Embracing China's "New Normal": Why the Economy Is Still on Track

By Angang, Hu | Foreign Affairs, May/June 2015|

It is clear by now that China's economy is set to slow in the years to come, although economists disagree about how much and for how long. Last year, the country's gdp growth rate fell to 7.4 percent, the lowest in almost a quarter century, and many expect that figure to drop further in 2015. Plenty of countries struggle to grow at even this pace, but most don't have to create hundreds of millions of jobs over the next decade, as China will. So understandably, some experts are skeptical about the country's prospects. They argue that its productionfueled growth model is no longer tenable and warn, as the economist Paul Krugman did in 2013, that the country is "about to hit its Great Wall." According to this view, the question is not whether the Chinese economy will crash but when.

Such thinking is misguided. China is not nearing the edge of a cliff; it is entering a new stage of development. Chinese President Xi Jinping has called this next phase of growth the "new normal," a term that Mohamed El-Erian, the former ceo of the global investment firm pimco, famously used to describe the West's painful economic recovery following the 2008 financial crisis. But Xi used the phrase to describe something different: a crucial rebalancing, one in which the country diversifies its economy, embraces a more sustainable level of growth, and distributes the benefits more evenly. The new normal is in its early stages now, but if Beijing manages to sustain it, China's citizens can count on continued growth and material improvements in their quality of life. The rest of the world, meanwhile, can expect China to become further integrated into the global economy. The Chinese century is not at the beginning of the end; it is at the end of the beginning.

FOLLOWER TO LEADER

Understanding China's new normal requires some historical context. As a latecomer to the modern economy, China has followed what one could call a "catch-up growth" model, which involves rapid economic growth following years of lagging behind. From 1870 to 1913, for example, the U.S. economy followed precisely this path, growing at an average rate of four percent. Between 1928 and 1939, Russia's gdp grew at an average rate of 4.6 percent. And from 1950 to 1973, Japan's economy grew at an average rate of 9.3 percent. Yet none of those countries came close to matching China's record from 1978 to 2011: an average gdp growth rate of nearly ten percent over 33 years.

This ascent has helped China's economy approach, and perhaps even surpass, that of the United States. In terms of purchasing power parity, a measure economists use for cross-country comparisons, China's gdp surpassed that of the United States in 2010 or 2014, depending on whether one relies on historical statistics from the Maddison Project or data from the World Bank's International Comparison Program. Yet if one relies on the World Bank Atlas method, China's economy won't likely outgrow the United States' until 2019. And China's gdp still trails that of the United States if calculated using current U.S. dollars. But the best method for comparing the two economies objectively is power generation, since it is physical and quantifiable. It also closely tracks modernization; without electricity, after all, or at least without a lot of it, one can't run factories or build skyscrapers, which is exactly what China has been doing. In 1900, China generated 0.01 percent of the power the United States did. That figure rose to 1.2 percent in 1950 and 34 percent in 2000, with China surpassing the United States in 2011. In this respect, China has caught up.

China's rise has also brought massive benefits to the country's population, although here there is obviously much more to be done. With a population more than four times as large as that of its closest economic competitor, China won't likely match even half the United States' gdp per capita until around 2030. To be sure, the country has made major strides in other areas. …

Embracing China's "New Normal": Why the Economy Is Still on Track