IN face of the West's "Great Stagnation," developing economies will foster greater integration with China, thus lifting China's overall influence in the world.
As G20 leaders met in Cannes, they faced an economic situation in the developed economies best summed up by Goldman Sachs, the company that coined the term "BRIC," as the "Great Stagnation." Until recently developments following the financial crash of 2008 have been accurately termed as the "Great Recession," describing the greatest economic downturn since the 1930s. But the bottom of the downturn has passed in most economies. The chief feature of the situation has become the extremely slow economic recovery in advanced economies, hence the Great Stagnation.
In the third quarter of 2011, the U.S. economic output reached its level at the peak of the previous business cycle at the end of 2007. But in the almost four-year period since the U.S. annual growth was only 0.1 percent. Furthermore, 15 quarters since the previous U.S. business cycle's peak, the 2.6 percent growth seen in the third quarter of 2011 is far from the type of rapid expansion you would expect during the "recovery" period of a U.S. economic cycle. During the previous slowest recovery in the U.S. post-war history following the recession of 1980, by the 15th quarter of the business cycle U.S. economic growth was at 8.3 percent. The present U.S. recovery is less than a third as fast.
The situation in Europe and Japan is worse. In neither has output regained its pre-crisis peak three and a half years after the economic downturn began. In the second quarter of 2011, EU GDP was still 1.9 percent below its pre-crisis level and in Japan it was 6.1 percent lower. For the latter the situation had been worsened by the earthquake and tsunami.
Turning to trade, imports to developed economies in the last year have almost stopped growing. They were 6.4 percent below their pre-crisis peak in June 2010 and 6.1 percent below in August 2011. In the EU, imports were shrinking – 7.8 percent below their pre-crisis peak in June 2010 and 9.6 percent off the level of August 2011.
Given the extremely slow growth in the developed economies and that analysis of underlying macro-economic factors such as savings and investment gives no reason to expect a substantial acceleration of growth. This places China in a new economic situation internationally. For almost the entire period since China launched its economic reforms in 1978, it has been growing more rapidly than other economies but in a context where the developed economies were growing significantly. The only serious previous recession in advanced economies during China's reform period was right at its beginning, in 1980-1981, when China had scarcely begun integrating into the international economy. The international slowdowns in 1990 and 2000 were brief and mild, and while the 1998 Southeast Asian financial crisis had significant impact on China, it did not originate in the developed economies.
Almost uninterrupted growth in the developed economies during the period of China's economic reforms undoubtedly created overestimation within China as to their stability, and Chinese analysis might have been very different if its reform period had overlapped significantly with the international economic crises of 1973 and 1979. Recently, for example, it was astonishing to read articles in the Chinese press about a report by the Boston Consulting Group predicting U.S. industrial revival as though it had already happened when in reality U.S. industrial production is still 6.6 percent below its pre-crisis peak.
In economics and business there is virtue in neither optimism nor pessimism, there is only virtue in realism. Given current trends, China has to base itself on a perspective that for several years there will be slow growth in developed economies and therefore slow growth of their imports. Developing economies, while growing more rapidly than developed ones, will not in the very short term be able to fully compensate China's exports for stagnation in developed economies.
The international framework for China's economy is therefore clear. It is important to understand that what is faced is a "Great Stagnation" not a new "Great Recession" and that is there is no reason to anticipate a major international economic downturn of the 2008 type. China therefore does not need a new huge stimulus program of the type it launched in 2008, as this would lead to severe economic overheating. But the international economic situation requires adjustments in emphasis.
First, even more than previously, China has to rely on developing domestic demand. Greater analytical clarity on this is important as at present domestic demand is frequently confused with domestic consumption – the two are not the same.
Second, while developing economies will not immediately be able to fully make up for the negative pressure on China's exports from the "Great Stagnation," they provide an important addition to China's domestic demand: in the last 15 years the percentage of China's exports going to developing economies has risen from 35 percent to 50 percent. All developing economies face the "Great Stagnation," therefore all face constriction on exports to developed countries, while China's imports are continuing to expand. This will produce greater integration of developing economies with China in both exports and imports.
Within developing economies many of China's top companies, such as Huawei, Haier, and Lenovo, already have high brand values and the present situation therefore creates opportunities to further enhance the positions of China's international brands.
Finally, political discontent in developed countries is growing due to the "Great Stagnation," evident in the political turmoil in Greece and the rise of the "Occupy Wall Street" movement. Many countries realize that win-win economic cooperation with China is the best way to confront the "Great Stagnation," but some unscrupulous politicians are attempting to divert attention from the real problems confronting their economies by "China bashing." China's policymakers therefore are doubtless following both the political and economic aspects flowing from the "Great Stagnation."
