China’s stock market collapse and currency woes have defined international economic news since the first trading day of 2016. The crisis of confidence in the Chinese government’s ability to manage the economy precipitated global sell-offs, which, combined with low oil prices, have many countries feeling the crunch. But volatility in stock markets and currency markets is a symptom. Early on Tuesday, local time, China’s Bureau of Statistics said that China’s economy expanded 6.9 percent in 2015, and that growth for the last quarter of 2015 edged down to 6.8 percent. This is not unexpected, despite the relative excitement with which it will be greeted. But there are a few key observations to make.
The first is that China’s official statistics are eerily in line with China’s own projections. The official target set by the Chinese government was 7 percent GDP growth in 2015, down from 7.3 percent in 2014. We have written before about how Chinese official statistics must be treated with some skepticism. China always releases GDP figures for the previous year in the third week of January—despite the fact that anyone who appreciates the complexity of calculating such a figure realizes that it takes far longer than three weeks. Also, in China statistics are gathered at the local level and passed up to the central government. There is a great deal of incentive for officials to manipulate data in order to advance their own standing. We are unable to prove that China is growing much slower than 7 percent, but we suspect that is the case—as does the rest of the world. A decline of 0.1 percent is not as worrisome as the potential that China is growing at half the rate it says it is.
The second is that these numbers were not unexpected. The world has woken up to the fact that the Chinese growth miracle is over, and that is not going to be returning anytime soon. But the central issue to watch in China right now is not the reported decline in GDP growth, which, besides being expected, only gives a sense of how much China wants the world to think it is slowing. The questions in China must now focus on what happens next. On a domestic level, this means closely watching whether the Communist Party can maintain social and political cohesion as it attempts to oversee a colossal restructuring of the economy from a high-growth model dependent on low-cost exports to a consumption-based model. It bears noting that according to the China Labour Bulletin, December 2016 saw the highest number of strikes and worker protests in China in at least five years. It also means closely watching whether President Xi Jinping and the Communist Party are able to continue to exert control over the People’s Liberation Army, the regime’s ultimate guarantor and internal security force. And lastly, it means following the Central Commission for Discipline Inspection’s anti-corruption purges, meant to ensure discipline throughout the party, from the very top to the most local level.
On an international level, realities that began to emerge in 2008 are now manifesting as a result of China’s slowing growth. The 2008 financial crisis was the first true alarm bell for the world—China was particularly hurt by declining consumption of its exports. China’s economy slowed as it exports fell, which led to China importing fewer industrial commodities. Oil was notable among these, and the combination of China’s lack of demand and an increase in global supply are chief among the reasons that oil is now less than $30 a barrel. Countries dependent on oil exports—Russia, Saudi Arabia, and Iraq, just to name three—are being hit hard by low oil prices. There is also a class of countries dependent on Chinese demand, among them global economic heavyweights like South Korea, Japan and Germany, which have profited from exporting a wide range of manufactured goods to China for years. The deeper issue behind China’s GDP numbers is how these countries manage the stresses placed on them by China’s downturn.
China’s economic decline and the related challenge it poses to China’s political system are key to our model and to our forecast for the coming year. We expect China to try to implement a range of ad hoc solutions to manage the effects of its weakening economy without being able to repair its deeper structural issues. Since 2016 began, China has been struggling with monetary policy. The release of today’s GDP figures is significant because it isn’t a symptom: it’s the problem laid bare.