The Upside to a Slowing Chinese Economy

The move might boost other exporting nations, create more sustainable growth in China.

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This week, markets were spooked by news that China is dialing back its economic growth, but the news very likely isn't as unequivocally bad as Wall Street seems to think.

Chinese Premier Wen Jiabao announced this week that his government is setting its target for growth at 7.5 percent this year, after having spent seven years with an 8 percent growth goal. The move is part of a broader shift in the Chinese economy, away from exports and toward greater domestic consumption, said Wen, as the nation looks to increase spending on its poorest citizens while maintaining fiscal restraint in other areas. Though the shift looks like a sign of a slowing economy working to keep its footing, China's new economic strategy could also make for a stronger global economy.

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One key benefit from this shift could be seen in what is called "trade rebalancing," says Michael Klein, a professor at Tufts University's Fletcher School and a nonresident scholar at the Brookings Institution. As the export-heavy Chinese economy dials back its trade surpluses, other countries could benefit, along with the Chinese people.

"To have strong and sustained economic growth, you need countries that have been running trade deficits to move toward trade surplus, but also you need countries that have been running big trade surpluses [like China] to move toward balance, as well," says Klein.

He explains that a trade deficit is the same as if a country is spending more than it's earning, whereas a surplus has the same effect as earning more than one is spending. The first scenario seems like a bigger problem, says Klein, but having far more income than spending can also be a bad thing.

"On an individual level if your spending exceeded your income, eventually your debt would get so big you'd have trouble paying it back," he explains. "But also at an individual level if your income is always exceeding your spending, you're living below your means."

Some of the new policies that Wen promoted on Monday, like higher minimum wages and increased spending on healthcare and agricultural subsidies, could help to boost the notoriously meager standard of living for some Chinese people.

The effect, says Klein, could be economic benefits on both domestic and global levels, as demand grows within China and demand for products from other countries also sees a boost.

Wen's new growth target, however, should be taken with a grain of salt, or at least a bit of statistical context. While the Chinese government has targeted 8 percent growth since 2005, the actual growth rate has been 10.9 percent over the last seven years, as the Wall Street Journal noted. Given this habitual underestimating, there seems little reason to believe that Chinese growth will quite fall to 7.5 percent.

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In addition, the world has already seen some of the benefits of a smaller Chinese trade surplus, says Nicholas Lardy, senior fellow at the Peterson Institute for International Economics, a Washington-based think tank. The Chinese trade surplus, he says, "has already declined quite substantially, down by more than two thirds." That trade surplus is now below 3 percent, down from nearly 11 percent in 2007.

"The biggest moderation has probably already occurred," says Lardy.

He also points out that, while fewer Chinese exports and more Chinese consumption might mean more demand for goods from other countries, the effect—particularly in the U.S.—might only be marginal. American exports to China account for less than 1 percent of U.S. GDP.

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