China has overtaken the United States to become the world's largest goods trading nation. Indeed, since the beginning of the international financial crisis, increases in China's merchandise trade have been larger than those of the United States, EU and Japan combined.
Even last year, well after recovery from the trough of the "Great Recession," China's trade increase was bigger than that of any other economic centre. In particular China's increase in imports remained larger than the combined total of the United States, EU and Japan - a key issue for other economies.
This change in global trade has major implications for other countries' trade strategies and for ongoing trade negotiations such as the Regional Comprehensive Economic Partnership Agreement (RCEP) and the Trans-Pacific Partnership (TPP).
The scale of the changes in global trade that have taken place since the beginning of the international financial crisis is shown in Figure 1. This illustrates the increases in the total trade of China, the United States, the EU and Japan between 2007, the last year before the crisis, and the end of 2013.
China's total merchandise trade in 2013 was $1,986 billion larger than in 2007 - China's exports having increased by $992 billion and imports by $994 billion. In comparison, the increase in the US goods trade was $741 billion, the EU $1,024 billion, and Japan $214 billion.
Therefore, not only was the expansion of China's trade almost twice that of any other major economic centre, but it was larger than the $1,979 billion for the United States, the EU and Japan put together.
Figure 1
Taking just a bilateral comparison with the United States, which is important for ongoing trade negotiations, in 2007 China's $2.2 trillion total merchandise trade was only 69 per cent of the United States. By 2013 China's merchandise trade, at $4.2 trillion, was 7 per cent bigger than the United States' $3.9 trillion. In six years China's trade increased by almost $2.0 trillion, compared to a US increase of $0.7 trillion - China's trade grew almost three times as much as the United States.
The change was even more dramatic for imports. In 2013 China's goods imports were $993 billion above their 2007 level, whereas US imports were up by $311 billion, the EU's by $329 billion, and Japan's by $212 billion. China's imports rose by more than three times as much as the United States - and by more than the United States, EU and Japan combined. China was therefore, by a huge margin, the most rapidly expanding market for other countries' exports.
Nor has this import situation altered since the Great Recession. Figure 2 shows that OECD data confirm that last year China's imports rose by $132 billion, compared to a rise of $30 billion for the EU - and falls of $8 billion for the US and $53 billion for Japan. China's imports rose four times as much as the EU, while the United States and Japan were declining import markets.
Figure 2
Such trends clearly have major implications for world commerce and ongoing trade negotiations.
First, the attempt by the United States to re-raise the question of the RMB's exchange rate was unfounded. On April 8, under a headline "US warns China after renminbi depreciation," the Financial Times carried an off-the-record briefing by a "senior [US] Treasury official." This reported a 2.5 per cent depreciation of the RMB since its peak earlier this year - a relatively small adjustment, clearly primarily aimed at preventing speculators having a continuous one way bet, and leaving the RMB 33.5 per cent above its 2005 level. Despite this, the unnamed US official declared "serious concerns" if the RMB did not show "adjustment" - apparent code for allowing its exchange rate to go up. But the trade data show China has been the world's most dynamic market for other countries' exports, while last year the United States made no contribution.
That China is the world's most rapidly expanding market for other countries exports, while US import markets have not regained pre-crisis levels, clearly affects China's promotion of an Asian RCEP, including India, Japan, South Korea, Australia, and ASEAN, and the United States promoting a TPP excluding China.
Regrettably, current US policy has moved away from supporting a multilateral opening of the world economy. Instead, as Philip Stephens of the Financial Times noted accurately:
"China has been the big winner from the open global economy… each of the proposed new [US] agreements would leave China on the sidelines. The exclusion of the world's second-biggest economy is more than a coincidence."
The United States recognizes that a relapse into national scale protectionism, of the post-1929 type, would have dangerous consequences, including for itself, but it has been losing to China’s competition in an open world economy. A way to attempt to limit China is, therefore, to create large trade blocs including the United States rather than a truly multilateral global economy.
But this faces many difficulties. First, US policy dares not risk serious disintegration of world trade - therefore protectionism must be limited in scope. Second, the US is not today a dynamic import market.
