The International Effects of China's Internal Economic Rebalancing

NEAR the centre of Sumatra, an Indonesian island once blanketed by forest, a gash in the ground reveals the wealth that lies just beneath its surface. Large yellow diggers prise out coal and tip it into 60-tonne lorries that huff their way to the top of the open-cast mine in Pauh subdistrict. Five years of constant traffic, propelled by China’s hunger for fuel, has formed deep ruts in the dirt road. Recently, however, the lorries have stopped moving at midday. China’s appetite for coal has plateaued, the coal price has sagged and Minemex, the firm that operates the mine, has given workers longer lunch breaks, without pay. “We have no choice. We must endure,” sighs Demak, a sun-weathered 38-year-old.

Enduring might seem an apt word for Asian economies that had come to rely on ever-stronger exports to China. After averaging 10% annual growth for 30 years, the Chinese economy has managed only 7.5% over the past two years—enviable for most countries but a clear downshift for China. The lull has rippled through the region. Taiwanese machine-tool makers have seen exports to China fall by more than 20% since 2012. Australian iron ore for delivery to China recently hit its lowest price in 21 months. Jewellery sales in Hong Kong have fallen by 40% this year, in part due to China’s crackdown on corruption.

But enduring is not the right word for all those doing business with China. Analysts refer to milk as New Zealand’s “white gold”, such is China’s thirst for it. The number of Chinese visitors to Sri Lanka more than doubled in the first half of the year. Chinese women in their 30s are now the biggest group of foreign buyers on the website of Lotte, a big South Korean retailer, snapping up cosmetics.

These contrasting fortunes stem from profound, if gradual, changes to Chinese growth. Consumption is at last edging out investment as the economy’s main engine. Household consumption has been inching up of late as a proportion of GDP, rising from 34.9% in 2010 to 36.2% last year, according to official data. Some economists think the true share could be ten percentage points higher. This year even with the government’s “mini-stimulus”—a burst of spending on railways and public housing unveiled in April—consumption has still accounted for over half of Chinese growth.

Limited though it has been, this rebalancing is beginning to make itself felt beyond China’s borders.

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