Saturday 9 February 2008

Has China's growth peaked?

This is the question that the FT ask in today's paper. Again, this is not a surprise and most economists would forcast a reduction in growth this year to perhaps single digit.

A US recession would not help. Even though the US and EU do not take the majority of exports from China, even exports to China's ASEAN neighbours will fall as they themselves depend on exports to these regions.

The saviour has to be domestic demand. However, although there is no doubt that the Chinese middle class is growing strongly, poverty levels are still very high, disposable income low and savings rates high.

China’s economic growth passes its peak [FT]

Behind the headline forecasts of decelerating Chinese output in 2008 lies a more significant trend that may mark a long-awaited turning point for the economy and its global impact.

Chinese and World Bank economists have significantly downgraded forecasts for China’s national growth in recent weeks – from 11.4 per cent in 2007 to maybe two percentage points lower this year.

But more importantly, the 11.4 per cent expansion in 2007 – the fifth consecutive year of double-digit increase – could represent the peak in headline growth for China for the foreseeable future.

In short, thanks to slowing global and US economies, China may never be able to grow as quickly again as it did last year.

So is this bad news? Far from it. This "breather" might be just what China needs especially given environmental considerations.

The Chinese government, far from being alarmed at such a turnaround in growth, would largely welcome it.

The slowdown could dovetail with Beijing’s own aims to moderate the contentious trade surplus and, at the same time, recalibrate growth away from heavy industry in favour of consumption and services.

“If China is able to rebalance the economy, making it less intensive in resources and capital, cleaner and more widely shared, growth of 9-10 per cent a year for long periods would be the [outcome] developing countries across the world are looking for,” said Louis Kuijs of the World Bank in Beijing.

The surge of recent years in investment in heavy industry, such as steel, aluminium and cement, has strained energy resources, contributed hugely to greenhouse gas emissions and pollution and created few jobs.

Such a cocktail is anathema to Chinese leaders, who face pressure at home to create more jobs – especially with exports in relative decline – and from abroad to tackle carbon emissions.

China Financial Markets also has a take on the effect of a US recession- the title gets straight to the point. Pettis agrees with me (or I agree with him) on decoupling.

A US slowdown won’t help China [China Financial Markets]


Last time I was here, in July, a lot of people asked me about the “decoupling” thesis, and not everyone was terrible pleased (or in agreement) when I said I thought the idea was mostly nonsense, based partly on mistaken premises and partly on wishful thinking.

Now, it seems, no one takes the idea of decoupling seriously at all. Everyone is convinced that a sharp slowdown in the US will be disastrous for the rest of the world. This is one idea whose death seems to have come quick and hard. In fact, the most noticeable aspect of my trip here is the sheer gloom and worry about the state of the US and world economy. It has been a while since I have seen so much pessimism and nervousness.


Talk of rising inflation and a slowing economy brings us straight back to the topic of China. Xinhua yesterday reported that the “U.S. slowdown could be opportunity, not crisis, for China.” They report that a number of Chinese economists believe that a US slowdown, by reducing the growth rate of exports, could help rebalance Chinese growth, towards a healthier mix of investment, exports and consumption and would help relieve monetary expansion.

To their credit few Chinese have taken the decoupling thesis very seriously, but if they expect a US slowdown to help resolve their domestic problems I think they are missing the point. One economist mentioned in the article, Zheng Jingping, a researcher with the National Statistics Bureau, did get focus on the key issue when he noted that “it was not export growth but the trade surplus that would be the key issue”. This is exactly right. If China’s exports decline, and Chinese imports decline also so keeping the trade surplus high, China will get hit by a double whammy. The reduction in exports will hurt economic growth but the high trade surplus will keep China’s furious money expansion going, so continuing to put upward pressure on investment and industrial production. The “rebalancing” would consist of an even greater share of investment as part of total GDP growth. This would be a worst-case outcome.

Could exports slow while causing a decline in imports? Yes, in fact it is highly likely. Remember that nearly half of Chinese exports are recycled imports, and any slowdown in the very important and lively export sector might indirectly affect Chinese overall consumption by increasing uncertainty. But even if there is a small decline in the trade surplus, that is not enough. In order to halt the money-creating monster that China’s currency regime has become, we need the trade surplus (and hot-money inflows) to decline substantially.


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