• Thursday, August 13, 2020

It’s not the Chinese economy that’s on life support

Discussion in 'China & Far East' started by Lure, Sep 15, 2015.

  1. Lure


    Mar 19, 2013
    +18 / 1,317 / -1
    I've read a great article today and I want to share it here. As a short summary : Chinese economy has a short term and a long term problem. Short term problem is as we've discussed with @LeveragedBuyout months earlier the damage of the stimulus packages are creating some stress on short term evaluation of the economy. And in the long term there is -and need to be- a paradigm shift on how China makes business. China is trying very hard to climb (i.e. concentrating it's workforce and industrial capacity) to higher positions in value addition chain, trying to create a consumption based growth and an urbanized nation.

    However the article speculates that if Chinese government haven't realized over 500 billion dollars of stimulus, how would the world economy be effected. It's clear that yuan would be depreciated instead of increasing against dollar. Chinese account surplus would stay larger, and preassure on exports would be lower. However other countries would be effected extremely bad from this movement. That's why maybe as a gesture of soft power and to create a responsible power image I guess they did what they did. By the way, there could have been more economical outcomes that could put other strains on Chinese economy such as increased unemployment which neither I nor the original author of the article had analyzed.

    Anyhow both short term and the long term challenges is being acknowledged and adressed delicately by the Chinese government, except for one recent blunder; that is intervention to stock market sell off to increase the stock prices. Such movements should be avoided and Chinese leadership backtracked from this.

    On the other hand despite everybody in the west is being worried by Chinese collapse, one should be aware of the actual problem in the current world economy. Almost entire Western hemisphere is at 0 interest rate to mandate at least a little bit of growth which in fact is the actual life support system. I guess the for the World economic conjecture Chinese economy seems to me the least factor that can percieved as a risk.

    Full text :

    The west’s bears have always well outnumbered the bulls when it comes to the Chinese economy. A new problem is all too often seen as an intimation of impending crisis, a hard landing, consequent social instability, and perhaps the eventual collapse of the regime. Dream on.

    The bears, it goes without saying, have a dreadful record. After 35 years of extraordinary economic growth, China is still growing at 7% annually. True, that is lower than before, but still at a rate that dwarfs anything in the west.

    One of the great weaknesses of so much western economic commentary is that it fails to look much beyond the next quarter’s, or even month’s, results. In contrast the Chinese understand where they have come from, where they are and where they need to go. Nor are they complacent: the Chinese leadership readily admits it faces quite new economic challenges.

    It is instructive then to look at China’s global role since the financial crisis. When the western economies were on their knees in 2007-08, the Chinese economy rode to the rescue. Although the actions of the Beijing government were primarily motivated by self-interest – avoiding being dragged down by the crisis – they also had the effect of saving the western economies from a fate far worse.

    Confronted by the near-collapse of their western markets,, which accounted for around half of Chinese exports at the time, China embarked on a huge $586bn stimulus programme to boost domestic demand and offset the loss in demand for their exports. It worked. The Chinese growth rate continued to expand at around 10% and thereby provided a major boost to the global economy.

    Furthermore, following those dark days, the Chinese have allowed their currency, the renminbi, to steadily appreciate, by more than 25% against the dollar since 2005 and considerably more against most other currencies. As a result Chinese exports have become considerably less competitive and have fallen. Meanwhile its current account surplus has dropped dramatically, from 10.1% of GDP in 2007 to 2.1% last year. Imagine the effect on other economies if the opposite had happened and the renminbi had been devalued by 25%.

    The growing importance of the Chinese economy for the health of the global economy is illustrated by the fact that America’s GDP has grown by just over 10% since 2008, while over the same period China’s has increased by about 66%.

    Alibaba, already accounts for more than 10% of retail sales and is growing at 40% per annum. China’s express delivery and internet financial services are world-class and in sectors such as advanced machinery equipment, electrical machinery and smartphones Chinese firms are rapidly catching up with the global leaders: Xiaomi, for instance, is now selling more smartphones in China than Apple. Nor should we ignore China’s energy revolution: wind, water and solar power now account for nearly a third of its total electricity generation capacity, a remarkable achievement.
    The western preoccupation with headline GDP figures overlooks this deeper structural shift. Ultimately it is the ability of the Chinese economy to make the transition from a labour-intensive, investment-led, export-oriented economy to one based on value-added production and domestic consumption that will be crucial to its long-term future.

    This, however, should not deflect attention from the short-term risks. China’s chronic debt problem – partly corporate (especially in infrastructural-related industries, such as steel, that have 30-40% excess capacity); partly property (the result of an explosion in construction, with many buildings remaining empty); partly financial (the growing inability of borrowers to pay back their debts, especially in the shadow banking sector) – could lead to a massive deleveraging and consequent economic contraction.

