China’s slowdown in context

Spearhead Analysis – 29.01.2016

By Hassaan Khan
Research Analyst, Spearhead Research

China-EconomyDespite allegations of being manipulated, in absolute terms the recent numbers that have come out from China regarding China’s economic growth are still somewhat positive with a forecasted growth rate of 6.9% for this year. That’s almost three times the rate forecast for the U.S., nearly five times the rate of the EuroZone, and more than ten times Japan’s expected clip.  From that angle, all the recent hoopla surrounding China’s economy is a function of China’s past successes with the global economy used to the People’s Republic posting a growth rate in the double digits. The significant question is then what is next for the Asian Dragon. Will China’s future mirror that of Japan in the nineties which continued to stagnate or will it resemble the turnaround witnessed in the US economy that has begun to revive since 2010.

Heavyweight investor and trader George Soros, also known as the man who broke the bank of England, has already voiced his opinion that he feels a hard landing for China’s economy is practically unavoidable. His views have prompted a response from the Chinese government through an opinion piece in the ‘Peoples Daily’ which has warned Soros that the war he is waging on the Yuan cannot succeed.  This quick rebuke from the Chinese government however, has shown to the world that China is feeling insecure about the recent hoopla surrounding its economy making the average speculator sway to the tune of Soros’s argument rather than the Chinese. Electric power and steel output fell for the first time in decades last year, and coal production has dropped for the second year in row, illustrating how a slowing economy and shift to consumer-led growth is hurting industry. The latest retail sales figures for December also show growth to be weaker than expected at 11.1% last month dampening expectations that consumer led growth can be the new model for the Chinese economy.

The Chinese government has already tried various stimulus packages to keep the economy chugging and further monetary easing is most certainly on the agenda this year.  However further stimulus or economic policy reform cannot change the fundamentals behind China’s slowdown. The world in general is slowing down in terms of growth and analysts have already coined the term the ‘new normal’ to describe the current state of affairs. The era of the BRICS comprising of Brazil, Russia, India, China and South Africa is now over. These nations were once picked by the Chief Economist at Goldman Sach to be the vanguards of global economic growth because of their strength in the commodities trade. However, with the commodities market in freefall in recent years their potential has been revised and put a lid on especially in the case of Brazil which is now teetering on the brink of an economic depression. The new darlings of the emerging world are the Ticks with technologically advanced Taiwan and South Korea pushing aside traditional commodity powerhouses Brazil and Russia. This readjustment tells us a lot about the changing dynamics of the global market with technology coming to the forefront and trade in commodities, in retreat.

Then there are global macro factors to contend with ageing populations worldwide and an underemployed millennial generation can only be dealt with only over the long run. China already has taken steps to rectify their own situation abolishing the infamous one child per family rule but a realization of this change will only come sometime in the future. The only hope for sustaining global growth in the short to medium lies in the emergence of other developing countries to pick up the slack. With this realization recent developments within the realm of foreign policy and international affairs become all the more clearer. The western world especially the US views India as its savior providing the global economy with the much needed growth that it so desires. China while supportive of India has also started to stimulate the economies of other nations to stimulate demand for its own products. Pakistan and the much lauded CPEC deal are part and parcel of this paradigm of thought with the bumper $46 billion CPEC project poised to benefit China as much as if not more so than Pakistan. This global slowdown itself is an opportunity for other countries to catch up to the western world and countries with an emphasis of developing their technology sector will come out of this rut stronger. Sadly for Pakistan in terms of preparedness we are far behind the pack with IT literacy lacking in the working population however the window of opportunity is still open but only just. It remains to be seen whether the huge amount of human capital at Pakistan’s disposal will be utilized or squandered but with no new initiatives to develop human capital on the way it seems as if the latter will hold true and Pakistan will once again find itself as the perennial outsider.