What will China do to contain its slowdown?

Will China’s economy slow to 5 percent or less this year, as economists project? In the months ahead, the U.S. Federal Reserve, the Bank of Japan and the Bank of England will need to…

What will China do to contain its slowdown?

Will China’s economy slow to 5 percent or less this year, as economists project?

In the months ahead, the U.S. Federal Reserve, the Bank of Japan and the Bank of England will need to continue their stimulative actions, but how much economic damage will ensue?

China’s economy expanded last year by 7.5 percent, and the government has recently lowered expectations again, to around 7 percent. Standard & Poor’s today lowered China’s credit rating to “A-minus” on concerns that growth may slow further.

If its economy fell below 7 percent, China would fall into a deep recession, by Standard & Poor’s reckoning.

China’s economy has a long way to go. It has an unemployment rate around 6 percent and an infrastructure backlog that will take up at least 10 years to pay off.

Meanwhile, the prices of many major commodities continue to decline. Oil prices have fallen almost 50 percent from their peak in June 2014. Wheat prices have dropped around 20 percent since last winter. Over the past year, copper prices have fallen almost 30 percent, aluminum prices have dropped 25 percent, and nickel prices have tumbled almost 40 percent.

Economists are predicting that China’s economy will slow further this year. China is downgraded as a leading growth candidate for the IMF, as oil prices fall and demand for its exports declines. Barclays, in a bold forecast released today, downgraded China’s gross domestic product growth rate for this year to 5 percent.

Central banks and business organizations around the world are scrambling to adapt to the changing world. In recent weeks, the U.S. Federal Reserve said that while it remains on track to raise interest rates next month, it would be a cautious and data-driven process. The Bank of Japan has a new governor who believes that policy should be based on economic conditions and not on projections for future growth. The European Central Bank has been preparing itself for a cut to its monthly bond purchases, which have been ongoing for nearly two years now. Japanese companies now recognize that they need to take defensive action.

The Japanese government has been preparing a comprehensive stimulus package for the past few months. In my December interview with Foreign Policy, Prime Minister Shinzo Abe promised to create a “revitalization tax system” for local governments to alleviate the increasing financial burdens caused by North Korea’s nuclear and missile programs.

Increasingly, Japanese corporations are transitioning to cloud computing. SoftBank announced this week that it would invest $117 billion in internet companies, and has made a $23 billion investment in Chinese e-commerce giant Alibaba, a key player in “new economy” growth.

Even the government is getting into the action. President Xi Jinping has launched a big new promotional effort for China’s socialist economy. Earlier this month, he announced a cap on the number of government jobs at 3.36 million, and he asked local governments to hire more people in the “socialist manufacturing sector.” China’s development has often been focused on meeting the needs of a small group of urban elites, and Xi’s call to make the country more inclusive may be aimed at addressing this problem.

But will these new fiscal measures work? China’s economic numbers may be in a state of flux, but the bottom line is that the Chinese economy has grown by far more than we would have predicted just a few years ago. The question is whether it has matured enough for long-term stabilization. The nature of the global economy is changing, but China is not going anywhere. It will continue to play a major role, and slowly build its status as a technology and infrastructure leader. As I discuss in my chapter of “China 2035,” China will be managing the transition as well as any state. It has the means and the incentive to succeed.

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