The Global Impact of China’s Growth

By+John+Ross

Chinas 13th Five-Year Plan （2016-20）， which was just adopted by the National Peoples Congress， the countrys top legislature， sets the framework not only for Chinas domestic development， but for other countries economic interaction with it. Consequently， it is important that other states accurately judge the effects that Chinas continued reform and opening-up process will have on them.

The first key point is that the 6.5 percent minimum annual GDP growth target over the plans duration is more important for China and other countries than 2016s individual 6.5-7 percent target. Some commentators have suggested that while China may achieve a 6.5 percent growth target in 2016， this will be followed by a significant slowdown—to 5 percent or below by 2020. If this occurs， China could be drifting toward the “middle-income trap.” The plans calculations， however， make clear that China is not prepared to let this happen， while the key features of Chinas economic structure show there is no reason for alarm.

The decisive target of the new Five-Year Plan is to achieve a “moderately prosperous society.” By the numbers， this means doubling Chinas GDP between 2010 and 2020. Growth in the first half of this decade averaged 7.8 percent. Therefore， to achieve the decades target average annual growth through 2020， the rate must equal at least 6.5 percent. As 2016s target is 6.5-7 percent， this means that no significant slowing will be accepted in the plans later years.

More important than a verbal commitment is that Chinas fundamental economic parameters show that this target can be achieved—statistics have confirmed that Chinas efficiency of investment in generating growth is higher than that of the United States. This means China will maintain its present position as the global economys strongest development point over the next five years.

The second key aspect for other countries to observe emerges from the combination of Chinas rapid growth， with China being a more open trade economy. The latest internationally comparable data show that trade constituted 40.1 percent of Chinas GDP compared to 30.1 percent for the United States. Chinas greater openness means that its growth generates a proportionately greater increase in international trade than equivalent U.S. growth.

In order to accurately grasp these trade trends， it is important to correct any misunderstanding caused by the fact that the dollar value of all major economies trade is currently declining due to the global fall in commodity prices—the latest International Monetary Fund （IMF） data show trade declining by$3.5 trillion， or 11 percent， year on year. However， Chinas world trade share has expanded as it suffered less from this than other major economies. The latest IMF data show Chinas share of world trade has reached its highest level ever.

If Chinas global position in growth and trade continues well-established trends， there are also new key factors that will affect other countries as China makes the transition from a middle-income economy， by World Bank standards， toward a high-income economy. Some factors， such as China becoming the world leader in renewable energy， will have a major indirect effect on global capabilities in fighting climate change.

Two of Chinas direct economic processes also have a particular effect on other countries. First， China is no exception to the rule that all major economies were internationalized first via trade and only later via foreign direct investment （FDI）. But China has unparalleled financial resources to contribute to FDI： Its $3.2 trillion foreign exchange reserves are the worlds highest.

Financial firepower has allowed China to rapidly ramp up its annual outward FDI flow from under $20 billion in 2006 to $118 billion in 2015， to be the driving force behind the Belt and Road Initiative， and to lead multilateral initiatives， such as the Asian Infrastructure Investment Bank and the New Development Bank. China will therefore play an increasingly large role in global bilateral and multilateral FDI.

A second decisive trend is Chinas technological upgrading and the priority given to developing innovative capacity. The new Five-Year Plan will raise Chinas research and development spending to 2.5 percent of GDP by 2020—almost equaling the United States current research and development spending as a proportion of GDP.

It is this huge resource allocation that powers Chinas innovative ability. It ensures that while China switches out industries， it will increasingly export higher-value products. Simultaneously， a consolidation of Chinas lead in cost innovation， an ability to achieve competitive prices by technological and managerial innovation， means global companies will increasingly want to locate research facilities in China.