The developed economies were worried last year about being swallowed up or overtaken by the fast-growing Chinese economy. Now, for a change, China is showing that it is not invincible and is posting trade deficits, inflation and slower GDP growth. It might be time for the worriers to start fretting about the slowing of the second-largest economy in the world and what problems that might entail for the rest of the world.
In the just-concluded National People's Congress, China's version of the parliament, Wen Jiabao, the premier, said China was aiming for just 7 per cent annual GDP growth during the next five-year plan, after posting double-digit growth for the past few years.
What the Chinese government wants in terms of economic growth it gets, or at least the data released confirm it. Cynics may think this is because the Chinese government manipulates the data, and there may in fact be an element of manipulation. Consider the fact that the sum of provincial GDP figures often do not tally with the GDP figures released for the national level for example. But it is also true that China is still very much a centrally planned and government-owned economy, and in such an economy,the government can control investments and other factors to produce the level of GDP that it wants.
The Chinese government seems genuinely tired of piling up exports to other countries and then using the resulting surplus of dollars to buy up US treasuries, allowing the US government to continue to run large deficits. China's latest five-year plan seeks to shift the economy decisively towards domestic consumption and promises to build 10 million affordable homes to stimulate the domestic economy and to try to curb runaway property prices.
China is probably just acknowledging the inevitable. Despite stock market excitement with monthly figures showing that US consumers are buying again, it seems unlikely that the debt-laden US consumer can come roaring back to consume in a big way. So demand is likely to be tepid for China's exports. Even more ominous, the rise of salaries in China and the appreciation of the Yuan mean that wages in China's eastern provinces are no longer low compared with the wages of other poor east Asian countries such as Indonesia, the Philippines and Vietnam. So the supply side also has problems.
At the strategic level, it is obvious that China's government has decided to grab the bull by the horns and try to switch to a consumption-driven rather than export-driven economy. There will no doubt be some challenges in the implementation, but the broad direction is clear enough. The world needs to get used to the switch.
Now that the China is not going to be hell-bent on exporting, the whining countries that used to receive these exports should be happy, right? Not necessarily. As in every game, there will be winners and losers. For example, Germany, the other export machine of the world, may not be that happy. The Germans were selling a lot of machine tools to the exporting factories of China and a lot of cars to those who made millions from thefactories. While Germany may find a way to benefit from the consumption-driven Chinese economy, too, the switch-over will present at least short-term problems for Germany.
One would think that the US, which is the largest market for most of China's exports and which is always accusing China of manipulating the yuan to make China's exports competitive, should be happy. Not necessarily. The US may be happy to receive less exports from China but may not be so happy if that means China has fewer dollars to fund the deficits of the US government. If the Chinese do not fund the yawning deficits of the US, the US government may have no choice but to raise taxes and cut spending, which it is loath to do.
As the Chinese economy slows and a switch to domestic consumption as a driver of economic growth takes place, the world must be prepared to continue listening to complaints about the behaviour of China's economy and government - only that this time the complaints will be about the slowing of the Chinese economy rather than its super growth.