No need to ex­ag­ger­ate eco­nomic head­winds

The Pak Banker - - OPINION - Zheng Yangpeng

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.

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