Any country tying itself into a trade bloc with the US, to the disadvantage of relations with China, is therefore entering a grouping the centre of which is relatively stagnant in trade terms. Despite political pressure to join, there are definite limits to how much other economies are willing to enter blocs with relatively stagnant trading partners, such as the United States, at the expense of more dynamic ones such as China.
These international trade realities interrelate with domestic political considerations. As global tariffs on manufactured goods are in general already low, the necessary aim of the US is to negotiate advantages in areas where its economy is particularly strong but where international tariffs and other barriers are still significant. Two of the most important of such sectors are agriculture and services. But these are areas of particular sensitivity in numerous countries. For example, in Japan rural areas are the key electoral base of the Liberal Democratic Party (LDP) and this is a key reason protectionism has been maintained in Japan's agricultural trade policy. As the Financial Times noted, Japan's newly signed trade agreement with Australia therefore did not dismantle agricultural trade barriers to the extent the United States wants.
In the United States itself there is significant resistance, particularly in the Democratic Party, to trade concessions in manufacturing and other sectors where developing economies hold competitive advantages. It is therefore difficult for the US to offer proposals making it worthwhile for other countries to accept the domestic political problems that would be created by further opening their economies to the United States in agriculture and services.
Given actual world trade dynamics, China's proposals for widespread trade liberalisation, such as the RCEP, will be more beneficial for other countries' economies than current US protectionist proposals for the TPP. This will undoubtedly influence the course of trade negotiations.
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An earlier version of this article was published at China.org.cn
The announcement of the relaxation of China's one child policy created great discussion in China and internationally. But its significance was widely misunderstood. Contrary to myth, the increase in China's labor supply plays little role in China's rapid economic growth. In reality, 96 percent of China's economic growth comes from factors other than a rising labour supply. Therefore, there is no reason why China's economy should slow significantly because China's working age population stopped growing in 2012. The mistaken view, sometimes expressed, that China will grow old before it becomes rich is therefore the reverse of the reality: China will grow rich before it grows old. To demonstrate clearly why, first the facts will be stated and then their implications analysed.
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A worker of a company processes galvanized products in Qingdao, east China's Shandong Province,[Xinhua/Yu Fangping] |
Even an elementary back of an envelope calculation shows why increases in China's working age population have made only a relatively small contribution to China's economic growth. Indeed, this is so immediately clear it is somewhat of a puzzle that the myth ever existed in some quarters that China's growth depended essentially on increases in labor and therefore China's economic growth faces a serious "demographic challenge" due to the end of the increase in the working age population.
From the beginning of reform in 1978 up to 2012, the average annual increase in China's population aged 15-64, the international definition of working age, was 1.7 percent. Over the same period the annual average increase in China's GDP was 10.2 percent -- almost six times as fast. The increase in China's working age population was therefore only 17 percent of the rate of increase of China's GDP -- showing clearly that the rate of growth of population could not possibly explain, or be the main reason for, China's rapid economic growth.
Looking at the trends in more detail shows still more clearly that population trends did not determine China's economic trajectory. Taking five year moving averages for changes in working age population and GDP, to remove the effects of short term fluctuations, China's average annual growth rate of working age population was 2.8 percent in 1983, five years after the beginning of reform. By 2000 this had fallen to 1.6 percent, and by 2012 it was only 0.6 percent. The growth rate of China's working age population was therefore consistently falling.
But China's GDP growth showed the exact opposite trend. Annual average GDP growth rate was 8.1 percent in 1983, 8.6 percent by 2000, and 9.3 percent by 2012. Therefore while the growth rate of China's population was falling its economy was accelerating! This shows clearly changes in China's labor supply were not the prime cause of its economic growth.
Making exact calculations shows the situation even more graphically. It might be naively imagined that as China's working age population grew at 17 percent of the rate of its GDP increase therefore increases in labour accounted for 17 percent, which is under one fifth, of the increase in China's economic growth. This contribution would already seem surprisingly small for those who believe increases in working age population was a major factor in China's economic development, that China's growth rate must therefore now necessarily fall sharply, and China will "grow old before it grows rich." But in reality even 17 percent is a great exaggeration of how much increase in the labor supply contributed to China's growth.
