its transition from one economic model to another; one that is more consumption-driven and focused on service industries. How China’s leaders manage this transition will be vital in whether or not this ambitious change comes off smoothly.

“But the effects of this transition have also been widely overstated. There will be losses but they will, in the main, be limited in scope, although exporters to China or those with high public or private debt levels may feel the effects very sharply indeed.”