China’s Strategy Shift: Implications for California
China is undertaking two major changes in its economic strategy that will materially affect California. First, it is downshifting to a more moderate growth track, which has already had cascading effect throughout the global economy. Second, it is reorienting its economy from one dependent on exports to one more reliant on consumer spending. Because of China's position as California's third largest export market (after Mexico and Canada) and the rapid growth we have seen in that market, understanding the implications of these strategic changes is vitally important.
More Temperate Growth
Over the past three years, China's leaders have debated what annual growth rate in real gross domestic product (GDP) should be targeted as a sustainable trend. Projections regarding an aging labor force, con-cerns about pollution, and the country's demands on the world's natural resources have all played a role in this debate. China's economy consistently racked up double-digit growth rates of 10-14% between 2003 and 2007. Growth continued in the 9-10% zone in the subsequent four years, 2008-2011, before edging below 8.0% to 7.8% in 2012. Growth is likely to equal about 7.5% this year, which would be consistent with China's target for 2013. (See Figure 3.) Annual real GDP gains of 7.0% to 8.0% are likely to be seen as the new norm for the nation over the next five years.
As part of its strategy to moderate growth, China is try-ing to curb excessive credit expansion, particularly in the "shadow banking system." Pawnbrokers, trusts, and many banks through their off-balance sheet operations have sold wealth-management products, often linked to opaque and questionable real estate structures. These activities could further inflate prices in commercial or residential real estate and exacerbate problems in the banking sector China is attempting to temper the growth of money and credit, while providing enough liquidity to facilitate business and economic gains.
Rebalancing Growth
China is also striving to rebalance its economy from exports, supplemented by large amounts of state-directed capital spending, to an economy relying more on con-sumer spending. Global imbalances in trade and invest-ment flows have persisted for a number of years, with China spending too little and saving too much, while the U.S. does just the opposite. In China, the personal saving rate is about 30%, while in the U.S., it is around 4.5%. Meanwhile, consumption accounts for about 35% of China's GDP, which is half the U.S. ratio. China is now trying to rectify its side of the equation.
To boost consumer spending, China is moving to bolster household incomes by raising the minimum wage and supporting labor's drive to secure higher earnings. It is also expanding the "social safety net" by providing increased health care and retirement benefits. These policies are intended to encourage individuals to spend more in the present instead of saving large amounts for future medical and old-age needs.
The California-China Nexus
In response to China's rapid growth during the past several years, California's exports have nearly tripled over the decade. In 2003, California shipped $5.4 billion worth of goods to China. This year, exports will reach an estimated $14.8 billion. (See Figure 4.)
California companies send a wide variety of manufactured goods and commodities to the Chinese market. These range from highly-sophisticated technology products to recycled materials. Some of the largest exports by value include electrical machinery, optical equipment, nuclear reactor components, wood pulp, cotton, recycled metal, chemicals, pharmaceuticals, fish, fruit, nuts, and dairy products.
Impact on California
A slowing in China's overall economic growth can be expected to mean slower growth for many of the state's key ex-ports to this important country. At the same time, California manufacturers, homebuilders, and consumers can be expected to benefit from a slowing in the pace of price increases for various commodities, including costs for various metals and construction materials.
Real GDP growth of 7-8% will still place China as one of the leading nations in the world for market expansion. California companies will need to concentrate on products with a greater technology content as China focuses on elevating productivity. Our firms that can serve a burgeoning consumer market also stand to prosper. Chinese consumers are likely to continue to place a high premium on American goods, particularly those made in a trend-setting state such as California.
It will also be vital to focus on opportunities in the services sector in addition to the goods side. Rising incomes and wealth mean that large numbers of Chinese will be traveling to our state, seeking education in California institutions and taking advantage of advanced medical care facilities located here.
On balance, China's new economic strategy to allow more moderate growth with a different mix poses risk for its own citizens, for the global economy, and for California. However, if we recognize the changes under way and prepare for them, California can take a lead role in facilitating change and benefiting from it.
Lynn Reaser, Ph.D., is chief economist of the Controller's Council of Economic Advisors. She is also chief economist of the Fermanian Business and Economic Institute at Point Loma Nazarene University.
Figure 3: China’s Growth Moderates
(Real GDP, percent change over prior year)
Figure 4: California Exports to China Nearly Triple Over Decade
(Billions of Dollars)