The reason for this is that the increase in the amount of time actually worked grows more slowly than the increase in the working age population. This is because the period of time spent in education rather than work tends to increase, vacations tend to get longer reducing the number of days worked, and other factors.
To show the effect of this, the chart shows the sources of China's GDP growth in 1990-2010 -- the latter being to the latest date for which international comparisons are available. As can be seen, 64 percent of China's growth was due to investment increases, 30 percent to increases in productivity, and only 6 percent to increases in labor. China's rapid economic growth was therefore overwhelmingly driven by increases in investment and increases in productivity with increases in the labour supply playing only an extremely small role. Given its growth rate, eliminating the entire increase in labor into China's economy would have taken only half a percent from China's GDP growth.
But even that 6 percent number slightly exaggerates the role of increases in labor supply in China's economic growth! Increase in labor contribution to economic growth take place due to two processes. The first is a rise in the number of hours worked as the workforce gets bigger (the increase in labor quantity). The second is the improvement in skills and education -- a skilled worker creates more value than an unskilled one (the increase in labor quality).
The increase in China's labor quality is 2 percent per year, in line with the average for developing countries. This has a modest scope to increase with higher expenditure on education and skills -- the average increase in labor quality in a developed economy is 3 percent a year. Only 4 percent of China's GDP growth comes from increases in the quantity of labor, which are affected by demographics.
In short, increases in China's labor supply, due to expansion of the working age population, accounted for only 4 percent of China's total GDP growth -- less than half a percentage point of annual GDP growth!
Claims by those such as that by Financial Times writer David Pilling that "the song of China's miracle has a three-word refrain: Just add people" are therefore absolute nonsense. Only 4 percent of China's growth came from "adding people" and 96 percent came from factors other than "adding people!"
This does not mean no economic problems are created by China's aging population. But these come from a completely different route than shortage of labor. The real economic difficulty China faces with regard to population is that people in work can save, while those not working, because they are too young or too old, generally do not save. The decline of the percentage of China's population in work therefore tends to lower China's household savings rate. As investment necessarily has to be financed by savings, this puts downward pressure on China's investment rate, and as investment is the main source of economic growth not only in China but in most economies this could lower China's economic growth. While the decline in China's working age population does not pose a risk of significant economic slowdown due to lack of labor, it could cause a problem due to fall in savings.
But fortunately households are only one of three sources of savings. Of the other two, government savings are small in almost all countries, and usually negative. But company profits are the biggest source of saving in China. If savings via company profits were to increase, this can compensate for any decline in household savings due to the fall in the percentage of the population which is working.
Maintaining high growth in China therefore depends more on maintaining company profitability than it does on population. A decline in company profitability is a much more serious threat to China's growth than any demographic factor. A rise in company profitability, through its effect in raising company savings, would be a far more powerful factor in maintaining China's economic growth than relaxing the one child policy.
In summary, the claim that China faces a significant slowing of its economy due to population factors, and therefore China will "grow old before it grows rich," is a typical example of myths created by engaging in woolly rhetoric without using numbers. Increases in labor supply play such a small role in China's economic growth that the end of the rise in the working age population will have only a very small effect in reducing China's growth rate. It is what happens to China's productivity, and above all its investment, that overwhelmingly will determine its economic growth and therefore its prosperity. Provided the correct policies are pursued, China will certainly become rich before it becomes old.
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This article was originally published in English at China.org.cn and in Chinese at Sina Finance.
In 2010 Professor Danny Quah, of the London School of Economics, noted: 'In the last 3 decades, China alone has lifted more people out of extreme poverty than the rest of the world combined. Indeed, China’s ($1/day) poverty reduction of 627 million from 1981 to 2005 exceeds the total global economy’s decline in its extremely poor from 1.9 billion to 1.4 billion over the same period.' The aim of this article is to analyse the situation taking data published three years after Quah's analysis; look at the trends not only of extreme poverty, which the World Bank calculates using expenditure of $1.25 a day or less; examine a slightly wider poverty definition ($2 a day expenditure), and compare the trends in other regions of the world economy.
The conclusion is simple. Quah's conclusion still holds. China is responsible for 100% of the reduction in the number of people living in poverty in the world. This finding is the necessary backdrop to any serious and informed discussion of the role of China in the world economy and its contribution to human rights.
