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Once again, all eyes are on emerging markets. Long the darlings of the global growth sweepstakes, they are being battered in early 2014. Perceptions of resilience have given way to fears of vulnerability.
The US Federal Reserve’s tapering of its unprecedented liquidity injections has been an obvious and important trigger. Emerging economies that are overly dependent on global capital flows—particularly India, Indonesia, Brazil, South Africa, and Turkey—are finding it tougher to finance economic growth. But hand-wringing over China looms equally large. Long-standing concerns about the Chinese economy’s dreaded “hard landing” have intensified.
In the throes of crisis, generalisation is the norm; in the end, however, it pays to differentiate. Unlike the deficit-prone emerging economies that are now in trouble—whose imbalances are strikingly reminiscent of those in the Asian economies that were hit by the late-90s financial crisis—China runs a current-account surplus. As a result, there is no risk of portfolio outflows resulting from the Fed’s tapering of its monthly asset purchases. And, of course, China’s outsize backstop of $3.8 trillion in foreign-exchange reserves provides ample insurance in the event of intensified financial contagion.
Yes, China’s economy is now slowing; but the significance of this is not well understood. The downturn has nothing to do with problems in other emerging economies; in fact, it is a welcome development. It is neither desirable nor feasible for China to return to the trajectory of 10% annual growth that it achieved in the three decades after 1980.
Yet a superficial fixation on China’s headline GDP growth persists, so that a 25% deceleration, to a 7-8% annual rate, is perceived as somehow heralding the end of the modern world’s greatest development story. This knee-jerk reaction presumes that China’s current slowdown is but a prelude to more growth disappointments to come—a presumption that reflects widespread and longstanding fears of a broad array of disaster scenarios, ranging from social unrest and environmental catastrophes to housing bubbles and shadow-banking blow-ups.
While these concerns should not be dismissed out of hand, none of them is the source of the current slowdown. Instead, lower growth rates are the natural result of the long-awaited rebalancing of the Chinese economy.
In other words, what we are witnessing is the effect of a major shift from hyper-growth led by exports and investment (thanks to a vibrant manufacturing sector) to a model that is much more reliant on the slower but steadier growth dynamic of consumer spending and services. Indeed,