False Alarm on China
The prospect of an economic meltdown in China seems to be rattling global financial markets at the start of 2016. Yet such fears are overblown, pumped up by a growing misalignment between China’s encouraging progress on structural adjustment in its real economy and disappointing performance on market-based financial-sector reforms.
NEW HAVEN – The prospect of an economic meltdown in China has been sending tremors through global financial markets at the start of 2016. Yet such fears are overblown. While turmoil in Chinese equity and currency markets should not be taken lightly, the country continues to make encouraging headway on structural adjustments in its real economy. This mismatch between progress in economic rebalancing and setbacks in financial reforms must ultimately be resolved as China now enters a critical phase in its transition to a new growth model. But it does not spell imminent crisis.
Consistent with China’s long experience in central planning, it continues to excel at industrial reengineering. Trends in 2015 were a case in point: The 8.3% expansion in the services sector outstripped that of the once-dominant manufacturing and construction sectors, which together grew by just 6% last year. The so-called tertiary sector rose to 50.5% of Chinese GDP in 2015, well in excess of the 47% share targeted in 2011, when the 12th Five-Year Plan, was adopted, and fully ten percentage points larger than the 40.5% share of secondary-sector activities (manufacturing and construction).
This significant shift in China’s economic structure is vitally important to the country’s consumer-led rebalancing strategy. Services development underpins urban employment opportunities, a key building block of personal income generation. With Chinese services requiring about 30% more jobs per unit of output than manufacturing and construction, combined, the tertiary sector’s relative strength has played an important role in limiting unemployment and preventing social instability – long China’s greatest fear. On the contrary, even in the face of decelerating GDP growth, urban job creation hit 11 million in 2015, above the government’s target of ten million and a slight increase from 10.7 million in 2014.