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MANAGING, or effecting, decline is as important as monitoring over-blowing growth. Going back to the pre 2007-08 era, it sounds even truer. Of course, hindsight is 20/20 and retrospective perception is always seen through the prism of crystal clarity.
The truth is that when the US rode high, the party went too late into the night. The more the country imbibed of the festivities, the more inebriated it became, leading to complacency and even perceived invincibility. As a man of the world, one can relate to such euphoria; however, by the same token, one can also, then, recognise the danger of the impending hangover the day after. The sickness still persists in the US, the lack of a focused approach to treat the cause rather than the symptom notwithstanding. But then this is another topic.
There’s been a lot said recently in the western media about China’s imminent crash. Listening to some, it almost seems like the discussion is with a view to limited thinking. In the heat of the moment, we tend to lose sight of two things: one, unlike the US, the Chinese system is not gridlocked and can objectively work its way through an issue while that issue is still in a nascent stage; two, the Chinese, as I have written before, think in terms of centuries which is also in sharp contrast to our thinking span in the US, stricken with a sense of myopia for good reasons.
Yes, China’s economy has softened. The Purchasing Manager’s Index hovers around 50 which is border-line. Other indices are also less sturdy. The stock market is feared to be entering the ‘bear’ territory. While the pessimism is understandable, it is also a little misplaced. The world is not where it was in 2008 when we saw an almost 11 per cent drop in world trade which registered as the sharpest fall since the Great Depression.
Consequently, Chinese exports were badly hampered, contracting by about 27 per cent by the beginning of 2009 from an expansion of 26 per cent just around nine months prior to that. Given that at the time in question, the Chinese economy was more export-driven than now, its GDP screeched to a virtual halt by Chinese standards to a low single-digit growth, causing a massive unemployment issue and exposing the country to a recessionary milieu.
Then came the huge stimulus and China rebounded. As with any medication, the stimuli were not without undesirable side effects. As the following lines will demonstrate, the three main issues of loan quality, property market pressures and hiking inflation are fairly manageable. Indubitably, such fears are not unfounded as non-performing loans are bound to go up. We also believe, however, that with a steady flow of migrants to the urban areas, the excess housing will be absorbed over several years. Also, the banking system is much better equipped to handle any crisis with their relatively low loan to deposit ratio.
Then comes the property bubble. Is it necessarily going to burst? Just as China initiated a big stimulus, it then thought it prudent to apply the brakes about the beginning of 2010 by raising down-payment requirements to 50 per cent. The preceding action has stabilised the property market, even though the affordability issue still exists for the mushrooming middle class which could cause a supply-demand mismatch in the future; however, the greater price stability could help mop up the overhang of the home supply, thus avoiding a housing bust of the US kind.
The third fear is an inflation hike, and it’s not without basis with the Consumer Price Index at six per cent The Chinese have accordingly acted along the following line.
One, food inflation which constitutes a good half of the rise is being attacked by cutting fertiliser costs and streamlining supply management of essential food items. Two, the reserve ratios have been raised consistently in the last year. Three, the yuan has appreciated at a faster pace making Chinese goods pricier to foreign countries. Four, in the last year, the Chinese central bank has raised its benchmark policy rate five times to a current level of 6.5 per cent.
The Chinese slowdown is a good thing, however counter-intuitive it may sound. The country cannot afford a consistent 10 per cent growth and is aiming to get to a more sustainable eight per cent target. With Europe’s situation now improving, and a bit of optimism as well across the Atlantic, there is hope that the decline management effort will come to fruition, and that growth will be contained to healthier levels. On the other hand, twice bitten and now shy — with the American financial crisis and now the European sovereign debt fiasco — China also realises that it can ill-afford to rely on its two largest trading partners for onward growth.
If we are to believe everything happens for a reason, then the Zen-like thinking will also tell us it is the right time for China to focus on domestic consumption, as the country presses on to yet another chapter in its remarkable journey to growth, not just economically but also with a keen eye on qualitative global influence.
As it is mostly about China, it is quite fitting to wish that we may all now step out of the interesting times we are living through. This Chinese curse has had a long run, and it’s now time to stop this course and move on.
The writer works for an international financial services firm in the US.
