Caution over China’s GDP Figures, 2010 is the Real Test
Commentary: China “Not Yet” Engine for World Growth
By Chris Devonshire-Ellis
Jun. 22 – Seeing the World Bank raise their expectations for China’s GDP growth for 2009 as a whole last week was encouraging news. Raising the anticipated growth level from 6.5 percent to 7.2 percent has shown the wisdom of China investing massively in its own economy to stimulate domestic demand.
However, I personally am cautious about any perceived upturn in the overall bottom line as regards the strength of the Chinese economy. I strongly suspect the 2009 figures to be skewed by the sheer volume of money injected by the central bank. The underlying trend is still that of an economy massively dependent on exports, and the news I am getting from the United States and Europe is that any significant recovery is some time away. Even if that proves false, banks will not be extending credit as easily as before and this will impact Western consumer purchases.
To its strategic benefit, China has been widening its export reach to other markets, notably the Middle East and Africa. However, quality control remains a serious issue for Chinese companies with their products dismissed as cheap and unreliable because of Chinese low-end manufacturers that abuse state customs and quality inspections. The low-end products that used to be shipped to Europe and North America now find themselves in more naive, emerging markets and these are not going to be enough to pull China out of its Western export-biased economic model, on which 40 percent of China’s GDP growth is reliant.
A stimulus plan needs to kick start a sustainable recovery, not manipulate GDP figures for twelve months. Accordingly, unless China can either come up with another trillion dollar stimulus plan for 2010, or shift its own economy by relying less on overseas exports, I cannot see how China is going to get close to even 7.2 percent for next year. This remains a concern amid the hype of China’s improving GDP figures.
There is also the increasingly important matter of India. A resurgent India is now armed with not just an affluent middle-class but also a government mandate for investment and reforms. For the first time, China,will start to face competition over which city in the world has the most skyscrapers. That used to be Shanghai, but when you’ve developed Pudong, what next? The labor and industry development that comes with a huge construction and infrastructure boom will soon head to India as the nation massively steps up its infrastructure developments.
The times are changing. I also expect to see the United States start to have balance of trade disputes with India’s Ministry of Commerce rather than China’s. India is also lowering its cost of business. Business taxes in many sectors are at a more attractive rate to foreign investors as opposed to China. This, coupled with no tax on turnover, or mandatory welfare payments for workers, will have the effect of driving FDI to India rather than China. Additionally, who isn’t now in China that isn’t already incumbent?
China’s problem is far deeper than just a slowdown in global spending. The country must reevaluate its economic model – it has gone too far along the route of an export-based economy. The thinkers and policy makers in China need to retract from this position, and balance the reliance on exports with a healthy domestic economy. The RMB4 trillion stimulus plan may make this year’s GDP figures look good, but maintaining growth rates again in 2010 is going to be far tougher than just throwing money at the problem without addressing the underlying issue. A full China recovery along the lines of 2008 GDP growth figures may not occur until 2012, possibly later.
In short, this means that China’s economy is far from yet being an “engine for global growth” as has often been suggested over the past few years. Louis Kujis, a World Bank senior economist, said in a statement last week: “China’s fiscal stimulus package has improved the growth outlook for China in 2009, however the effects of this will dwindle in 2010. China’s fiscal stimulus will help support fundamentals for a shift to a domestic demand-led economy, but it is yet to be the world’s growth locomotive.”
To accomplish this, China needs to develop a platform with a more balanced economy that is less dependent on exports plus a significant increase in domestic consumption to make up for the balance. In an economy the size of China’s, such a shift is going to take some time to implement.
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