The Blog of Changes - Duncan Freeman

According to the Chinese government China’s economy is now in a New Normal state. While it is not entirely clear what this actually means, it is evident that one part of the New Normal is slower growth rates. In 2014, China’s GDP grew by 7.4%. The target for 2015 is 7%, the lowest for many years.
China’s slowing economic growth rates in recent years have generally been met with consternation among the media and commentators outside China. For years the assumption has been that high growth rates would continue, indeed they were generally considered an absolute necessity. Among the reasons given was that China had to grow by at least 10% a year to create sufficient employment, otherwise the country would fall apart. In addition, the slower growth rates were seen as having negative impacts around the world as a result of the growing importance of China in the global economy.

At a very simple level of analysis, the global importance of China can be measured by the size of its economy. There have long been many and varied predictions of when China would become the largest economy in the world, an event that is usually portrayed as one that will change the world.
In 2014 the IMF announced that China had overtaken the US as the largest economy in the world on a purchasing power parity (PPP) basis. The PPP basis, which takes account of price differences between economies, is one measure of the size of an economy when making international comparison. At current exchange rates, the size of the Chinese economy remains far smaller than the US, and may take some years to catch up. The Chinese government on this basis insists that China is still the second largest economy in the world. However, there are many measures of a country’s economic importance and power, not just the size of its GDP. The global significance of China in many respects remains well behind that of the US and even other economies such as the EU. But there is one area where China has become the global super power: growth. China today dominates growth in the global economy. And despite the slower rates, China will continue to dominate global growth.
In 2013, even when it was already undergoing a slowdown, on a PPP basis, the growth of China’s economy accounted for 37.3% of the expansion of the global economy. The US, which in 2013 on the same basis was still the largest economy and enjoying a degree of economic recovery, accounted for only 11.8% of global growth. India, another major developing economy, accounted for 10.5%. The EU accounted for a mere 0.4% of global growth, and Germany, the “powerhouse” of Europe, only 0.1%. The Eurozone actually made a negative contribution to global growth of -2.1%. On the basis these statistics, China’s contribution to growth far outweighs any other major economy, while the EU, which often lays claim to be the largest single economy, made a negligible contribution.
The longer term picture is similar. In the period after the onset of the crisis in the US and EU, from 2007 to 2013, China contributed 38.9% of growth in the global economy on a PPP basis. The US accounted for 5.3% and India 12.7%. The EU contributed -0.3% and the Eurozone -1.5%. The recent figures stand in contrast to earlier periods. In the decade from 1991 to 2000, the US contributed 24.6% of global growth, compared to 18.0% from the EU and 17.9% from China.
To put this in a comparative perspective, in 2013 China’s growth increased the size of its economy by the equivalent of 47.0% of the UK’s GDP, 45.4% of France’s GDP and 32.0% of Germany’s GDP. The cumulative effect of China’s growth is enormous. In 1999, only 15 years ago, the last time China’s growth rates dipped as low as they are now, the economy grew by 7.6%. At that time the GDP added in China was equivalent to 16.1% of UK GDP, 14.6% of French GDP and 10.0% of the German GDP.
The result is that what happens in the Chinese economy is more important than ever before, not just for China, but for the global economy. Without China’s growth, the performance of the global economy would be in a far worse than it actually is. The growth of the Chinese economy has enormous ramifications. The impact of its economy is visible throughout the world. One of the most important in recent years has been the demand for imports. For many economies, whether they be producers of raw materials or consumer goods, China has become a vital market.
In the EU, the importance of China as a growth superpower has yet to be realized by most of its policymakers. The importance of China impacts not only on bilateral trade and investment, but must also be taken into account when the EU and its member states are thinking about their position in the world, and where their interests lie. Can they continue to treat China as a secondary consideration in their global strategy when it is already a growth superpower?

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