Remodeling China’s Economy, the Bear to Watch

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By Chris Devonshire-Ellis

Aug. 3 – Andrew Peaple in today’s Wall Street Journal article wrote an interesting piece on China’s stimulus habit which details new concerns over the remodeling of its economy. As I mentioned in my recent essay, China is having to remake its economic model and move away from such an export driven base. How it does that is a subject of some conjecture on Wall Street.

While China’s GDP figures for this year so far look encouraging, my belief is that this has largely come about as a result of the stimulus plan put in place by Beijing. Put simply, if you inject US$1.1 trillion into your economy, GDP goes up. However, it’s a trick Beijing can only pull off the once – and with announcing likely GDP this year of some 7.9 percent, it gives a signal that maybe the actual, non-manipulated growth is actually about 4 to 5 percent.

Peaple writes: “Rebalancing the Chinese economy is a seriously long term project and may mean the government having to accept lower growth in some years than has become the custom.” I fully agree with that perspective.

Quite how this impacts in China is also an issue of concern. Perceived wisdom has it that China needs to maintain an 8 percent growth yearly to absorb new graduates every year as well as the ongoing retrenchment of workers engaged in inefficient industries. If so, then the government is going to have a manage potential issues of social unrest very carefully – increases in pensions, unemployment funds and so on will all need to be examined.

There are difficulties. Unemployment funds in China are not insurance based as they are in the West and there is the potential for massive fraud within these funds having occurred. As China strains to take the weight of a shifting of its economic model, it needs to be highly sensitive to its internal issues. It’s easy to manage a country when the going is good, but when strains appear the cracks begin to show.

China will still be a magnet for foreign investment, especially to those businesses keen to sell infrastructure related products and knowledge to the inland regions and for those businesses who can cope with the competition of selling product and services to the Chinese domestic market. However, I believe that China’s growth days of 8 percent are likely over for the time being and some sensibility is needed if looking at China growth as a pure investment.

As Peaple concludes in his piece: “Unshakable faith in Beijing’s planning powers, when such large amounts of money are being spent so quickly, makes little sense. ” I concur with that, and believe now is the time for caution when it comes to understanding China’s economy.

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