It is the end of an era for China, and also for Latin America.
After expanding by at least eight percent, and often by double digits, for more than a decade, the Chinese economy is entering a period of slower growth. In 2012, it grew by only 7.8 percent, and the government's official growth target for 2013 is even lower (7.5 percent). Those numbers are obviously quite high by U.S. and European standards, but China is still a developing country with widespread rural poverty, and according to the New York Times, the Communist Party is hoping to relocate another 250 million people from the countryside to towns and cities by 2025. Chinese officials have long believed that eight percent annual GDP growth is the minimum required to ensure "social stability." Now they are dealing with a severe credit crunch, as years of debt-financed investment spending have left Chinese banks holding a massive quantity of bad loans, the value of which has now increased for seven consecutive quarters.
Indeed, IMF researchers have calculated that, between 2007 and 2011, "China may have been over-investing by between 12 and 20 percent of gross domestic product relative to its steady-state desirable value." As a result of excessive investment and mad-dash urbanization, the country has empty cities, empty airports, empty trains, empty highways, and empty shopping malls. Once-booming communities are now being devastated by China's credit tightening. A recent Times dispatch described how, in the Shenmu region of northern Shaanxi province, "thousands of businesses have closed, fleets of BMWs and Audis have been repossessed and street protests have erupted." In a report issued last month, China's state-run Development Research Center flatly declared that the Chinese economy "has become unstable and uncertain like never before."
The good news, writes Ian Bremmer of Eurasia Group, is that China's new leaders (who assumed full power in March) appear "willing to begin undertaking modest economic reforms." Peking University finance professor Michael Pettis agrees, noting that the government of President Xi Jinping "seems determined to make the necessary changes, even at the expense of much slower growth." But rebalancing the Chinese economy -- making it less dependent on investment and more dependent on consumption -- won't be a quick or easy process. Pettis warns that, "if the economic rebalancing is managed well," average Chinese growth rates will probably stay at or below 3 to 4 percent. That would be a major change from the torrent growth China experienced over the past three decades.
It would also mean major changes for global commodity producers. Writing in the Wall Street Journal, renowned energy expert Daniel Yergin observes that the China-fueled commodity "supercycle" is over, and the export-driven economies that reaped huge benefits during the supercycle will have to adjust.