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There are many remarkable economic statistics about China.
Nevertheless, impressive as such statistics are, from the point of view of human welfare it is another number which dwarfs all others: the contribution of China to the reduction of human poverty not only within its own borders but in its impact on the world. The astonishing fact remains that China has been responsible for the entire reduction in the number of people living in absolute poverty in the world!
To show this the table below gives the number of those in China and the world living on expenditure less than the two standard measures used by the World Bank to measure poverty. These are the criteria for extreme poverty, expenditure of less than $1.25 a day ($37.5 a month) and those living in poverty – expenditure of $2 day ($60 a month). Charts showing the trends are at the end of the article.
In 1981, on World Bank data 972 million people in China were living on an expenditure of less than $37.50 a month. By 2008 this had been reduced to 173 million, by 2009 it fell to 157 million. Consequently 662 million people were lifted out of extreme poverty in China in the twenty seven years up to 2008 and 678 million by 2009.
In contrast the number of people living in such extreme poverty outside China increased by 50 million between 1981 and 2008 – the number of people emerging from poverty was less than the population increase. This was due to the rise in the numbe of people living in extreme poverty in sub-Saharan Africa. China was consequently responsible for 100% of the world’s reduction of the number of people living in extreme poverty.
Analysing those living on $2 a day ($60 a month), still a very low figure, the trend was even more striking. The number of people in China living on an expenditure of this figure or less fell from 972 million in 1981, to 395 million in 2008, to 362 million in 2009. The number living on expenditure of $60 a month or less in China fell by 577 million by 2008, and by 610 million by 2009.
In contrast the number of those living at this level of poverty in the world outside China rose from 1,548 million in 1981 to 2,057 million in 2008 – an increase of 509 million. Again, China accounted for the entire reduction in the number of people in the world living at this level of poverty.
It is therefore almost impossible to exaggerate what a contribution not only to its own people but to the welfare of the whole of humanity China’s economic progress has made. Without China there would have been literally no reduction in the number of world’s people living in poverty.
The gigantic impact of this on human well-being is not only in its direct effect on personal income and expenditures. It is also in its indirect consequences for human welfare. To take simple examples
The direct and indirect effect of bringing people out of poverty is also the greatest contribution that can be made to human rights, The reality is that China’s bringing over 600 million out of poverty means no other country in the world remotely matches China’s contribution to human wellbeing and real human rights.
Notes
Quah, D. (2010, May). 'The Shifting Distribution of Global Economic Activity'.Retrieved January 2, 2012, from London School of Economics: econ.lse.ac.uk/~dquah/p/2010.05-Shifting_Distribution_GEA-DQ.pdf
Summary
China has the world’s fastest growth of consumption while its population lives significantly longer than would be expected from China’s level of economic development. These facts clearly establish China has easily the world’s fastest rise in living standards.
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One of the strangest claims about China that sometimes appears in the media is that it has a slow growth of consumption and living standards. In reality China has the fastest growth of consumption of any country in the world – whether this is measured only by household consumption or includes government consumption on areas vital for quality of life such as education and health. Furthermore, indicators show that compared to other countries, China's quality of life is better than would be expected from its present stage of economic development.
First the facts regarding these issues will be established and then they will be analyzed.
Table 1 shows the growth rates of consumption, both total and household, for the G7 and BRIC economies. These economies are selected for comparison as, given China's size, the appropriate comparison is with major economies – not Caribbean islands or African states. Nevertheless including small economies would make no difference – China would still be seen to have the world's fastest consumption growth rate.
The fundamental period of comparison used is from 1978, the beginning of China's economic reform, to 2011 – the latest date for which figures are available for all countries. However, as data is not available for Russia before 1990, a comparison for 1990-2011 is also given.
The pattern is clear. China's average annual increase in total consumption was 7.9 percent in 1978-2011 and 8.5 percent in 1990-2011. The increase in household consumption in the same periods was 7.7 percent and 8.1 percent. China's are easily the world's highest rates of growth of both household and total consumption.
By comparison, India, ranking second after China, has an annual rate of total consumption increase in the same periods of 5.4 percent and 5.9 percent and its rates of increase of household consumption are 5.2 percent and 5.9 percent.
