Do China’s woes hurt world re­cov­ery?

The China Post - - COMMENTARY - BY DR. AB­DUL­LAH SHI­BLI

Since Aug. 11, when main­land China an­nounced that it is de­val­u­at­ing the yuan, world at­ten­tion has been trained on China’s econ­omy in an ef­fort to un­der­stand what is hap­pen­ing in the world’s sec­ond largest econ­omy.

In the wake of re­cent stock mar­ket and cur­rency fluc­tu­a­tions, even old China hands who were sit­ting on the side­lines have joined the con­ver­sa­tion. Fi­nan­cial mar­kets have been abuzz with spec­u­la­tions, and ru­mors are cir­cu­lat­ing in the media re­gard­ing the true state of China’s gross do­mes­tic prod­uct (GDP) and other macroe­co­nomic in­di­ca­tors as well as the ef­fect of mea­sures it was un­der­tak­ing to right the ship.

From the flurry of in­formed dis­cus­sions in re­cent weeks, there are in­di­ca­tions that China is in more trou­ble than its of­fi­cials were will­ing to ad­mit, and its tra­vails are af­fect­ing the economies of its trad­ing part­ners, in­clud­ing some of its neigh­bors, and the global fi­nan­cial mar­kets and eco­nomic growth in other coun­tries.

Even the U.S. Fed­eral Re­serve post­poned its much an­tic­i­pated in­ter­est rate hike this week, and one of the rea­sons cited by the Fed chair­man for its de­ci­sion is the un­cer­tain prospects of China and the Eu­ro­zone coun­tries. A larger con­cern now is whether China’s eco­nomic con­di­tion could worsen and even­tu­ally drag down the rest of the world or cause ma­jor dam­age to some of its trad­ing part­ners like Brazil, South Korea and Aus­tralia, among oth­ers.

Un­doubt­edly, the world econ­omy was go­ing through a rough patch even be­fore the re­cent round of trou­ble. While the re­cent de­cline in oil prices and the con­certed ef­forts by gov­ern­ments and cen­tral banks to nudge their re­spec­tive economies to move for­ward have had some im­pact, the re­sults have been some­what dis­ap­point­ing.

Since 2007, when the last ma­jor global fi­nan­cial cri­sis started, the av­er­age key in­ter­est rate has de­clined by 4 per­cent in de­vel­oped coun­tries and 2 per­cent in the emerg­ing mar­kets, but the growth rate of GDP has fallen con­sis­tently short of ex­pec­ta­tions.

In April 2010, the In­ter­na­tional Mon­e­tary Fund (IMF) pre­dicted that the world econ­omy would grow by 4.5 per­cent for four years, start­ing at 2011. The ac­tual growth rate was 3.6 per­cent. While the short­fall spread across the globe and af­fected ev­ery sin­gle coun­try and re­gion, it is stark for In­dia, Brazil, Rus­sia, China, and the Eu­ro­zone. Even the U.S. econ­omy, which per­formed bet­ter than the rest of the world and came clos­est to the ex­pected rate, re­cently down­graded its forecast for the cur­rent year from 3.8 per­cent to 3.3 per­cent of growth in GDP.

How did this come to pass? In these times of in­ter­con­nected economies, China’s re­cent eco­nomic trou­bles seem to be the last straw that broke the camel’s back. First of all, less growth in China spells trou­ble for its trad­ing part- ners. But there is another wor­ri­some de­vel­op­ment for the rest of the world.

China, af­ter years of goad­ing from IMF and U.S. econ­o­mists, is un­der­tak­ing a pol­icy shift in an at­tempt to change its eco­nomic growth par­a­digm. This was prompted by ear­lier signs of struc­tural weak­nesses in China’s econ­omy, stem­ming from its re­liance on the world mar­ket to drive its en­gine of growth. Chi­nese econ­omy was fal­ter­ing even be­fore its con­di­tion be­came acute, which led to the re­cent de­val­u­a­tions, and has sapped its energy for a much longer time.

