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Is the Chinese economy weakening?

Published: January 28, 2019
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The writer is a former caretaker finance minister and served as vice-president of the World Bank

The writer is a former caretaker finance minister and served as vice-president of the World Bank

China has outgrown the model of economic programme that produced what the World Bank in its 1993 study called the East Asian miracle economies. The model relied on export-led growth in which activist states encouraged manufacturing enterprises to produce cheap items of daily consumption for export to the Western markets. First to make use of this approach were Japan and some of the smaller states in East Asia, including South Korea and Taiwan. South Korea is now regarded as a developed country.

China followed with the same approach and rose equally spectacularly. In a bit more than a quarter century — from 1980 to 2007 — it was able to increase 32-fold the size of its GDP. This growth meant increasing income per head of the population 25 times. As a result, China no longer has cheap labour it could use to produce the manufactures in demand by the West. It needed to diversify its markets and find new ways of reaching them. After President Xi Jinping had consolidated his power, he turned his attention to implementing a new approach to development. His Belt and Road Initiative (BRI) was an important part of this approach. The China-Pakistan Economic Corridor (CPEC) is by far the most important component of the BRI.

The BRI is based on a number of assumptions. While there will be significant changes in the content of the Chinese economy and also in the direction of the county’s exports, the rate of economic growth would be maintained well into the future. The economy would continue to expand at the rate of between six to seven per cent a year. Even this lower rate is more than twice the rate at which the world’s more developed nations are likely to grow. Domestic demand in China will join the export sector as the driver of growth. And there will be a significant relocation of population from the crowded east coast and the eastern provinces to those in the west of the country. The western provinces will need agricultural and livestock products to feed the relocated population. Pakistan would be an important part of the last component of this strategy. However, according to some indicators and some experts, the Chinese economy is likely to slump as the country comes face to face with new circumstances?

Where is China headed? This is an important question not only for Pakistan but for the entire world. China is important for Pakistan since its economy is getting increasingly tied with that of China. But the global economy also depends on China to stimulate it. It was China’s resilience that saved the Great Recession of 2007-08 from becoming the Second Great Depression after the one in the 1930s. Some of the recent economics and financial data from Beijing suggest some slowing down in economic activity. In the last three months of 2018, the economy grew at its slowest pace since the global financial crisis of 2007-08. The rate of growth in the October-December 2018 period was 6.4 per cent. This was the same rate as in the last three months of 2017. However, for all of 2018, the economy grew by 6.6 per cent, the slowest pace since 1990.

The Chinese slowdown is coming at an awkward time for the world economy. The American economy which had been doing well in recent years with strong growth and historically low rates of unemployment is also slowing down. The United States stock market has been gyrating; its volatility suggests that the investors are unsure which way the economy is going. Europe is also slowing down; even Germany, the continental powerhouse is sputtering.

The evidence for China’s slowdown comes from a number of sectors. Automobile sales have plunged since last summer, brought down by the tightening of credit. The real estate market has slowed with deeply indebted developers facing steep interest rates. There are a number of other reasons for the Chinese slowdown that are external to the country. The trade war with the United States is one of them. “The global economy and financial markets are incredibly sensitive to China’s growth and currency outlook,” said Robin Brooks, the chief economist at the Institute of International Finance, in Washington. “The immediate financial linkages are relatively modest, but they are swamped by sentiment channels.”

Consequently, for the 2019 meeting in Davos, Switzerland, the direction of the Chinese economy was the most pressing issue. The mood was not upbeat. The stage was set by a report issued by the World Bank under the title of ‘Darkening Prospects’. The Bank is worried about the coming together of a number of negative trends and developments. Notwithstanding the generally pessimistic mood at Davos, those attending the meeting drew some comfort from the fact that the participants from China gave a strong indication that they will not allow their country’s economy to slump. At a financial conference held in Shanghai in June 2018, the Chinese authorities indicated that they might have gone too far in constraining credit. According to one assessment, quite a few China-watchers say, “They still have confidence in China’s consistent four-decade record of pulling itself out of slumps quickly. Chinese officials have put new emphasis in recent weeks on rebuilding confidence. And they are at least trying to reassure private companies that the government will not favour state-owned enterprises over them.”

There is a tendency among Western analysts who watch China to misread the country. When I was the director of World Bank China Operations from 1987 to 1994, I had a running argument with Rupert Pennant-Rea, then editor of The Economist. After the collapse of the Soviet Union in 1991 and the adoption of what came to be called the big-bang approach to economic reform, the magazine wrote a number of editorials urging Beijing to follow the Russian example. I disagreed. I believed that the approach favoured by Deng Xiaoping to cross the river by feeling the stones would be better for China. The Chinese moved cautiously. They succeeded while Russia failed spectacularly.

The conclusion I would draw from the above analysis is that Pakistan need not worry about the likelihood of some slowdown in the Chinese economy. Even if that occurs, it would not change the set of assumptions on which Beijing is making huge investments in the BRI and CPEC.

Published in The Express Tribune, January 28th, 2019.

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