The U.S., by comparison, had an annual growth rate of total consumption of 2.7 percent in 1978-2011 and 2.5 percent in 1990-2011. U.S. growth rates of household consumption are 2.9 percent and 2.8 percent in the same periods. China's consumption growth rate was therefore almost three times as fast as the U.S.
It is obvious that such a rise in consumption – an increase in quantity and quality of food, housing, holidays, phones, cars, furniture, health care etc. – is a decisive factor in determining any country's living standards. China's rapidly growing numbers of smartphones, cars, internet users, those taking foreign holidays etc. reflect its rising living standards. However some people attempt to claim, entirely falsely, that China's dramatic increases in consumption may be offset by other factors – for example weaknesses in health care, deterioration in the environment etc.
Fortunately, this can be tested objectively. Life expectancy, as is well known, is a very sensitive indicator of overall living conditions. As well as most people having a direct goal of living longer, length of life also summarizes the combined impact of health, environment, consumption and other factors on human well-being.
As people in China live significantly longer than would be expected given its economic development level any claim China’s rapid rise in consumption is more than offset in terms of rising living standards by health, environmental or other considerations is false. The evidence is clear that environmental, health and other factors affecting health quality are superior in China than would be expected for its level of economic development.
None of this is grounds for complacency. What have been analyzed here are growth rates, not absolute levels. China’s life expectancy (73.5 years) is still significantly behind the US (78.6 years) let alone Italy (82.1 years) or Japan (82.6 years). China must still undergo a prolonged period of economic growth before it achieves the highest levels of developed economies.
Nevertheless China is developing from a situation where in 1949 it was one of the world’s least developed countries. It is therefore ridiculous utopianism, which in practice would lead to the wrong policies, to believe China can in one step achieve the highest levels of the most advanced economies. The relevant question is whether China is developing living standards and consumption more rapidly than other economies, in which case it is catching up with them, or whether it is developing more slowly than other countries – in which case it is falling behind.
But given that China has the world’s fastest growth of consumption, why is the totally erroneous statement made that China underdevelops consumption? Such claims commit the elementary mistake of confusing China’s growth rate of consumption, the world’s highest, with the percentage of consumption in GDP – which is low in China. But for change in the population’s living standards what counts is how fast their consumption is growing, not the percentage of consumption in GDP – for example the percentage of consumption in GDP of the Democratic Republic of the Congo is an extremely high 89% but it is the world’s poorest country for which data exists!
The conclusion is therefore absolutely clear. China has by far the fastest growth rate of consumption in the world, together with life expectancy significantly above that which would be expected given its level of economic development. China, in short, has easily the world’s fastest rise of living standards.
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An earlier version of this article originally appeared in Chinese on Sina Finance. This article was originally published in English by China.org.cn.
The period since the international financial crisis began has for the first time in over a century seen the US displaced as the world’s largest industrial producer – this position has now been taken by China. It has also witnessed the greatest shift in the balance of global industrial production in such a short period in world economic history. In 2010 China’s industrial output exceeded the US marginally but this has now been consolidated into a more than 20% lead with the gap still widening further.
In 2007, on UN data, China’s total industrial production was only 62% of the US level. By 2011, the latest available comparable statistics, China’s industrial output had risen to 120% of the US level. China’s industrial production in 2011 was $2.9 trillion compared to $2.4 trillion in the US – this data is shown in Figure 1.
Figure 1
When the comparable data is released for 2012, China’s lead will have increased substantially– between December 2011 and December 2012 China’s industrial output increased by 10.3% whereas US industrial production increased by only 2.7%. Calculations based on estimates in the CIA's World Factbook indicate in 2012 the value of China's industrial production was $3.7 trillion compared to $2.9 trillion for the US – which would mean China's industrial production was 126% of the US level.
Taking only manufacturing - that is excluding mining, electricity, gas and water production - in 2007 China’s output was 62% of the US level, by 2011 it was 123%. Again the gap has widened in 2012 and 2013.
No other country’s industrial production now even approaches China - in 2011 China’s industrial output was 235% of Japan’s and 346% of Germany’s.
World Bank data, using a slightly different calculation of value added in industry, confirms the shift. On World Bank data China’s industrial production in 2007 was only 60% of the US level, whereas by 2011 it was 121%.
