Chinese model runs out of road

[sms]

There is no easy solution for this global phenomenon. But What China is able to sustain now is still a remarkable fete. The repercussion of the slow growth will be seen after some time. But I's sure the Chinese leadership has enough witty people to find another good solution to turn tide in China's favor.

Before the onset of the global financial crisis, China could be relied upon to export its way out of trouble. Year after year, its exports grew at an annual rate well in excess of 20 per cent. As its current account surplus rose, its economy expanded with a swagger that became the envy of the world. Now, however, China’s export growth has faded, its current account surplus has almost disappeared and Beijing has had to search for alternative sources of rapid economic expansion.

For a while, Beijing thought it had the answer: if exports weren’t expanding quite so quickly, the infrastructure tap could be turned on, helped along by easy credit. It was the ultimate Keynesian stimulus. No one could object to infrastructure investment because, compared with the industrialised world, China’s infrastructure was still in its infancy.

Beijing’s subway system, for example, is tiny compared with the London Underground or the Paris Metro. Yet, even as infrastructure spending increased and social credit expanded, the Chinese economy was unable to regain the buoyancy of old. While the mid-2012 dip could conveniently be blamed on the eurozone crisis, the renewed weakness in the first few months of 2013 could not be so easily brushed off.

With its feet now firmly under the desk, Beijing’s new administration has had a re-think. As Premier Li Keqiang stated last month: “To achieve this year’s economic targets, the room to rely on stimulus policies or government direct investment is not big – we must rely on market mechanisms...We must revitalise private investment and spending through deregulation and other reforms.”

It's easy to see why Beijing might be concerned with the old “pump-priming” model. Alongside excessive credit growth, it has become increasingly clear that the marginal return on capital has been declining rapidly. Put another way, more pump-priming has led to slower growth and bigger financial imbalances.

The focus now is on supply side reforms designed to strengthen the economy’s foundations. As ever, there will be near-term costs. Interest-rate liberalisation is a perfectly sensible move but is likely to increase the cost of funding in the short term. Reducing government administrative spending may lead ultimately to a more efficient allocation of resources but will, in the short term, dampen demand. Introducing market pricing for a range of utilities – water, electricity – may take Chinese companies and consumers into the real world but may also squeeze real incomes. And, in a bid to encourage more in the way of private investment, the iron grip of the state-owned enterprises will have to be eased: that means more competition but, inevitably, a great deal of resistance too.

Two implications stem from this. First, Beijing is willing to tolerate a lower growth rate in the short term than might have been the case earlier in the financial crisis. Supply side reforms may dampen growth near-term but, by reducing dependency on potentially wasteful pump-priming, they may also reduce some of the “fat-tail” downside risks that China might otherwise have to contend with. Second, following a period of weak data, there is no longer the guarantee of a Pavlovian knee-jerk pump-priming response. The message is clear: Beijing is increasingly concerned about the quality, not the quantity, of growth.

Yet there are limits. A growth rate sustainably below 7 per cent would probably lead to big job losses for migrant workers, as occurred in 2009. So despite the emphasis on supply side reform, Beijing may still need to provide a safety net should economic growth slow to a crawl. With a fiscal surplus in the first five months of the year and, if necessary, room to cut interest rates, pump-priming measures could still be dusted off. Given its new emphasis on the supply side, however, Beijing will prefer to keep its powder dry unless it really has to act.

HSBC’s new forecasts, courtesy of Qu Hongbin, Chief Economist for Greater China, suggest economic growth of 7.4 per cent both this year and next (down from 8.2 per cent and 8.4 per cent, respectively). While still impressive, these gains are much lower than the double-digit increases regularly seen before the onset of the financial crisis. China, however, is being realistic: it is not immune from developments elsewhere in the world and, like other countries, doesn’t possess a stimulus “magic wand” to return easily to the growth rates of old.

The implications for the rest of the world are discomforting. Supply side reforms should safeguard China’s future but, for other countries, the bigger concern is likely to be the near-term loss of Chinese demand momentum. The most obviously vulnerable are China’s near neighbours. The bigger challenge, however, may be for those commodity producing countries that previously lived off a heady cocktail of strong Chinese pump-priming and, thanks to the Fed, easy credit conditions. For them, 2013 is turning out to be a challenging year.

Link: News and insight - Chinese model runs out of road

 

[AUSTERLITZ]

Close thread plz,will end in mass trolling.

 

[cirr]

The stock market has never been an indicator of the general health or otherwise of economy in China the way it has in most countries following the western development model。

The Chinese economy has expanded some 10 times since the inception of this century while the Chinese stock indices remain more or less flat，ranged bound for example between 1500 and 2500 for the Shanghai main board，with occasional breakouts。

As a fact of matter，the stock market performed the worst when the Chinese economy was in its hey days of growing 12-14% annually。When you can make lots of money investing in your own business，why invest in someone else' company？

This is unique to China。

 

[cirr]

The reserve ratio is still a very high 21% for Chinese banks，compared to below 3% for Indian banks。

This means there is still too much liquidity in the market。

The Central Bank just needs to make sure that the money goes to where it works for the real economy，not some “shadow banks” which exist only to make money from money。

Though I am heavily invested in stocks，I am fully behind the Central Bank for its determination to correct the “wrongs” done by some financial institutions。

 

[tranquilium]

There is definitely enough money in the Chinese market, this is why the central bank recently refused to bail out sub-banks such as the Chinese commercial bank. Premier Li made the point very clear on CCTV, the Chinese government are clamping down on high risk loans (for example, the loans to real estate) and want to direct the available capital to manufacturing and high tech where the return is lower, but safer and more health for the economy.

This is actually the second time such policies are implemented since the economic reform during Deng's time. The previous time was around 92. At the time, the Chinese economy just went through a decade of rapid expansion from 80 to 89. As a result, the economy overheats and is structurally unhealthy. As a result, the Chinese economy growth slowed for a few years to adjust its structure. The current situation is similar. While the growth from 2000 to 2012 is not quite as rapid and the bloat is not as bad, the Chinese economy still needs certain period of adjustment.

One of the forumer on Baidu actually made a good analogy for the situation: "There are two ways for a person to grow strong. The first one is slowly increase your muscle in a controlled pace. The second is to take a LOT of weight rapidly and then exercise away the fat. The former is safer, but takes a long time. The latter is more risky, but let you catch up quickly if it is successful. The economy is no different. China was behind the curve and short on time, so the second method is the only option."

The next three to four years will be a period of change and it is not just for the Chinese economy. Europe and USA will also go through significant changes. We shall see who will come out on top.

Oh, I think someone already mentioned the stock thing. The Chinese stock market is kept artificially low so it does not displace actually manufacturing. The Chinese stock markets that involves core interests are not even open to the international traders, so stocks are hardly an economy indicator for China.