"In the100-year view of Nobel laureate economist MichaelSpence, the current global economic woesare linked to the slow and painful adaptation of the developed world to the growing economic cloutof China, India, Brazil and other developing economies.
Spence says it has not yet been fully recognised that the economic malaise is not just a cyclical downturn caused by excess debt, overconsumption, low interest rates and lax regulation, but part of a long-term structural change brought about by globalisation and technology, which are shifting the comparative advantage in a range of industries and services towards the developing world."
As China's domestic market continues to grow, so, too, does its economic power and ability to set global rules. With the country fast approaching a position similar to that of the US and Europe after World War II, much will depend on the policies it pursues in two key areas.
In a recent commentary for the South China Morning Post, Helen Wong, HSBC’s chief executive for Greater China, shows that China’s rising generation of 400 million young consumers will soon account for more than half of the country’s domestic consumption. This generation, Wong notes, is largely transacting online, through innovative, integrated mobile platforms, indicating that it has already “leapt from the preweb era straight to the mobile Internet, skipping the personal computer altogether.” Of course, China’s rising middle class is not news. But the extent to which digitally oriented younger consumers are driving rapid growth in China’s service industries has not yet received ample attention. Services, after all, will help drive China’s structural transition from a middle- to a high-income economy.
In recent years, China has been offloading its labor-intensive export sectors to less-developed countries with lower labor costs. And in other sectors, it has shifted to more digital, capital-intensive forms of production, rendering labor-cost disadvantages insignificant. These trends imply that supply-side growth has become less dependent on external markets. As a result of these changes, China’s economic power is rapidly rising. Its domestic market is growing fast, and could soon be the largest in the world. And because the Chinese government can control access to that market, it can increasingly exert its influence in Asia and beyond. At the same time, China’s declining dependence on export-led growth is reducing its vulnerability to the whims of those who control access to global markets.
Michael Spence on the risks of increasing global debt. 28th April 2016.
What ever happened to deleveraging? In the years since the 2008 global financial crisis, austerity and balance-sheet repair have been the watchwords of the global economy. And yet today, more than ever, debt is fueling concern about growth prospects worldwide.
The McKinsey Global Institute, in a study of post-crisis debt trends, notes that gross debt has increased about $60 trillion – or 75% of global GDP – since 2008. China’s debt, for example, has increased fourfold since 2007, and its debt-to-GDP ratio is some 282% – higher than in many other major economies, including the United States.
A global economy that is levering up, while unable to generate enough aggregate demand to achieve potential growth, is on a risky path. But to assess how risky, several factors must be considered.
First, one must consider the composition of the debt across sectors (household, government, non-financial corporate, and the financial sector). After all, distress in these sectors has very different effects on the broader economy.
As it turns out, economies with similar and relatively high levels of gross debt relative to GDP exhibit sharp differences when it comes to the composition of the debt. Excessive household debt is particularly risky, because a shock in the price of assets (especially real estate) translates quickly into reduced consumption, as it weakens growth, employment, and investment. Recovery from such a shock is a long process.
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