Therefore in only a six year period China has moved from its industrial production being less than two thirds of the US to overtaking the US by a substantial margin. If China was the ‘workshop of the world’ before the international financial crisis it is far more so now
The trends producing such dramatic shifts in such a short period are shown in Figure 2. In six years China’s industrial output almost doubled while industrial production in the US, Europe and Japan has not even regained pre-crisis levels. To give precise statistics, between July 2007 and July 2013 China’s industrial production increased by 97% while US industrial output declined by 1%. Industrial production data for July is not yet available for the EU and Japan, but between June 2007 and June 2013 EU industrial output fell by 9% and Japan’s by 17%.
Figure 2
It is this enormous rise in China’s output which also drove the much discussed global shift in industrial production in favor of developing countries - in the six year period to June 2013, the latest date for which combined data is available, industrial production in advanced economies fell by 7% while output in developing economies rose by 65%.
As is clear from Figure 3, China accounted for the overwhelming bulk of the increase in the developing economies. Industrial production in Latin America rose by 5%, in Africa and the Middle East by 6%, and in Eastern Europe by 10%. But China’s industrial production in this period rose by 100% - industrial output in developing Asia as a whole rose by 65%, but the majority of this was accounted for by China.
Figure 3
Such a rise in China’s industrial production has consequences spreading far beyond industry itself. Industry has easily the most rapid increase in productivity of any economic sector – notably compared to services. The decline of industrial production in the EU and Japan, and relative stagnation in the US, means China is cutting the productivity gap between itself and the advanced economies. This is crucial for progress in raising China’s relative GDP per capita and living standards.
This rising productivity also explains why China’s exports have been able to maintain their competitiveness despite substantial increases in the exchange rate of China’s currency the RMB. On Bank for International Settlements data, the RMB’s nominal exchange rate rose by 25% between July 2007 and July 2013. But China’s real effective exchange rate, that is taking into account the combined effect of the nominal exchange rate and inflation, rose by 31% But despite this major currency revaluation China’s exports continued to exceed its imports.
The ability of China to successfully absorb such high increases in its exchange rate, due to high levels of industrial productivity increases, directly translates into relatively lower prices for imports and improved relative living standards for China’s population.
This data also settles the dispute between who believed there was a major industrial revival in the US, such as the Boston Consulting Group, and Goldman Sachs and other analysts who correctly concluded no such major revival has occurred. Those in China, such as Lang Xianping, who wrote that a great US industrial revival was taking place and China’s industry was in crisis look foolish in the light of data showing China’s industrial output doubled in a period when US industrial production did not grow at all. The only reason US industrial performance does not appear very weak, with negative net growth over a six year period, is because of the even worse performance of a major decline in industrial output in the other advanced economic centers – the EU and Japan.
It is naturally important not to exaggerate this scale of advance by China in industrial production. China’s industrial output is now considerably larger in value terms than the US, but the United States retains a substantial technological lead which it will take China a considerable period to catch up with. Due to a long period of globalization and consolidation by US companies, both processes which are only at early stages in China, US manufacturing firms are still four times the size of China’s in terms of overall global revenue– although between 2007 and 2013 Chinese manufacturing firms overtook Germany to become the third largest manufacturing companies of any country.
The scale of these changes in world industrial production also make clear that in comparison to developments in China gas and oil ‘fracking’ in the US, which have attracted widespread media attention, is merely a statistical sideshow – as already noted overall US industrial production has not even recovered to pre-crisis levels.
For the first time for over a century the US has been definitively replaced as the world’s largest industrial producer. Such a once in a century shift can literally only be described as historic.
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An earlier version of this article appeared at China.org.cn
Publication of US 2nd quarter GDP data, following that for China, makes it possible to accurately compare the recent performance of the world's two largest economies. The results are extremely striking as they show that in the last year the slowdown in the U.S. economy has been far more serious than in China. Consequently the data shows that while both economies are being adversely affected by current negative trends in the world economy, China is dealing with these more successfully than the U.S. Intense media discussion in China about its ‘slowdown’ is therefore misplaced unless equivalent attention is paid to understanding why the US economic slowdown is much worse than China’s.
