TOPICS > Economy

Can China use the slowdown to change its economy?

January 19, 2016 at 6:35 PM EDT
China's economy grew last year at the slowest pace since 1990, at a lower-than-expected rate of 6.9 percent. Jeffrey Brown talks to Ken Lieberthal of the Brookings Institute and Cornell economist Eswar Prasad about what that means for China and global economic stability.

JUDY WOODRUFF: But, first, worries over global economic growth, falling markets, and China’s connection to what’s happening.

Jeffrey Brown zeros in on the China piece of the story.

JEFFREY BROWN: Six-point-nine percent annual growth, it doesn’t sound so bad, but context and direction are everything. And China’s latest quarterly GDP numbers were lower than expected, and the year showed the slowest pace of growth there in 25 years, all of course with huge implications for the rest of the world, the U.S. very much included.

We get perspective from two who watch this closely, Ken Lieberthal, a political scientist with the Brookings Institution, and Cornell University economist Eswar Prasad.

Welcome back to both of you.

Ken Lieberthal, let me start with you.

How much of a slowdown, downturn is it? How do you characterize China’s economy today?

KENNETH LIEBERTHAL, Brookings Institution: Well, it’s a significant slowdown, but let’s keep in mind they wanted the GDP rate to slow down.

JEFFREY BROWN: They wanted it?

KENNETH LIEBERTHAL: They wanted it. The question is, can they use this slowdown to transition to a different economic model?

And they’re having a rocky time doing that. That is in progress, but it’s a tough balancing act, and I think it’s not going quite as smoothly as they had hoped.

JEFFREY BROWN: All right, we will get to the larger model change.

But, Eswar Prasad, first, this big question: How much of a slowdown? What do you see?

ESWAR PRASAD, Cornell University: China’s economy has been powered by the manufacturing sector. There has been a lot of investment in the economy, not all of it very good investment.

China has to some extent relied on exports. And they’re trying to shift towards a model of growth that is largely driven by the services sector, which is much better at generating employment. They’d like more consumption in the economy, with private consumption taking the lead.

And they’re making very gradual progress. Right now, it turns out that in 2015 private consumption did contribute a little more than half of GDP growth. The services sector now accounts for more than half of GDP.

So, this is a big ocean liner. It’s very difficult to turn around, but they’re very gradually turning it around in the right direction. The problem is that slowing growth makes it harder to put in place the reforms to get the ship staying on the right road.

JEFFREY BROWN: The numbers themselves, though, first, how accurate are they, right? Do we believe the numbers that come from China on their GDP?

KENNETH LIEBERTHAL: It’s very hard to tell.

Keep in mind that their statistical system was really quite good at capturing the — what’s now the old economy, the industrial economy, the export economy that Eswar was just talking about. That economy is not doing well. They’re now trying to grow, as he mentioned, the service economy and consumption economy.

The statistics are not collected as effectively on that part of the economy. So there’s a fudge factor here that, frankly, makes it hard to be very precise.

JEFFREY BROWN: So this is the model that you’re both talking about, this change, right, from a manufacturing to a more consumer-oriented, a service economy.

KENNETH LIEBERTHAL: And also more of an innovative economy, where they end up not being the assemblers of high-tech things produced elsewhere, where they bolt them together in China for export or domestic consumption.

They want to become an innovative, higher value-added kind of economy. And that’s a difficult transition.

JEFFREY BROWN: And would you agree that part of that is inevitable, as the economy becomes — well, as Ken was saying, that they want to, in part — some of this has to happen, right?

ESWAR PRASAD: It has to.

And if it doesn’t, there is going to be a huge cost on China, because the model that has been in place so far, investment-driven, industrial-led growth, it’s led to a lot of very inefficient investment, and China is living with the consequences to this day. There are lots of loans taken by state-owned enterprises that are not going to be paid back, and somebody is going to have to pay the bill.

Although this isn’t likely to lead to a financial crisis, it’s still a big bill for Chinese citizens. Plus, the environmental consequences of this industrial-led growth have not been great, and it’s not been that great at generating employment.

So, in terms of GDP growth, it’s been a great model, but in terms of the environmental, human consequences and consequences in terms of the benefits for the average Chinese citizen, not so great.

JEFFREY BROWN: Part of those human consequences, of course, an aging population as well, right, a work force?

KENNETH LIEBERTHAL: Yes. That’s a result in part of their one-child policy. And they’re really now paying the price for that, because they have had a large number of people entering the work force for years, and a large number of working age.

Now the number of people of working age in China is actually beginning to decline every year, and it isn’t being made up by kids too young to work. Rather, they have an explosion in the number of people who are now retiring and, you know, getting much older, and therefore have a lot more demands for health care and all kinds of other things that are going to tax their system.

JEFFREY BROWN: So, to the extent that you are both saying this is about managing this change — Eswar, you can start with this — where do you see the country, the government doing well? Where do you see it doing poorly?

ESWAR PRASAD: Over the last year, there have been some reforms put in place, but largely in terms of the financial system. They started getting some changes instituted in the banking system.

They’re trying to make the currency float more freely. But the real side reform, the reforms to liberalize the services sector so it can grow faster, generate more employment, take on the burden of growth, the reform of the state-owned enterprises, all of those are real side, supply-side reform, including the reforms to increase innovation, as Ken mentioned, those are not going so fast.

And if those reforms don’t supplement the financial sector reforms, this economy is not going to go in the right direction.

JEFFREY BROWN: What would you add to that? And bring in — and, of course, we’re talking about the — inevitably about the political system’s impact on the economy, right?


And in China, local levels of the political system, you know, province — most provinces are as big as countries are in Europe, for example — province on down, really have a huge role to play in this system. They have been generators of the kind of GDP growth that we have seen over the years.

The way this is being approached now has the heads of these local political systems running very scared, unclear what will be rewarded and what will be punished, afraid of being tagged with corruption, not getting the kinds of rewards they used to get.

And so the way they’re pursuing this is in some ways making it very difficult to implement some of these headline programs that you see announced at the top. It’s a kind of hidden story that, in fact, I think it’s having — is slowing down the real economy reforms quite a bit.

JEFFREY BROWN: And, Eswar, we just have about 30 seconds.

But we have been talking on this program, of course, and everywhere, talking about the impact of all this on the rest of the word, right, markets and all kinds of things. That will continue.

ESWAR PRASAD: There’s a lot of bad news coming out of China. The stock market hasn’t been doing well, the currency is plunging, but all of this doesn’t mean that the real economy is really collapsing or even stalling.

I think there is decent momentum in the underlying economy. And what we should all be looking for is not how fast China grows, but how it grows. And I think it’s slowly moving in the right direction, but there’s a lot of work to be done still.

JEFFREY BROWN: A lot of changes to come that will impact us.


JEFFREY BROWN: Eswar Prasad, Ken Lieberthal, thank you both very much.


ESWAR PRASAD: Thank you.