No need to exaggerate economic headwinds
THE Economist Intelligence Unit claimed China was set for a hard landing in its latest global risk analysis report. Closer inspection of the Chinese economy shows that to be a false alarm. The forecasting and advisory services provider issued a report in which it forecast the top risk for the global economy was a sharp economic slowdown in China, due to what it saw as the country's febrile manufacturing sector, rising debt and growing downward pressure on the renminbi due to capital flight. The think tank is right that the Chinese economy is experiencing headwinds, but this is hardly breaking news. The country's leadership has spoken at length about the challenges brought by the new normal growth rate and structural reform.
The manufacturing sector is struggling. Industrial investment is falling, the trade environment is worsening and overcapacity is weighing upon the sector. However, manufacturers are busy upgrading their systems and equipment, which will create a more competitive, innovative environment.
Yes, the debt level is not low, but it is still manageable. The capital adequacy ratio of China's commercial banks is still below the international warning line, while their provision coverage ratio is above the government's requirement. Moreover, local government debt pressure will be eased by public-privatepartnerships in costly infrastructure projects.
Some weakening of the Chinese yuan in the short term is understandable. China's forex controls have been loosened and the US Federal Reserve's interest rate adjustment will unavoidably lead to capital outflows. Nevertheless, there is no basis for substantial yuan depreciation as China's trade surplus and forex reserve are more than adequate and its foreign debt is low.
However, the report is right about one thing: Other countries are dependent on China for investment and products. A sharp slowdown would have a severe knock-on effect worldwide and is a scenario that nobody wants to see. Despite the challenges, China is determined to keep GDP growth at a minimum of 6.5 percent this year while pressing ahead with economic restructuring.
It is a difficult balancing act for Chinese policymakers, who must walk a fine line between preventing systematic risks and reducing overcapacity while at the same time avoiding a credit bubble.
Fortunately, the government has ample means to revive economic confidence, ranging from more flexible fiscal and monetary policies to more targeted support.
Forewarnings are necessary to keep the world economy on track, but exaggeration only causes unnecessary panic, upsetting it.
The headwinds challenging China's economy are there, but the country is facing them square-on and policymakers have the ability to navigate them skillfully.
Global CEOs attending the China Development Forum currently underway in Beijing said theyhave a better sense of policy direction, and are upbeat about the country's outlook.
"I'm a big fan of what's going on in China. If you had faith in China's potential 12 months ago,then that it has hit some bumps on the road, which I believe are all short-term, should notimpact your view on the long-term potential of the economy," said Dennis Nally, chairman ofprofessional services group PricewaterhouseCoopers (PwC) on the sideline of the forum.
The 13th Five-year Plan shows China's commitment to opening-up, reform and focus oncreating comparative advantages. "It's one that will continue to provide clarity," he said.
The latest PwC Global CEOs Survey found that China was identified by 34 percent of CEOssurveyed as the most important market for their business prospect over the next 12 months, second only to the United States (39 percent) and much higher than Germany (19percent).The annual survey covered 1,409 CEOs from 83 countries.
"If many parts of the world followed what I described as ' best practices' in China: clear goals,accountability and others, it would be best practices for them too," he said.
HansPaul Burkner, global chairman of Boston Consulting Group, said global CEOs areattending the forum because Chinese market is so important. They feel that they have tounderstand what's going on here, and to get a first-hand sense of the discussion here.
They are also coming here to meet CEOs of Chinese companies, because a lot of them arebecoming leading players in global market. Burkner said China's slowdown should be "put in context". Though growth rate has slowed, inabsolute terms the near-$11 trillion economy still grew by $700 billion per year, which is amajor addition to the world economy.