    One of the great problems facing the Chinese leadership is that it is facing several serious challenges all at the same time. If it backtracks on restructuring and rebalancing to provide short-term economic stimulus and shore up the growth rate, this will only store up much more serious problems for the future. If it mishandles the debt problem China could conceivably have the hard landing that it has so skilfully avoided over the last few decades. In short, the new Chinese leadership is confronted with serious overload. Add to this China’s enormously ambitious infrastructure project, One Belt One Road, America’s blatant attempt to contain China and China’s more assertive foreign policy, especially in east Asia, and the danger of over-reach becomes apparent.

    China’s leadership, unsurprisingly given the circumstances, has made one serious error: its ill-conceived and mistaken intervention to try to reverse the sell-off on the Shanghai Stock Exchange, from which it now appears to have largely backtracked. In the event, however, it was the resulting plunge in western markets that was far more revealing and significant. Its message was threefold. First, the west is concerned about the state of China’s economy. Second, it was a dramatic illustration of just how important China now is to the global economy, in many ways greater than the US. Even five years ago such an event would have been unimaginable: China has arrived big time. And third, it reminded everyone of the underlying fragility of the western economy, the fact that it has never recovered from the financial crisis, that the latter ushered in a new era of what Larry Summers has called secular stagnation.

    The western world continues to depend on a life-support system, namely zero interest rates, combined with Chinese growth. What if the latter falters? That is why western markets have suddenly started panicking. In Beijing there is concern, not panic. Their challenges seem manageable in comparison.

    It’s not the Chinese economy that’s on life support | Martin Jacques | Comment is free | The Guardian
    Last edited: Sep 16, 2015
  2. Shotgunner51

    Shotgunner51 RETIRED INTL MOD

    Jan 6, 2015
    +49 / 20,054 / -2
    Thanks, it's a good read!

    I concur with your view that China should have focused all efforts proactively in forging fundamentals that affect the economy in the long run, rather than passively over-reacting to to short-term market turbulence. Don't blame the players, blame the game.

    The industrialists are doing fine, as you said the sector is both expanding across the whole spectrum, and moving upward in the value-adding chain. This has been the principal driving force of China Inc in the last few decades, and the momentum is still on if not becoming even faster. Other sectors like agriculture, commerce & hard infra (energy, grid, transport, etc) are basically satisfactory.

    As last frontier of decades-long reform, the two remaining sectors that require massive overhaul are finance, and public welfare. Despite being distracted by some short-term market turbulence, the current administration has started taking planned actions. As usual practice, reforms will be carried out in a steady & progressive manner. More time is needed than before, since reforming these two sectors also mean some deep-level alterations of existing socio-politico structure are required.

    Good luck to China and global economy!
  3. Tiger Genie

    Tiger Genie BANNED

    Apr 19, 2015
    +1 / 917 / -23
    United States
    I have not come across any 'bears' in the west about China. Rather, the concerns are more about:

    * inconsistencies in outlook and approach towards market economics
    * unilateral currency manipulations
    * issues of transparency and ability to verify numbers

    I am not even going to claim that the US is perfect in these three areas, but certainly these concerns exist and manifest in language that sometimes sound like being bearish.

    Just be assured that along with such criticisms is also the realization that ANY large sized economy will essentially have to go through some such difficult periods which serve the need for that country and all those that deal with that country to truly understand each other. Here is an example: When the shanghai market swung precariously, we all criticized the ways the Chinese govt intervened (objection being to the way not to the idea of intervention) - but on the +ve side Chinese govt learnt what to do with circuit breakers (which btw the NYSE implemented only within past 10/12 years).

    I do agree that the $3T cushion China was sitting on was a great measure of comfort - if not I ma sure we will be seeing the DOW much worse.
  4. TaiShang


    Apr 30, 2014
    +72 / 93,294 / -2
    Taiwan, Province Of China
    China to accelerate integration of Internet, agriculture
    September 15, 2015

    More will be done to promote the application of digital technology in the agriculture sector to reinvigorate the rural economy, Vice Premier Wang Yang said on Monday.

    The government should improve Internet infrastructure and rural logistics in the countryside, nurture tech-savvy farmers, and encourage big data in agriculture, Wang said during an inspection in Beijing.

    He encouraged companies to explore sustainable business models and take advantage of the Internet to improve supply, techniques and services.

    China's cabinet unveiled its "Internet Plus" action plan at the beginning of July, which aims to integrate digital technology into traditional sectors to make them more efficient. Agriculture was on the top of the list.

    Wang said the move will brighten the prospects of the sector.