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The new Chinese model

The new Chinese model

Winners and losers

Analysis by Michael Pettis, an theoretical economist and financial strategist, who lives in Beijing and is a professor at the University of Guanghu. Pettis has been called a “brilliant economic thinker” by the Wall Street Journal.

China is changing its economic growth model,  or trying to at least. The leaders of  Asian Giant are seeking to change the locomotive of economic growth from massive investment to domestic consumption .In order to achieve this purpose; they must increase the purchasing power of families. This change is likely to slow down the pace of GDP growth.

In a recent paper, Michael Pettis, a theoretical economist and financial strategist who lives in Beijing and is a professor at the University of Guanghu, says the economic band’s growth will be over the next decade about 3-4%. There are more optimistic forecasts announcing a range of 5-7%. However, perhaps most interesting is what global impact these changes might bring.

Pettis points to four. The first one, is a strong downward pressure on the prices of hard commodities such as aluminum, copper or iron. In terms relative to its GDP, China imports between 4 and 10 times more of these goods than the world average. With a less buoyant investment, these commodities could fall to 50% in the coming years. This fall in prices will benefit countries that import these goods (and those who hurt exports). Also will benefit companies to which these commodities represent a significant portion of their costs. According to Pettis, there are good news for food-producing countries, with more consuming power more Chinese families will continue to demand more foods.

new china model

The second change is that countries and companies supplying China with consumer goods will see changes in their demand. In net terms, the change will not be great but it will, says Pettis, benefit some providers and others will be harmed.

The third point is related, demand will fall for construction supplies, heavy manufacturing, transportation and all the other sectors that have fueled China’s investment boom.

Finally, the fourth point is that the change in the set of China’s relative prices will result in benefits for those countries that rely heavily on their industry to grow, as the Asian Giant will be less competitive. For example, says Pettis, countries like Mexico are already benefiting from it.

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