China Is Changing, Far Beyond Tariffs and Exchange Rates

(Bloomberg Opinion) -- This is not your grandfather's China. It's not your father's China. At this rate, quite soon it won't even be your China.

Recognizing the passing of an era is key to understanding what the world economy will look like beyond the next couple of quarters. That big picture is what is lost in the current handicapping of specific yuan levels and the next tariffs.

The larger point is that China is evolving into a different animal from the one that's buoyed world commerce the past couple of decades. The current moment is likely to force new changes to the Middle Kingdom's role in the global economy and accelerate trends already in progress.

It's not a stretch to figure China's economic growth may slip to 6 percent this year and less in coming years. The pace has been slowing for the past decade. The halcyon days of double-digit expansion are gone.

It was the bountiful promise of an inexorable boom and a billion-plus people that drove the “China rising” narrative. A favorable, or at least benign, international operating environment underpinned that assumption.

A fellow traveler assumption that, by extension, deserves some scrutiny is the ubiquitous “Asia is the future of the world” line. When many people say that, they're thinking of China's performance to date.

And indeed, China is hardly on the verge of a recession. But a recent report from Merrill Lynch Bank of America argues something worse may be in store: a prolonged period of difficult relations with the U.S., which is still the world's largest economy and biggest capital market.

America is the only country with the heft and apparent determination to block China's rise, say the authors, Joseph P. Quinlan and Lauren J. Sanfilippo. Recessions come and go. Business cycles are, you know, cyclical. What they are talking about is something structural. And bear in mind: Even before President Donald Trump took office, China was already changing, with less focus on manufacturing, exports and public investment.

If you take seriously the idea that ties with China are unlikely to be the same again, and if you recognize that China has prospered by being part of the existing system, then you need to ask what the setup will look like without that. China would be less of an anchor for global growth, much less of a low-cost location for manufacturing. And next time a global slump hits, China would be less of a willing partner with a massive wallet. Any country with an economy of significance will need to rethink what its commercial ties with China look like.

This is all true whether or not Trump and the Chinese president strike a short-term truce. These big shifts don't hinge on whether and when the yuan will drop to 7 per dollar, or whether the next U.S. tariffs on Chinese goods are 10 percent or 20 percent. Think bigger.

To contact the editor responsible for this story: Philip Gray at philipgray@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Daniel Moss writes and edits articles on economics for Bloomberg Opinion. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.

©2018 Bloomberg L.P.