China’s in­scrutable con­trac­tion

Financial Mirror (Cyprus) - - FRONT PAGE -

While vir­tu­ally ev­ery coun­try in the world is try­ing to boost growth, China’s gov­ern­ment is try­ing to slow it down to a sus­tain­able level. As China shifts to a more do­mes­tic-de­mand driven, ser­vices-ori­ented econ­omy, a tran­si­tion to slower trend growth is both in­evitable and de­sir­able. But the chal­lenges are im­mense, and no one should take a soft land­ing for granted.

As China’s econ­omy grows rel­a­tive to the economies of its trad­ing part­ners, the ef­fi­cacy of its ex­port-led growth model must in­evitably fade. As a corol­lary, the re­turns on mas­sive in­fra­struc­ture in­vest­ment, much of which is di­rected to­ward sup­port­ing ex­port growth, must also fade.

Con­sump­tion and qual­ity of life need to rise, even as China’s air pol­lu­tion and wa­ter short­ages be­come more acute in many ar­eas. But, in an econ­omy where debt has ex­ploded to more than 200% of GDP, it is not easy to rein in growth grad­u­ally with­out trig­ger­ing wide­spread fail­ure of am­bi­tious in­vest­ment projects. Even in China, where the gov­ern­ment has deep pock­ets to cush­ion the fall, one Lehman Brothers-size bank­ruptcy could lead to a ma­jor panic.

Think of how hard it is to en­gi­neer a soft land­ing in mar­ket-based economies. Many a re­ces­sion has been catal­ysed or am­pli­fied by mon­e­tary-tight­en­ing cy­cles; for­mer Fed Chair­man Alan Greenspan was chris­tened the “maestro” in the 1990s, be­cause he man­aged to slow in­fla­tion and main­tain strong growth simultaneously. The idea that con­trolled tight­en­ing is eas­ier in a more cen­trally planned econ­omy, where pol­i­cy­mak­ers must rely on far nois­ier mar­ket sig­nals, is highly ques­tion­able.

If one were to judge by of­fi­cial and mar­ket growth forecasts, one would think that the risks were mod­est. China’s of­fi­cial tar­get growth rate is 7.5%. Any­one fore­cast­ing 7% is con­sid­ered a “China bear,” and pre­dict­ing a down­shift to 6.5% makes one a down­right fa­natic.

For most coun­tries, such small dif­fer­ences would be split­ting hairs. In the United States, quar­terly GDP growth has fluc­tu­ated be­tween -2.1% and 4.6% in the first half of 2014. Of course, Chi­nese growth almost surely fluc­tu­ates far more than the of­fi­cial num­bers re­veal, in part be­cause lo­cal of­fi­cials have in­cen­tives to smooth the data that they re­port to the cen­tral au­thor­i­ties.

So where is China’s econ­omy now? Most ev­i­dence sug­gests that the econ­omy has slowed sig­nif­i­cantly. One strik­ing fact is that an­nual growth in elec­tric­ity de­mand has fallen sharply, to be­low 4% for the first eight months of 2014, a level recorded pre­vi­ously only in the depths of the global fi­nan­cial cri­sis that erupted in 2008. For most of China’s mod­erni­sa­tion drive, elec­tric­ity con­sump­tion has grown faster than out­put, not slower.

Weak­en­ing elec­tric­ity de­mand has tipped China’s coal in­dus­try into se­vere dis­tress, with many mines ef­fec­tively bank­rupt. Fall­ing house prices are another clas­sic in­di­ca­tor of a vul­ner­a­ble econ­omy, though the ex­act pace of de­cline is dif­fi­cult to as­sess. The main house-price in­dices mea­sure only ask­ing prices and not ac­tual sales prices. (Data in many other coun­tries – for ex­am­ple, Spain – suf­fer from the same de­fi­ciency.)

Of course, ex­ports have also slowed, given slug­gish growth in the rest of the world. Com­mod­ity ex­porters such as Aus­tralia, In­done­sia, and Brazil have al­ready felt the ef­fects of slow­ing Chi­nese growth, as have coun­tries, such as Ger­many and Switzer­land, that China’s vo­ra­cious in­ten­sive goods.

Un­for­tu­nately, China’s data are not nearly as re­li­able as those mea­sur­ing a de­vel­oped econ­omy, which makes it dif­fi­cult for any­one to be sure of what is hap­pen­ing. Elec­tric­ity us­age is typ­i­cally one of the most re­li­able mea­sures of growth; but, with the econ­omy shift­ing to­ward ser­vices, and with many en­ergy-in­ten­sive in­dus­tries such as ce­ment and steel pro­duc­tion slow­ing down, it is per­fectly pos­si­ble that slow elec­tric­ity growth is sim­ply a symp­tom of re­bal­anc­ing.

Like­wise, the soft­en­ing of hous­ing prices fol­lows a short pe­riod in which prices more than dou­bled, which makes it dif­fi­cult to tell whether China is fac­ing a mod­est and healthy cor­rec­tion or out­right col­lapse. And if con­ti­nen­tal Europe even­tu­ally re­cov­ers, as the US and the United King­dom are, ex­port growth could pick up again.

What seems clear is that China’s lead­er­ship is in­tent on pur­su­ing many of the mar­ket-ori­ented re­forms ap­proved by the Third Ple­nary in 2013. Pres­i­dent Xi Jin­ping’s ag­gres­sive anti-cor­rup­tion cam­paign might be seen as prepa­ra­tion for po­lit­i­cal re­sis­tance to fur­ther eco­nomic lib­er­al­i­sa­tion. On the de­pend on sat­is­fy­ing de­mand for cap­i­tal- other hand, one can ar­gue that, un­til now, Chi­nese cor­rup­tion was more of a tax than a paralysing force, and that dra­mat­i­cally chang­ing the rules of the game could by it­self catal­yse a sharp drop in out­put.

Can China’s gov­ern­ment en­gi­neer a soft land­ing while weed­ing out cor­rup­tion, re­duc­ing pol­lu­tion, and lib­er­al­is­ing mar­kets to en­sure long-term growth? The stakes are high. If Chi­nese growth col­lapses, the global fall­out could be far worse than that caused by a nor­mal US re­ces­sion.

China’s growth rate re­mains perched at a very high level, so there is a great deal of room to fall. The po­ten­tial vul­ner­a­bil­ity of Western ex­ports and eq­uity prices is mas­sive. Of the two ma­jor in­stances of pol­icy tight­en­ing oc­cur­ring in the world to­day, the US Fed’s may be the eas­ier one to un­der­stand, but it is not nec­es­sar­ily more con­se­quen­tial for the world than what is hap­pen­ing in China.

Newspapers in English

Newspapers from Cyprus

© PressReader. All rights reserved.