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Is the '€˜China economic crisis'€™ overblown or a '€˜new normal'€™?

  • Putera Satria Sambijantoro

    The Jakarta Post

Beijing | Fri, January 15, 2016 | 04:44 pm

China is on the minds of the international media and economic policymakers as its equity markets have nosedived and its currency is fluctuating wildly. The world'€™s second-largest economy is estimated to have grown only 6.9 percent in terms of gross domestic product (GDP) in 2015, its slowest annual expansion in more than 20 years, and investors'€™ major fear is now that China could record another worse-than-expected slowdown this year.

Stock indexes around the world have seen massive sell-offs on fears the collapse of China may take the whole world with it. Market speculator George Soros has warned that recent China-triggered volatility might mean the 2008 global financial crisis is soon to be repeated.

 But, as the world is on edge over a possible crash in China, citizens living on the mainland now might be wondering, perplexed: Where'€™s the crisis?

Here in Beijing, consumer spending is as strong as ever as people are still flocking to shopping centers. Malls and supermarkets remain crowded despite the recent boom of e-commerce businesses, which encouraged more people to turn to internet startups such as Taobao (China'€™s version of Amazon) to buy necessities online, from food and drink to clothes and detergent.

My friend who works at a global consumer goods company admitted that her company had noticed declining sales throughout China, but noted that it was caused by fiercer competition due to strong growth by local Chinese brands, not by weaker demand.

Outside the capital, domestic tourists still passionately flock to sightseeing spots. The last time I traveled outside the city on a high-speed train, the tickets for which are generally considered expensive by locals, it was full, without a single vacant seat as far as my eyes could see.

Unlike in 2008, when the stock and housing market crash in the US and the impact rippled through to the real sector through rampant layoffs and mortgage closures in a flash, optimism among the Chinese remains intact despite the slowdown and the constant, worrying drops in the stock markets of Shanghai and Shenzhen since mid-2015.

Most importantly, the terms '€œeconomic crisis'€ or '€œmarket crash'€ were never mentioned by my economics professors at Peking University, a campus known for its culture of being critical toward the government. They showed no gesture of worry at all.

One of my professors coolly explained that Chinese policymakers might have decelerated growth on purpose, as overly fast economic growth had predisposed the country to overheating. This is why, despite the lingering slowdown, China'€™s fiscal and monetary policy stances are still at a rather tight setting, not an expansionary one.

The no-big-deal viewpoint of my professors is shared by most Chinese: Their country is growing slower, but it is far from falling into an economic disaster. In short, the nation is just experiencing a rational slowdown needed to steer the economy toward a healthier and more sustainable growth path, which will mean more efficient utilization of resources and less pollution.

Over the past two decades, annual GDP growth in China has averaged around an impressive 10 percent, underpinned mostly by investments, as well as exports.

As China'€™s reliance on investment grows, its efficiency falls, hence the long-run unsustainability of this growth model. As capital accumulates, the capital-output ratio will trend lower meaning that China will need a higher and higher level of capital if it wants to record the same level of growth.

China stubbornly relying on investments would only lead to a piling up of debts, inefficient usage of resources and overexploitation of the environment. This is why China wants to drive its growth not with investments, which now accounts for 46 percent of its GDP, but with household consumption, which accounts for 36 percent of GDP '€” a low figure for the world'€™s most populous country.  

Some of China'€™s leading economic indicators, such as its manufacturing index and factory output, are indeed slowing. However, those readings are sensible in a country where the government is now aggressively shutting down many dirty factories and enacting various regulations to force industries to adopt cleaner, more efficient technology, in response to a serious pollution problem.

China'€™s underperforming provinces for example, the biggest laggards to national growth, are either exposed to dirty commodities, or are known for their inefficient and polluting factories, thus making them soft targets for the government'€™s environmental crackdowns.

For example, annual GDP growth fell to 2.7 percent in the first half of last year in Shanxi, the country'€™s top coal producer. Other Chinese provinces that also experienced sharp growth slowdowns were Inner Mongolia, which provides around one-third of China'€™s coal; Hebei, a leading steel producer; and Heilongjiang, a manufacturing base with substantial oil production.

Meanwhile, in the capital and in China'€™s emerging provinces, growth remained robust thanks to the booming service sector. GDP growth in Beijing, which has twice Jakarta'€™s population with 22 million people, is estimated at least 7 percent for last year. Where in the world does a crisis-threatened country still sees its capital growing by 7 percent?

Another possible reason why some provinces have reported lower growth than in recent years could be the clampdown performed by the Chinese central government on regional leaders who are suspected to have '€œinflated'€ their statistics. Some reports have suggested output or investment figures in some provinces have been inflated by more than 20 percent.

This is because in China, regional leaders are appointed by the central government and promotion or demotion depends largely on their management performance, which is indicated by economics statistics. Now, they might be settling with reporting lower, but more credible, growth figures.

China'€™s economy has its defects, including a lack of policy oversight, rampant corruption and the underdevelopment of its financial sector. However, I see many fears about China get overblown as foreign media and economists take too simplistic a view, labeling its policy implementation inefficient and its economic future risky just because China is a non-democratic country with an idiosyncratic policy-making approach.

Quite the reverse. China'€™s centrally planned economy, where all economic organs can be flawlessly steered in a specific direction, actually make it extremely efficient. A well-coordinated, communist-style implementation of fiscal stimuli in the aftermath of the 2008 global financial crisis was the reason why China could return to 10 percent growth only two years after the crisis '€” a faster economic recovery than any other country.

China is Indonesia'€™s largest trading partner and every economic development on the mainland has a significant impact on the outlook for Indonesia'€™s exports and economic growth and even the rupiah. The two countries are so heavily linked that the International Monetary Fund (IMF) has estimated that every 1 percentage point of slowdown in China could trim Indonesia'€™s growth by up to 0.5 percent.

Regardless, the situation in China might not be as scary as global policymakers imagine. Indonesia and the rest of the emerging markets may just have to the deal with the '€œnew normal'€ of global growth as the Asian giant seeks a slower, but more sustainable, economic expansion.


The writer is currently pursuing a master'€™s degree in public policy at Peking University, China.