AFTER decades of unprecedented growth, China’s economy has hit heavy turbulence. Its official GDP growth rate has slowed to around 7pc so far this year — from over 10pc in 2010. Industrial output has decelerated sharply, if not contracted outright, while exports have declined 8pc in July followed by another 6pc in August. Other economic indicators, such as electricity consumption, the Purchasing Managers’ Index (PMI) and railway freight volumes, are pointing to even lower industrial production, leading many Western economists tracking China to lower their consensus forecast for GDP growth in 2015 to around 5pc.

China’s main equities index, the Shanghai Composite Index, has declined over 40pc so far since June, wiping off trillions of dollars in market capitalisation. Construction and the real estate sector, which have grown to a sizeable share of the country’s GDP, are being weighed down by overcapacity, tightening availability of financing, and bankruptcies.

Given that China is the world’s second-biggest economy, and is the largest trading nation globally, the impact of a sharp slowdown in its growth rate is being felt around the globe. To put its importance to the world economy in perspective, it is worth considering that while the Chinese economy is roughly 15pc of world GDP, its impact on global growth is far higher. For example, in 2012 economic growth in China contributed 66pc to the expansion in world GDP for that year.

Its huge imports from the rest of the world, nearly $2 trillion in 2014, represent a substantial share of output of many developing countries around the globe. In fact, China is the top export market for a large number of commodity-exporting countries. It accounts for 36pc of Australia’s exports, 24pc in the case of Chile, 19pc for Brazil, 13pc for Indonesia, and 10pc for South Africa.

Reports of China’s economic demise are greatly exaggerated...

Given the high degree of dependence on China, the swoon in the Chinese economy — exacerbated by its currency move in August — sent the global financial markets into a tailspin, with international equity markets losing trillions of dollars collectively in market capitalisation. Emerging markets that are major commodity-producers as well as exporters are experiencing a severe effect due to the collapse in commodity prices caused by slowing demand from China.

The currencies of many emerging markets have fallen sharply as a result. In aggregate, the softness in China’s economic data the past few months has injected a large dose of uncertainty in the global economic outlook.

The downswing in China’s economic activity will almost certainly slow global economic growth substantially this year, and possibly next. A number of highly vulnerable economies, most of them being large commodity producers or those dependent on oil revenues, are likely to even tip into recession. Deflation sparked by a collapse in oil and commodity prices could, under some not-too-implausible scenarios, seriously threaten the global economic recovery for a number of years — though the risk of such an eventuality is moderate at this stage.

The specific impact on Pakistan will depend on the magnitude and duration of China’s slowdown. Pakistan’s exports to China account for 10pc of its total, but the global impact of China’s deceleration is likely to translate into a larger impact. Falling commodity prices will be a boon for the external account, but will hurt government revenue as well as specific segments such as exporters and farmers. However, imports from China are likely to surge as well, due to a combination of the rupee overvaluation and the Chinese yuan’s weakness.

In this backdrop, many are questioning China’s economic model and whether it can deliver the kind of stellar growth rates it has since 1978. Is this truly the end of the Chinese economic miracle? To answer this question, one has to first appreciate the scale and breadth of the rise of China.

Its economy has expanded nearly 50-fold since 1980. From 7pc of the size of the US economy in 1980, China is now at over 55pc — with many predicting that it will overtake the US as the world’s largest economy well before the end of the next two decades. Since its lift-off, nearly 500 million people in China have been moved out of poverty, creating the largest-ever middle class within a country’s borders in all of human history.

The growth of the Chinese economy since 1978 has been unprecedented in many ways. It has been the most rapid, as well as the most sustained, ever for such a populous nation. In addition, as noted earlier, China’s explosive economic performance has lifted the largest number of people out of poverty within three decades, while creating a massive middle class. Much of the transformation in China has occurred since 2000, even though its basis had been laid earlier. One statistic that captures the amount of wealth generation in China in the past decade is the absolute number of US dollar billionaires in the country. Just eight years ago, the number was 18, according to Forbes. This year, that number has shot up to 213.

Nonetheless, recent developments illustrate that China is undergoing yet another economic transformation in its long history. Its model of state-led capitalism has met its natural limitations after delivering for over three decades, and is giving way to an even more market-driven economy. A ‘slowdown’ in GDP growth to around 5-6pc a year, from the torrid pace earlier, will be the new normal for China, with greater growth volatility and the semblance of a business cycle gradually emerging. In addition, its economy will continue to re-balance, with the share of domestic consumption rising further over a period of time. Nonetheless, serious challenges remain, especially the fragile financial health of its state corporations and local governments, the property sector, and the banking system.

However, it is important to realise that China has the tools and financial resources to adjust. And that an adjustment is both ‘natural’ as well as beneficial in many ways in the longer term, both for China as well as for the world, especially if it’s an orderly one.

The writer is a former economic adviser to government, and currently heads a macroeconomic consultancy based in Islamabad.

Published in Dawn, September 18th, 2015

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