China’s economy – As gloomy as it seems?

by Catherine Lankes

The Chinese economy is experiencing a slowdown, transforming the economic wunderkind of the past three decades into an unpredictable teenager. Now, in 2016, China is mired in debt, with a current debt growth rate of 11%. The Renminbi has weakened considerably, following Beijing’s mismanagement of the currency. The property market is in a worrisome state with tens of millions of homes standing empty and prices plummeting in smaller cities. At a current GDP growth rate of 6.9%, the annual expansion of China’s economy is the slowest today since 1990, when the regime faced international sanctions in the wake of the Tiananmen Square massacre.

The prime reason for this slump is the government’s goal of creating a more stable economic model based on sustained domestic spending. This objective has sent the country down a long path of transition, influencing sector shares at home and economic output abroad. Today, the world’s workbench is shifting its focus from manufacturing to consumption, from export to import, from mass-production to innovation. Additionally, the government is lowering its level of investment while trying to foster an environment that favors supply-side over demand-side business.

From “Bigger is Better” to “Less is More”

“Deeper reform is the way forward,” explained China’s Prime Minister, Li Keqiang, in a recent comment published in the The Economist’s “The World in 2016.” He stressed that the Chinese economy “is moving in the desired direction.” The “transition from ‘bigger to better’ to ‘less is more’ is a good thing,” he wrote, stating that the reforms are working just as intended. Li expects 2016 to be “a year of reform, openness and international co-operation,” according to him “a potent combination,” and one that has already been crucial for China’s development in the past and will now be “taken further.”

And indeed, the engineered transformation has had and will have measurable effects on the Chinese market. The Economist is predicting that China will experience an 8% retail growth in 2016, a car market sale that is to extend its lead over the United States and a 7% growth in leisure tourism. The number of domestic airline passengers has jumped and outbound tourism has grown by 10% in the first quarter of 2015 on a year-by-year comparison. Increasing consumption is currently responsible for about 60% of the country’s growth. Adding to that, the Chinese government registers about 10,000 new enterprises every day, according to official data.

Lagarde: Changes are “perfectly manageable”

Given the grim mood amongst bourses and the fact that official economic statistics coming out of China are chronically short on credibility, this positive picture painted by the Chinese government may read simply as the desperation of the politburo trying to calm brokers as well as Western politicians. Yet, their optimistic outlook is also supported by the International Monetary Fund (IMF). “China is going through a list of transitions. From our perspective, the situation is perfectly manageable if the right policy measures are taken,” said Christine Lagarde, head of the IMF, at a panel discussion during the World Economic Forum in Davos earlier this year. “When Chinese authorities put their minds on something, we have seen an unbelievable determination and an ability to deliver what many would have considered undeliverable. And we do believe that China will indeed deliver – even at a lower growth rate,” she added.

Not everyone in Davos shared this point of view, however. Business magnate and investor George Soros warned of a market crisis similar to the bust of the US housing bubble in 2008. “China has a major adjustment problem. I would say it amounts to a crisis. When I look at the financial markets there is a major challenge which reminds me of the crisis we had in 2008,” Soros said. In his eyes, the country’s struggle to find a new growth model is the main reason for the potential of a global economic downturn. According to Soros, current development strategies are transferring China’s problems to the rest of the world.

Chinese resilience

George Soros’ remark did not go unnoticed. In a prompt reaction to his statement, Xi Jinping’s administration accused the investor of “waging a war against the Yuan.” Soros’ comparison also brought Paul Krugman to the stage. In his New York Times op-ed, the Nobel Laureate rejected the idea of the current situation in China being critical enough as to bring the global market to its knees. “Now, my best guess is that things won’t be that bad – nasty in China, but just a little bit of trouble elsewhere,” Krugman writes, adding “And I really hope that guess is right, because we don’t seem to have a plan B anywhere in sight.”

Whether worries about the Chinese economy will subside or gain traction in the coming months, it is safe to say that the Middle Kingdom will try everything in its power to further its international influence. China will use its resilience and well-known ability to transform to its advantage as it muscles its way to the very front of the global stage – if necessary, by propping up its economy, in the event that it should falter, rendering economic collapse highly unlikely.

 

 

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