Riding the ‘new normal’

“When China sneezes, the world catches a cold,” a foreign columnist wrote recently about the influence of China’s giant economy.

Only about a decade ago, China’s share of the global economy was not significant. But since last year, China’s purchasing power parity (PPP) became higher than that of the United States. Based on the current exchange rate, China’s gross domestic product is expected to account for 15 percent of global gross domestic product this year. The United States is expected to comprise about 25 percent. Of course, China’s remarkable rise is the outcome of 10-percent annual growth over the past 30 years, thanks to its steady policy of reform and opening to the outside world since the late 1970s.

It’s easy to predict the impact of the gargantuan Chinese economy on the global economy. Since the 2007-2008 financial meltdown and economic crisis originating in the United States, China has managed to keep its rapid growth and served as a locomotive for global economic growth by accounting for 25 percent of the growth. And yet, the Chinese economy grew only 7.4 percent last year, and the outlook is hazy for even 7-percent growth this year. Recently, the International Monetary Fund (IMF) estimated that the Chinese economy will grow about 6.8 percent this year.

What we must keep in mind is that the Chinese economy is at a stage of development that requires a new growth paradigm. The new paradigm is now called “xin chang tai,” the Chinese translation of the “new normal.” This concept is also reflected in China’s 13th five-year plan for 2016-2020, an economic roadmap that predicts the country’s growth will slow to an annual 6.5 to 7 percent.

In order to maintain xin chang tai, China must resolve a series of structural problems. The imbalance between domestic demand and exports; a mismatch between investment and consumption; a disparity between the manufacturing and service sectors; and development and income gaps in different regions and between the urban and rural areas. In addition, the accumulation of unhealthy debt, the distorted distribution of resources, environmental destruction and a general weakening of the foundation for sustainable growth need to be addressed.

Restructuring in each field has already started, and there is no doubt that the outcome will determine the future of the Chinese economy.

At any rate, the transformation to a new normal for the Chinese economy will surely have an enormous impact on the world’s economy and virtually every country. First, slowed overall growth of the world’s largest commodity importer and oil consumer and its rebalancing of its manufacturing and services industries will pull down prices for raw materials, including oil, which will lead to the devaluation of the currencies of commodity and oil exporters along with capital flight, dealing a substantial blow to them. In Latin America, Brazil and Chile are already feeling the impact, as are Russia and South Africa.

Second, a rebalancing by China as the world’s largest manufacturing and processing factory - less emphasis on exports and more on domestic consumption - will also have a considerable impact on exporters of intermediary goods and capital goods to China, such as Korea.

The world is now paying close attention to whether China can avoid a hard landing and transition relatively gently to xin chang tai or a new normal of lower growth. I believe there is a slim likelihood of a sudden fall in the economy. It’s important to remember that China has stronger fiscal, financial and foreign currency capabilities than other major economies to deal with a crisis. China’s policy makers also maintain a strong level of crisis management ability.

Therefore, the crucial challenge for Korea is how to wisely respond to the China’s xin chang tai and turn it into an opportunity for a better future. The Korean government must create an atmosphere to fully take advantage of the growing demand for services among China’s rapidly growing middle class. To this end, a series of bills pending at the National Assembly, such as a basic law to develop the service industry, must be passed as soon as possible.

At the same time, we must put strategic effort into rebalancing our portfolio of exports in terms of destination because about 25 percent of our exports are concentrated on the China market. The Korea-Japan free trade agreement and Korea’s participation in the Trans-Pacific Strategic Economic Partnership also should be pushed forward aggressively to meet that goal.

The world’s equity and currency markets are expected to fluctuate for a considerable period of time due to the Chinese economy’s xin chang tai and the Fed’s raising of short-term interest rates, which is expected to come at the end of this year and early next year.

In such a tough time, we must enforce a policy that can improve the market’s confidence in our economy. That’s another reason for the successful implementation of labor market reforms being pushed by the government.

On the eve of the 1997-98 Asian financial crisis, the government hurriedly and loudly pushed for financial reforms and failed while the world was watching us. We must never again repeat such a mistake.

Translation by the Korea JoongAng Daily staff

JoongAng Ilbo, Aug. 31, Page 28

*The author, a former finance minister, is an adviser to the JoongAng Ilbo.

by Sakong Il