China slowdown: Mother of all slowdowns or father of
all growth?
China has
been growing for a long time, almost three decades at a blitzkrieg pace of 10%
in what has shocked and awed the world. Millions were lifted out of poverty;
trillions spent on development and by becoming a growth engine became a ray of
hope for the commodity markets in times of turbulence.
Hence, when the Chinese growth story exhibits
signs—that of becoming just a story— the markets sink.The China customs bureau
data reporting the nation’s y/y export growth at 1% subsequent to figures of 11%
growth in June did cast a dullness in not only the crude oil markets but across
the spectrum of global economy.
“There were hopes that we might see some
decent demand growth in China but that’s looking less and less likely,” said
Michael Lynch, president of Strategic Energy & Economic Research in
Winchester, Massachusetts to Bloomberg.The figures tangoing with the weak IEA
data saw the oil markets plunging by as much as 1%.
But, is the Chinese economy really slowing
down?
It has to be noted that the current slowdown
in China is more due to internal causes rather than external.
In 2008, China faced a slowdown due to
sluggish exports as the great recession kicked in affecting countries like US.
The current slowdown is more due to internal reasons, says Patrick Chovanec,
Associate Professor of Practice, School of Economics and Management, Tsinghua
University to the Council on Foreign Affairs.
“The main growth driver of the past several
years has been an investment boom that was engineered in response to the global
financial crisis, the last slowdown, and this investment boom is buckling under
its own weight. It's not sustainable, and it has given rise to inflation and now
to bad debt, and that bad debt is dragging down Chinese growth.” he said in the
interview.
“China is due for correction” he said and
added, “that correction will be good for China in the sense that a lot of the
growth we've been seeing over the past several years is not sustainable and in
many ways does more harm than good. So in some ways, slower growth, if it's part
of an adjustment toward a more sustainable growth path, is actually
good.”
In agriculture, services, healthcare, retail
and logistics China has humongous potential. “The problem is that that growth is
not as easily achieved as pumping money and boosting investment.” He
said.
The facts are clear: China is slowing down by
choice, not by compulsion. China prefers a sustainable growth path to an
unsustainable one of dizzying pace in an attempt to boost domestic economy and
domestic consumption.
“Part of China's export-led growth model was
to suppress consumption in order to maximize investment and then make up the
difference through selling abroad. The Chinese economy is geared toward
channeling resources away from the household sector --Chinese savers and
consumers--toward investors and producers to boost production and basically
turbo-charge GDP growth. To re-balance the Chinese economy, you have to channel
those resources back to the household sector through changing exchange rate
policy, interest rate policy, the tax policy.” The professor continued.
“…it takes some foresight and some vision to
pursue that.” He added further.
So, how will this tectonic shift affect
commodity countries?
Countries like Australia, Chile, Brazil etc.
catering to Chinese raw material demands of iron ore, copper and the like would
be affected.
“…they're very exposed to this economic
adjustment that's taking place, this correction.” he said.
“But if your goal over the long term is to
sell to the Chinese consumer, and if you have an economy positioned to do
that--if you're a producer of finished goods or a producer of food--then this
economic adjustment could be a good thing if it unlocks the buying power of the
Chinese consumer.” he continued to say.
But, isn’t subdued macro economic data a cause
for concern?
“If you have lower GDP in China, that doesn't
necessarily mean that China's consumption has to fall. In fact, China has $3
trillion in reserve; that's buying power. China has produced more than it has
consumed for many years; China could afford to consume more than it produced.
That would be a major growth driver for the rest of the world. It would provide
a cushion for China to undertake this kind of economic adjustment that otherwise
could be extremely painful.” Chovanec concluded.
- Umesh Shanmugm
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