Monday, August 13, 2012

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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