To accurately establish the facts, it should be noted China and the U.S. publish their economic data in slightly different forms. It is therefore necessary to ensure that like is compared with like. The U.S. emphasizes annualized change in GDP in the latest quarter compared to the previous one; for the newest data this means it takes the growth between the 1st and 2nd quarters of 2013 and basically multiplies it by four. China emphasizes the growth between the 2nd quarter of 2013 and the same quarter in 2012.
Both methods have advantages and disadvantages. Quarter by quarter comparisons depend on seasonal adjustments being accurate, which is not always the case, while year by year comparisons are less sensitive in registering short term shifts.
But in the present case the conclusion is not fundamentally changed whichever method is used. If the method emphasized by China is used, then, as shown in Figure 1, in the 2nd quarter of 2013 China's GDP grew by 7.5% compared to a year earlier, while U.S. GDP grew by 1.4%. This means that China's economy grew at over 500% of the rate of the U.S. economy. Using the method preferred by the U.S. China's annualized GDP growth in the 2nd quarter was 6.8% and the U.S.'s was 1.7%, which means that China's economy grew at 400% of the rate of the U.S. economy.
Due to the difficulties of making accurate seasonable adjustments in both China and the U.S., the author would emphasize the year on year comparison; but whichever method is preferred China's economy was growing at 4-5 times the speed of the U.S. economy.
Figure 1
If the whole period since the international financial crisis began is taken then the disparity in growth between China and the U.S. is even more striking. In the five years up to the 2nd quarter of 2013 China's GDP grew by 50.7% and U.S. GDP by 4.5% (Figure 2). China's GDP grew more than ten times as rapidly as the U.S.
Figure 2
Turning to the most recent period, it is widely understood that since the beginning of the international financial crisis, China's economy has far outperformed the U.S., even if the dimensions of this are not clearly grasped. What is not so often understood is what has happened during the last year. During that period the economies of both China and the U.S. slowed, indicating the negative trends in the international economic situation. But the U.S. slowed far more than China.
China's year on year GDP growth fell from 7.6% in the 2nd quarter of 2012 to 7.5% in the same quarter of 2013 - a decline of 0.1%, or a 1.3% deceleration from the initial growth rate. However the year on year growth rate of the U.S. in the same period fell from 2.8% to 1.4% - that is by 1.4% or by 50% of the initial growth rate (Figure 3). Consequently China's growth fell marginally but the U.S.'s growth rate halved.
Figure 3
Furthermore, as the Financial Times correctly pointed out in its editorial on the latest U.S. data, U.S. economic growth has been particularly depressed in the last nine months. In that total period the U.S. economy grew by only 0.7%, or an annualized rate of under 1%. In the same period China's economy grew by 5.3%, or an annualized rate of slightly over 7%. Therefore if over the entire course of last year China's economy has been growing at 4-5 times the speed of the U.S. economy, in the last nine months China's economy has been growing at 7 times the speed of the U.S.
This does not mean that the US cannot partially recover from its extremely depressed 1.4% annual growth rate in the last year – the 10 year moving average of US annual growth is 1.8% and its 20 year annual moving average is 2.5%. But even recovery to these rates would leave the US growing at only one third of the rate of China.
The latest data therefore shows that the global economic discussion about the present world economic situation is not about China's "slowdown" and U.S. "recovery". It is "why is China coming so much more successfully through an adverse global economic situation than the U.S.?" And "why has the U.S. economy slowed so much more dramatically than China's in the last year?
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An earlier version of this article appeared at China.org.cn.
I greatly admire and avidly read Gavyn Davies blog, but his latest comments on China, unusually, lack precise numbers which therefore creates some ambiguities which can give unnecessary credibility to wrong analysis. Putting in precise numbers should bring clarity.
China's government has spelt out officially its precise growth target. That is to increase GDP by 100% in 2010-2020 – about four times the prospective growth rate of the US in the same period.
Given China’s cumulative growth in 2010-2012 (17.8%) this means China has to hit a 6.9% average growth rate for the rest of the decade to achieve its target. As all this is unambiguously spelt out the relevant yardstick is whether China will achieve this.
