China’s Irresistible Rise

LONDON – China’s recently released GDP data for 2017 confirm it: the country’s dramatic rise, with the concomitant increase in its global economic relevance, is not slowing down.

To be sure, there has been fresh media chatter about the reliability of Chinese data, owing to reports that some provinces have been overestimating their economic performance in recent years. But for all we know, other provinces may have been doing the opposite. And in any case, the provinces that have admitted to inflating their data are not large enough to have a significant impact on the national picture.

Moreover, two key points are often lost in the debate about China’s official statistics, which the country first starting releasing in the late 1990s. First, the debate is relevant only if China is increasing the degree to which it overestimates its data. Second, China’s published data should be considered in the context of its trading partners’ own figures, as well as those of major international companies that do business in China. As I have written before, it is telling that China has overtaken both France and the United States to become Germany’s top trading partner.

As for the annualized 2017 data, most of the media focus has been on China’s reported real (inflation-adjusted) GDP growth, which, at 6.9%, represents the first acceleration in a couple of years and an improvement even on the government’s soft target rate of 6.5%. But the more important figure is China’s nominal GDP growth translated into US dollars. Owing partly to a strengthening renminbi, China’s total economic output grew to $12.7 trillion in 2017, representing a massive increase of 13% ($1.5 trillion) in just 12 months.

Clearly, those who have warned that China is following in Japan’s footsteps and heading for a long-term deflationary cycle have been far off the mark. To my mind, such simplistic comparisons are never particularly useful. Not only has China averted the risk of deflation; it has done so with an appreciating currency.

When my former Goldman Sachs colleagues and I first started tracking the rise of the BRIC economies (Brazil, Russia, India, and China) in the early 2000s, we figured that it would take until the end of 2015 just for China to catch up to Japan. Yet 2018 has barely started, and already China’s economy is two-and-a-half times larger than Japan’s, five times larger than India’s, six times larger than Brazil’s, and eight times larger than Russia’s. It is also larger than the entire eurozone.

China’s staggering $1.5 trillion expansion in 2017 means that, in nominal terms, it essentially created a new economy the size of South Korea, twice the size of Switzerland, and three times the size of Sweden. The latest data suggest that China could catch up to the US, in nominal terms, sometime around 2027, if not before. Within a decade after that, the BRIC countries collectively could catch up to the G7 economies.

Of course, such an achievement would be driven largely by China. Still, taken together, the remaining BRICs are larger than Japan. And now that Brazil and Russia have put their recent recessions behind them, the BRICs will likely make a large contribution to nominal global GDP in 2018.

One final consideration for the global growth outlook is the Chinese consumer. Many commentators still discuss China as if it were solely an industrial power. But consumption in China has crept up nearly to 40% of GDP. Since 2010, Chinese consumers have added around $2.9 trillion to the world economy. That is bigger than the United Kingdom’s entire economy. British trade negotiators should take note: after Brexit, the Chinese market will be more important to the UK economy than ever.

Yet, in addition to its annualized data, China also recently reported its December data, which revealed monthly reported-retail-sales growth of a slightly disappointing 9.4% year on year. One hopes that this is a reflection not of a consumption slowdown, but rather of Chinese policymakers tightening financial conditions in the second half of 2017.

Needless to say, as China becomes increasingly important to the global economy, its upside and downside risks will continue to have far-reaching implications for the rest of the world. And, indeed, a consumption slowdown would be bad not just for China, but also for the rest of the world economy, which is now depending on China’s shift from industrial production to domestic consumption.