China in the Global Economy

SF Fed President John Williams talks with Zheng Liu, Mark Spiegel, and Fernanda Nechio of the international research team about China's economic slowdown and how it's affecting global economic activity (video, 6:08).

In the 2015 annual report, What We've Learned...and why it matters, we share our research findings about the slowdown in China's economic growth and its effects on the U.S. economy, emerging market economies, and global commodity markets. Cyclical and structural factors underlie the slowdown. We discuss the impact of trends in exports and investment, and the country's transformation from a manufacturing-based economy to a service-based economy. We believe China's days of 10 percent economic growth likely are over.


Hide this section

John Williams:

Zheng, China's growth has slowed quite a bit over the last five years. Are the days of 10 percent growth behind China? What is happening in China's economy, and what are the Chinese leaders doing to try to liberalize their economy and keep it on its growth trajectory?

Zheng Liu:

A lot of people have that question. I think essentially, the days of 10 percent growth are over. Since 2011 in fact, China has been slowing. The growth has slowed significantly. That has to do with the slowdown in exports because of the global financial crisis, and also the slowdown in investment growth. In the meantime, China has shifted away from a manufacturing-based to service-based economy. In the past 20 years, service sector as a share of total GDP has increased from around 30, 35 percent, to now about 50 percent. In early ‘80s, about 200 million people out of the 1 billion population lived in cities. Now it's 770 million out of 1.3 billion.

Along with the structural change, when the economy shifts away from manufacturing towards services, when there is a structural policy, reform policies continue to be implemented, the economy will naturally slow down. This structural factor coupled with the cyclical factor I mentioned—export, investment—together lead to the slow growth in China.

John Williams:

Mark, as you think about the potential implications of a slowdown in China for the U.S. economy, especially in light of the fact that we're all so interconnected in the global economy today, what do you think a slowdown in China would mean for prospects here at home?

Mark Spiegel:

China is a large country and an important trading partner of the United States. But overall, trade with China is still a small number relative to the overall size of the U.S. economy. Therefore, the direct implications from lost trade with China on the U.S. economy are likely to be limited. However, there is a possibility that the slowdown in China will have indirect implications for U.S. trade patterns, because of the fact that China is an important trade partner for other countries as well. There are some risks that might make us think that that might be the case in the sense that as China has been re-balancing towards its service sector, its service sector has been growing and overall GDP, the headline numbers, are not small enough to be indicative of a hard landing. But those numbers hide the fact that, while the service sector is growing, the service sector is not one that is relatively open to trade. Most of the trade that China does is because of its industrial sector.

John Williams:

Fernanda, China is now the world’s second-largest economy and clearly, it's much more connected with the rest of the global economy and with the U.S. economy. What role has China's economic development over the last few years played in affecting oil and other commodity prices?

Fernanda Nechio:

In recent years, we've seen a big increase in the supply of commodities and oil. In terms of oil production, we have been seeing alternative sources of oil and alternative ways of producing such, as shale oil and fracking. We are also seeing some geopolitical changes. Weakening demand plays a role. China is the biggest consumer of a number of commodities and also one of the largest importers of crude oil. The slowdown in the Chinese economy has to play a role in the declining commodities and oil prices. One thing that we have to keep in mind is that although China is a big player in both commodities and oil markets, its relative importance is much bigger for commodity prices. Something else has to be driving the decline in oil prices.

Analysts have been estimating that the bulk of the decline in oil prices has been caused by the increase in supply that I mentioned before. The estimates are such that around 20 to 30 percent has been driven by demand, by the declining demand in China and other economies.

John Williams:

China is a big factor, but it's not the only one. There are really extensive trade linkages between China and other emerging market countries. When you think about China's slowdown, it could have a pretty big negative effect on some emerging market countries. How do you think of that in terms of what are the effects going to be on emerging market countries on China's slowdown? Also what are some of the policy responses we might expect from those countries?

Fernanda Nechio:

The direct effects come from countries that are very big exporters to China. As the Chinese economy is slowing down, these economies are certainly going to be affected negatively. In terms of the indirect effects, the slowdown in China's main trade partners may also affect other economies that don't trade as much with China. For example, we can take South Africa, a big trade partner of China, but [South Africa] also trades a lot with other countries in the region. As the Chinese economy slows down, the South African economy also slows down, and they're going to likely buy less goods from the other countries in the area, so other, smaller economies can also be affected. In terms of policy, the slowdown in China and the declining commodity prices that we talked about before is likely to ease inflation pressures in these emerging economies and to reduce their growth. This opens the opportunity for some governments and central banks in emerging economies to try to take measures to boost the economy.

The risk to the U.S. and to other economies is that some of these measures to boost the economies may weaken their currencies, and this would affect trade competitiveness in the U.S.


Is China's Growth Miracle Over?

Global Fallout from China's Industrial Slowdown

An Overview of Our 2015 Annual Report

Redefining the Labor Market

The Fed's Balance Sheet

Regional Influences on Monetary Policy

Transforming Financial Services

Technology for Today’s Fed

Becoming a Destination Employer

The Future of Cash

Creative Placemaking

Health and Prosperity

The Fragility of Finances

2015 Annual Report: President's Letter