China cau­tious over signs of de­fla­tion

Financial Mirror (Cyprus) - - FRONT PAGE -

China’s in­cred­i­ble eco­nomic growth has long been the envy of the stag­nat­ing and slowly re­cov­er­ing, post-re­ces­sion, west­ern na­tions. The ‘Made in China’ trade­mark has be­come syn­ony­mous with man­u­fac­tured goods and the num­ber of Chi­nese com­pa­nies spread­ing their strong wings in­ter­na­tion­ally has been mak­ing head­lines.

Af­ter all the hype about this new su­per­power, last week’s rev­e­la­tion that the Chi­nese lead­er­ship are now an­tic­i­pat­ing the slow­est growth rate in a quar­ter-cen­tury has brought about mixed re­ac­tions from in­vestors.

The coun­try’s lead­ers an­nounced a new eco­nomic tar­get of 7% growth in 2015, lower than their 7.5% goal last year. The Gover­nor of the Cen­tral Bank, Zhou Xiaochuan, then warned on Sun­day that China is “cau­tious” about the de­clin­ing com­mod­ity prices glob­ally and should be closely watch­ing for the warn­ing signs of de­fla­tion. His re­marks raised eye­brows and led to fur­ther ner­vous­ness among in­vestors and pol­i­cy­mak­ers that the econ­omy is los­ing its pow­er­ful mo­men­tum.

Pres­i­dent Xi Jin­ping, how­ever, ex­pressed a more pos­i­tive out­look. He was keen to stress on Fri­day that a 7% growth is im­pres­sive by any stan­dards and will drive China’s ro­bust econ­omy for­wards. Since com­ing to power in 2011, he has fo­cused on struc­tural re­form and prefers to take a long-term view on the coun­try’s fu­ture growth. So what’s be­hind th­ese seem­ingly mixed sig­nals? Chi­nese in­vestors are right to be wary about the cur­rent level of debt. Although bor­row­ing al­lowed the coun­try to fuel its past growth, debt now stands at 250% of gross do­mes­tic prod­uct. That’s a bur­den that the gov­ern­ment need to ac­count for and pay. How­ever, in many other re­spects, the slow­ing growth is merely a re­flec­tion of the coun­try’s steep climb.

Var­i­ous eco­nomic and so­cial fac­tors con­trib­uted to the rate of growth. The coun­try’s work­ing-age pop­u­la­tion reached record num­bers in 2012, and in­vest­ment also peaked at a phe­nom­e­nal 49% of GDP. Yet th­ese were never go­ing to be sus­tain­able for­ever. Plus, as China has caught up to the tech­no­log­i­cal ad­vances of West­ern coun­tries, the gap in its growth po­ten­tial is also slow­ing.

At some point a cor­rec­tion to sus­tain­able lev­els was bound to hap­pen. This isn’t au­to­mat­i­cally a neg­a­tive thing. It hap­pens in large economies and busi­nesses alike. Con­sider that a 7% growth now, given the size of what is now the world’s sec­ond largest econ­omy, equates to a greater out­put in real num­bers than the 14% growth back in 2007. The re­al­ity is that although the cur­rent growth tar­get is lower than China’s usual rate, China’s past ‘nor­mal’ was ex­tra­or­di­nary.

If you only look abroad, it’s clear that Xi is right to point out how good 7% growth is. Yes, China has en­tered a new stage in its eco­nomic cy­cle. It is un­likely to en­joy dou­ble digit growth again, at least in the next decades ahead. But if it can find and main­tain sus­tain­able growth lev­els, it will surely con­tinue to be an eco­nomic force to be reck­oned with.

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