China Comment

Energy, Environment, and Economy

Bandwagoning About China’s Economy

In the wake of the global economic downturn, China’s economy is growing slower; “only” 9 to 9.9% on the year (Reuters), and perhaps expanding at 8 to 9% in 2009 (China Daily, 11/8/08). Some experts warn that China needs to grow between 6 to 8% to ensure stability and sufficient employment for newly-emerging workers. These worries led to a spate of articles spouting warnings about China’s 2009 economic prospects. Announcement of China’s “financial stimulus” package led to a brief hope-driven turnaround in investor opinion, but China alone cannot lead worldwide economic recovery (other analysts agree). Still, China’s economic composition allows it to weather this recession quite well.

The mass media seems at times to get into “bandwagons” of “fad” commentary that lose sight of the big picture behind issues. For purposes of perspective, I present a cautionary review of some now-ironic predictions and “dire warnings” that were made from November 2007 until today.

(Later, I hope to present a case for what circumstances will allow for continued Chinese economic viability.)

Inflation versus Deflation.

There always seems to be another crisis looming, and yet, China sustains its economic growth. This summer, China was buffeted by increasing energy prices, which contributed to rising prices for food and other commodities. Now, China has seen six consecutive months of declines in its inflation rate and China fears deflation may arrive around February 2009 (The Guardian). China last dealt with deflation in 2002, shortly after China joined the WTO (in late 2001); interestingly, that deflationary experience was similarly precipitated by domestic overcapacity.

Remember back in March 2008 when “Premier Wen Jiabao said tackling inflation was ‘the biggest concern of the people'”, and the BBC commented that “[t]his is a serious concern for the government, which fears higher food prices could trigger social unrest.” (BBC, March 11, 2008).

Deflation may harm China’s growth, but it may also correct a near-overheated inflationary market that was otherwise in danger of bursting. In 2002 the Hong Kong General Chamber of Commerce warned of deflation, but also noted its benefits (I emphasized the most pertinent part); “[a]lthough deflation can give consumers greater spending power, it ultimately gives way to weaker demand as consumer confidence begins to erode [because prices keep falling]… On the flip side, deflation can help increase consumers’ spending power, raise the standard of living of China’s poorer residents, and weed out weaker companies…Mild deflation in China has so far kept the economy from going into recession, and the economy has enjoyed steady growth for the whole of 2002.”

Both inflation and deflation can harm economies, given other surrounding factors, but when making “bets” on China’s future, this current situation should serve as a reminder to draft out a long term plan. In February and March, headline articles appeared not to see this slowdown coming. Instead, they were concerned that inflation driven by rising commodity prices would lead to rising prices for exported Chinese goods, and dire domestic consequences.

A Basically Strong China Supports the World versus A Structurally Weak China Burdens the World.

Just four months ago, Albert Keidel’s piece on China’s coming economic rise was touted as a harbinger of a Chinese Century of overpowering strength. Although people who study China know China currently lacks the economic heft to single-handedly support the world economy, TV newscasters, the BBC, and others complained about how China’s demand was either the main or a significant factor for driving up oil prices. Although China’s rising demand certainly contributed to some of the climb to $150/barrel oil, no one country’s sole future expected supply and demand caused oil’s massive price fluctuations from $60 to $150.

Importantly, China’s decreases in demand for certain commodities came after American consumers cut back on their mileage driven and energy utilized (June 2008 saw the biggest decline in US oil utilization in 17 years). In China, however, imported oil demand was up 17.3 percent in the first five months of 2008 [and was up 3 percent in June] despite prices rising 66.9 percent over the previous year (Xinhua, June 2008). China’s imported oil demand decreased 7 percent in July, but then gained 11.5 percent in August, according to Bloomberg.

Additionally, bulls who bet that oil would become scarce and that demand would remain high were confronted with Western public policy pushes toward financing and supporting recovery of additional energy sources.

When considering China’s current affect on the world, it is important to remember that although China is growing, “China accounts for no more than 11% of global GDP, against 21% for the U.S, on a purchasing power parity basis.  [5% for China and 28% on non-PPP numbers] Its domestic market is only one-eighth of the size of the U.S.’s at $1.2 trillion (2007 consumption). (Forbes). China can be a guiding factor, one of many in the growth of the world economy, so its domestic policies will likely neither harm, nor hurt the global economy much more than Japanese domestic economic policies (which admittedly is no small effect). But China alone cannot shake the world… yet.

Bonus

* A paper delivered at the Peterson Institute on April 3, 2008 argues that to combat inflation “the world economy really needs what is now forecast for 2008/2009: a significant slowing of economic growth.” It’s good to remember that some people thought this recession could help the economy avoid a larger future financial disaster. Could America’s economic implosion actually have saved China from its own domestic inflationary and energy-price-driven meltdown? It is an interesting point to consider.

To avoid over-capacity, economies need to grow at measured rates. 20 years of growth at 6% is arguably better than 5 years at 10%, 2 years at 5%, then 4 years at 9%, then 3 years at 4% since steady growth rates guarantee a modicum of both stability and job security.

* To allow another view to express itself; perhaps China caused part of the fluctuation in demand for some commodities. J. Christoph Amberger at Seeking Alpha warned in April 2008 that slowing growth in textile and light industry export toward Western countries would contribute to Chinese economic weakness post-Olympics.

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12 November, 2008 - Posted by | China Economy, China Future | , , ,

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