Malaysia’s Opposition Leader and former finance minister, Anwar Ibrahim, said late in August what no one really wants to hear publicly stated. He is increasingly concerned about whether China can continue to be an engine of growth for the still relatively healthy Asian economies, saying: “You’ve really got to wonder how sustainable it is.”
This is particularly concerning as almost all of Asia now sells a smaller share of its exports to the US and Europe than it did before the GFC – and China has become its biggest customer. Indeed, most nations in the region are anxious about inflation, including China (6.5 per cent at end-July); India, which is experiencing a 9.2 per cent rise in annual wholesale prices; and Vietnam, where consumer prices rose 24 per cent in the year to August.
Most analysts believe that the higher food and commodity prices and ongoing weak US dollar pressures should ultimately ease but rising interest rate pressures almost everywhere in the region are a growing concern. Indonesia’s current policy rate is 6.5 per cent, India’s 8 per cent. So while China’s unique fiscal stimulus was responsible for more than 50 per cent of global growth in 2009, how flexible is it now to continue as essentially the regional global growth engine?
Simply put, three years on from the collapse in global demand at the end of 2008, China’s capacity to withstand a second slump is now constrained by a continued reliance on exports and investment as its key drivers of growth, at least for the next few years. This leads us to an interesting, growing debate – that is, on the parallels between Japan’s peak economic structure in 1990 and China’s now in 2011.
The current two-speed recovery with China and other emerging economies has fostered a belief that China is somehow inoculated from the global economic flu. For example, according to China’s Ministry of Finance, the profits of state-owned enterprises rose by 24.4 per cent in the six months to July, reaching $US210 billion.
Many of the major investment projects that featured in China’s 2008 stimulus package had been planned for some time but were brought forward in response to the external downturn.
But with the risk of a double-dip recession rising, the central government is now expected to largely focus on ensuring sufficient financing for existing investment projects before contemplating any serious second major stimulus package. Encouragingly, late last month Liu Minkang, the respected chairman of the China Banking Regulatory Commission (CBRC), publicly said that the widely feared and commented-upon local government debt risks that are off China’s public balance sheet were “under control” and conscious policy efforts to ease them were “going smoothly”. Most analysts, myself included, broadly agree.
Let me posit eight considered China propositions about the next few years, which I will then explore more in my next BRW Eco article early next month.
1. Most respected observers currently believe that because of the inherent strength of the country’s fiscal position, over the next four to five years they cannot see either a really hard landing in China or inflation getting out of control.
2. The major challenge facing China is to drive 8 per cent-plus growth on average for that period without stoking inflation. We discussed earlier how that is now likely to happen (no major second stimulus on new projects).
3. An emphasis on accelerating those reforms that in effect stimulate domestic consumption.
4. Many pro-consumption initiatives have already now been introduced: An undertaking to increase the availability of affordable housing (such housing starts were up 34 per cent in the year to July, while the growth in housing starts overall was up 17 per cent); healthcare reforms to make basic services and drugs more accessible; a meaningful increase in the personal tax threshold; likely interest rate reform from the current centralised system to make capital and credit more available to SMEs and personal customers; and a much greater focus on services rather than simply export growth.
5. China’s rapidly evolving second-tier cities with continuing urbanisation pressures are also a key component. By 2020, China will have 93 cities that are bigger than Sydney.
6. A likely more public push to China’s “best-kept-secret” – the rise of the private sector, which is already responsible for 60-70 per cent of GDP and an estimated 80 per cent of employment.
7. China still has a huge range of levers available to government with prodigious resources that can be drawn upon if done so efficiently.
8. The optimistic view is that China’s growth potential is huge for another 15 years or so and can manage the planned transition of the 12th five year plan, released in March this year, as a starting point.
It will be a bumpy ride at times no doubt, but despite the global economic concerns now bubbling up yet again, I clearly remain an optimist.