It is a wholly spurious method, not used by Gavyn but used by others, to invent some target China never set and then claim there is a ‘crisis’ because China has ‘failed’ to achieve a target it never put forward! There is no indication China is falling below its projected growth target - China’s growth this year will clearly be above the target rate.
If Gavyn, or anyone else, wants to say argue there is a serious crisis in China, they have to claim growth will fall below the average 6.9% rate – some people do of course, so we will examine that below.
As for the efficacy of the 2008 stimulus programme it can be seen in two sets of figures. In the five years between the 1st quarter of 2008 and the 1st quarter of 2013 China’s GDP grew by 51.8% and the US by 3.5% - the EU and Japan contracted. This is shown in Figure 1.
Figure 1
To remove any claim of possible distortion caused by the depth of the US recession in 2007-2009, in the year to the 1st quarter of 2013 China’s economy grew by 7.7% and the US economy by 1.6% - that is China’s economy grew 6.1% faster than the US economy, or at 480% of the US growth rate. This is shown in Figure 2.
Figure 2
The argument that China is suffering from economic ‘crisis’ on anything like the scale of the US, Europe or Japan, for example because of its recent liquidity problems, is rather like the spurious argument that really the flu is the same as polio because they are both illnesses!
As for the suggestion that Michael Pettis has been proved right I am afraid that although he edits his blog very fairly his predictions on China are extremely inaccurate. In 2009 he insisted: ‘'I continue to stand by my comment last year... that the US would be the first major economy out of the crisis and China one of the last.' This statement is entirely inaccurate – as the more than 50% growth in China and less than 4% in the US since the beginning of the financial crisis shows. His new thesis is that: ‘'I still maintain that average growth in this decade will barely break 3%.' The projection of 3% growth is itself entirely inaccurate but given China’s existing growth this means that for the rest of the decade it would have to grow at 1.6%!!! The reason for such inaccurate predictions is that Michael Pettis makes, as shown in his book The Great Rebalancing, one of the oldest errors in economics – underconsumptionism, that is the confusion of demand (consumption plus investment) with consumption. He himself lists in the opening pages a whole series of underconsumptionist authors.
Coming back to Gavyn’s blog, China’s growth rate continues to be above the target it has set itself of 100% GDP growth in a 10 year period. That will be about 4 times US GDP growth in the same period. China will overtake the US to become the largest economy in the world in approximately 5 years. The rest of the world would be highly delighted to have such a ‘crisis'’.
I actually sort of assume Gavyn doesn’t disagree with those numbers? If I am wrong, and he does then of course it would clarify the debate, if he gave his own. But indicating numbers is the best way to clarify the discussion. My projection is simple – China will hit its 100% GDP growth target over a 10 year period.
The claims 'Abenomics' is a big success are so far fake.
Headlines have appeared such as 'Japan revises up Q1 growth to annual 4.1%' with commentary this, 'was much higher than the preliminary estimate of 3.5 per cent, which was already the fastest rate recorded by any Group of Seven economy.' This ignores that this annualized 4.1% growth in the 1st quarter of 2013 was only recovery from a 3.6% fall in the second quarter of 2012.
Year on year GDP growth in Japan in the 1st quarter of 2013 was only 0.2%, the lowest since the 4th quarter of 2011 - see Figure 1, Table 1, and Figure 2
Figure 1
Table 1
Figure 2
Japan’s GDP remains 1.2% below its peak in the 1st quarter of 2008 and its recovery remains slow – Figure 3.
Figure 3
At best all ‘Abenomics’ has done so far is stop the renewed decline which commenced in Japan’s economy in 2011. But the ‘Abe recovery’ is simply in line with the trend since 2009. Only if the growth seen in the 1st quarter of 2013 continued for a significant period could ‘Abenomics’ really claim any significant success.
In short the claims to date of a big success by ‘Abenomics’ are a fake.
![A worker of a company processes galvanized products in Qingdao, east China's Shandong Province, Nov. 1, 2012. [Xinhua/Yu Fangping]](http://images.china.cn/attachement/jpg/site1007/20131206/001ec949c22b140bddaf34.jpg "A worker of a company processes galvanized products in Qingdao, east China's Shandong Province, Nov. 1, 2012. [Xinhua/Yu Fangping]")