Third, Chinese rebalancing means a partial transfer of demand from investment-related spending to consumption-related spending. A reduction in economic growth will have a disproportionately large impact on reducing investment growth, and a disproportionately small impact on reducing consumption growth. German exporters of capital goods, for example, will suffer much more than German exporters of consumer goods.
How a Chinese slowdown affects the global economy, in other words, depends crucially on how China rebalances. The seeming determination of Premier Li Keqiang to come to grips with debt and force a rebalancing even if that brings, as it must, a sharp slowdown in economic growth bodes well for an orderly rebalancing which will benefit most of the world.
What about the social impact of slower Chinese growth - can ordinary Chinese tolerate growth rates much below 7 percent? The same process that determines the impact of slower Chinese growth on the rest of the world will also determine how it will affect ordinary Chinese.
Slower growth after 1990 did not outrage ordinary Japanese largely because it did not result in equivalent contraction in their economic prospects. The average Japanese household, like households everywhere, doesn't care about changes in its per capita GDP. It cares about real changes in its disposable income. As Japan was forced to rebalance its economy after 1990, one of the implications was, by definition, that household income and household consumption grew as a share of overall GDP, just as it must in China. After many years in which household income growth lagged the high GDP rates of the 1980s, it began to exceed the much lower GDP growth rates of the next decade, and this was magnified by the twin forces of deflation and a declining population.
The growth rate of income for the average Japanese household, in other words, slowed much less than GDP growth rates after 1990. As a result, the shocking collapse in GDP growth was not reflected in an equally shocking collapse in household income growth. Japanese households were not so badly hurt by Japan's apparent economic stagnation because the slowdown occurred in conjunction with an orderly rebalancing of the economy.
Depending on how Beijing manages its own economic adjustment, the same can happen in China. There should be little doubt that China's GDP growth rates will continue to drop, and to levels well below the 6 to 7 percent that most analysts now suggest as a worst-case scenario for China. In fact it's hard to see how a rebalancing China is consistent with GDP growth rates on average much above 3 to 4 percent.
By definition, a rebalancing China means that household income must grow much faster than GDP. This will not be easy and will require significant transfers from the state sector to shore up the social safety net, boost household wages and raise deposit rates. But if the rebalancing is managed well, GDP growth rates of 3 to 4 percent can be consistent with household income growth rates of 6 to 7 percent. This is far from being a disaster for ordinary Chinese.
China's economy will continue to slow dramatically over the next few years. Of this there should be little doubt. The implications, however, are not as obvious as many think. They depend on how successful and orderly the rebalancing process will be in the face of tremendous domestic opposition from elites who have benefitted spectacularly from three decades of unbalanced growth. An orderly rebalancing in China will be positive for overall global growth - although not positive for every country - and positive for ordinary Chinese, if not for the elite. What matters are the decisions Beijing takes over the next year to direct the pace of China's rebalancing.