A com­par­i­son of China’s im­ports in July from a year ear­lier shows that its im­ports from Ger­many and Ja­pan were down al­most 14 per­cent from a year ago. China’s man­u­fac­tur­ing sec­tor has been on a slight down­ward slide since last year, ac­cord­ing to Zhoo Qinghe, an economist with the Na­tional Bureau of Sta­tis­tics. Many econ­o­mists also doubt whether China, in spite of its pro­nounce­ment to keep GDP growth rate at 7 per­cent, is ca­pa­ble of do­ing so given that it can no longer count on ex­ports as an en­gine of growth.

In a re­cent ar­ti­cle in the UK’s Fi­nan­cial Times ti­tled “Doubts Rise Over China’s GDP Growth Rate,” it was re­ported that China’s econ­omy is re­ally not grow­ing at the level its lead­ers pro­claimed, and its eco­nomic sta­tis­tics seem to op­er­ate in a make-be­lieve world. And on top of that, China has an­nounced that it will move away from its ex­port-ori­ented and credit-driven growth model to one with greater em­pha­sis on do­mes­tic con­sump­tion. There is no doubt that if suc­cess­ful, this would bring about other pol­icy changes, lead­ing to lower im­ports, a cause for con­cern for coun­tries with link­ages to the Chi­nese econ­omy.

The im­pact of China’s eco­nomic down­turn on other de­vel­op­ing and Asian coun­tries as well as in the U.S. and EU is felt in other ways. Notwith­stand­ing IMF Man­ag­ing Di­rec­tor Chris­tine La­garde’s re­cent pro­nounce­ment that “Asia as a re­gion is still ex­pected to lead global growth,” China’s eco­nomic de­cline is caus­ing headaches for many Asian coun­tries. One rea­son is that China’s re­cent de­val­u­a­tions have made Chi­nese goods cheaper, lead­ing to greater com­pe­ti­tion for Malaysia, In­done­sia, and Viet­nam.

These coun­tries an­nounced that pro­duc­tion of man­u­fac­tur­ing goods de­clined last Au­gust. Malaysia’s fac­tory in­dex, known as PMI, dropped to a 34-month low in Au­gust, fall­ing from 47.8 in July to 47.2 in Au­gust. New or­ders re­ceived by Viet­nam’s man­u­fac­tur­ers con­tin­ued to fall in Au­gust, ex­tend­ing the cur­rent run of con­trac­tion to four months. Brazil and Aus­tralia, two coun­tries that are far away from China, have also wit­nessed ma­jor slow­downs. Brazil, a BRIC coun­try, has seen its real cur­rency de­cline by 32 per­cent against the U.S. dol­lar in the first nine months of this year.

So, what can we ex­pect in the com­ing months? Much de­pends on China’s abil­ity to bounce back and how its key eco­nomic in­di­ca­tors per­form: fac­tory pro­duc­tion, new or­ders, hir­ing, em­ploy­ment, con­sumer de­mand, stock mar­ket and ex­change rate. Can we say with cer­tainty whether China will drag down the world econ­omy if its re­cov­ery fal­ters? The sim­ple an­swer is a no. With so many fac­tors at play, par­tic­u­larly growth of the Eu­ro­zone econ­omy and con­tin­ued tur­bu­lence in Ja­pan and Brazil, one can only keep a close eye on the ma­jor in­di­ca­tors and con­tinue read­ing the tea leaves.

There is a very help­ful para­ble that might help those who like to keep track of gath­er­ing storms on the eco­nomic hori­zon. In ear­lier times, min­ers would carry caged ca­naries while at work to give them early warn­ings of dan­ger in the coal mines. If there was any toxic gas such as car­bon monox­ide in the mine, the birds would die be­fore the lev­els of gas reached a level haz­ardous to hu­mans. What are the “ca­naries in the coal mine” that could pro­vide sim­i­lar warn­ings for in­vestors or eco­nomic pol­i­cy­mak­ers? Ex­change rates of the euro and yuan, price of crude oil, GDP growth in EU, the Fed’s pol­icy, and tight­en­ing ex­change con­trols in China are clearly early bell­wethers of choppy wa­ters ahead. Most im­por­tantly, in the com­ing months, China’s abil­ity to put its econ­omy on an even keel would have some im­pact on the eco­nomic out­look for the world as well as for the fi­nan­cial mar­kets.

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