China's economy has stabilised. What's on the horizon?
Frank Sieren & Andreas Sieren / Jul 11, 2009, 00:03 IST
Lao Jiang’s old boat could use some fresh paint. But he doesn’t have the money. Jiang cruises on the Yangtze, the longest river in Asia, almost 200 kilometres north of its mouth near Shanghai. Jiang sells razor blades, Harbin beer and Chinese snacks to crews on big ships. Jiang has little understanding of economics but he has a good nose for business opportunities: “There are fewer big container ships with products bound for America.” For weeks, a Chinese container vessel was anchored in the docks of the Yangtze near Jiang’s village. A few tankers are parked there too. The small overloaded barges keep moving up the river as usual though. They carry cargo of coal, motorbikes and fridges for the rural population. But their crews buy little from Jiang; he has been making his money with help from the crews of the bigger ships. However, Jiang knows that in the shipyards along the river work continues as usual. And the coal power station 30 km away is being extended. He knows that from his brother-in-law who works a crane there. But all of this generates few customers for Jiang’s floating market. He moans a bit, but is not really worried. “Every river has low tide once in a while.”
Jiang’s observations are similar to the thinking of the macro-economists in distant Beijing. Exports are shrinking, even though not dramatically. But at the same time, the domestic economy has risen significantly during the first quarter of this year. The economic stimulus package worth $600 billion that was implemented last November works — at least in the construction sector and for infrastructure projects. In the first quarter of the year the banks granted 30 per cent more loans than during the same period of the previous year. Real estate sales are on the rise. The stock market is booming. However, industry production — as also exports — has decreased. The economic situation is easing from month to month, even if the growth rate of 6.1 per cent is a lot lower than towards the end of 2008 when it was at 6.8 per cent.
Most Western analysts predict that the Chinese economy will pick up again during the course of 2009. “The Chinese economy has already gone through the worst and is currently in a powerful upward movement,” says Michael Heise, Chief Economist of the Allianz Group, who recently visited Asia. The American investment bank Morgan Stanley speaks of a “continuous recovery”. And UBS recently adjusted their forecast for GDP growth in 2009 from 5.5 to 7 per cent since the economic stimulus packages had “a bigger impact than expected”. This has built confidence and has prevented investment and private consumption from further decreasing during the first quarter of this year.
Chinese analysts, especially the ones close to the government, are more sceptical. “Even if the Chinese economy has reached the bottom, we cannot expect a V-shaped recovery but rather a U-shaped one,” says Zhang Wenhui, Researcher at the State Council. “A speedy and long-lasting recovery is rather unlikely.” He does not believe that the government will be able to continuously stimulate consumption. “Consumers do not buy a new TV every year,” he says.
Do Chinese economists know more than their foreign counterparts? Hardly. They act in an anti-cyclical manner to government policies. When the economic outlook is bad they do not pour more oil into the fire. When the economic outlook is promising they play it safe. But once you blend the positive Western and sceptical Chinese points of view you get a more realistic picture: two of four engines of the Chinese economy have seized. China has left its usual flying altitude and cruises at a more stable lower altitude. By doing this China’s economy can continue the flight as, contrary to Japan and Western nations, China barely needs to go into debt in the current crisis. China however will reach the higher flying altitude only after the global economy has recovered. All those who hoped that China would save the world economy may be disappointed. “China’s economy is not powerful enough, it only has one quarter of the size of the US economy,” said investor George Soros during a lecture at Shanghai’s Fudan University in early June. But he is also optimistic about the Chinese economy: “Personally, I believe it’s going to grow faster than most people currently expect.”
In fact, once global consumption resumes it is likely that China’s economy will gain disproportionately. This is because, globally, China is still in the best position to offer the right mixture of quality and price. In addition, Chinese entrepreneurs have the advantage of being able to rehire workers within two weeks.
How does the Chinese government assess the situation? The Politburo has been so confident that last month it advised banks to grant less credit. “We wanted to check whether the recovery will also continue with normal credit volume,” said a senior representative of the central bank. This in times when the global economy will most likely shrink for the first time since World War II. Those who were certain last autumn that China wouldn’t be able to stay out of the global crisis have become quieter.
Consumption was on a downward trend in January, it has steadily grown during the last four months, and in April it rose by 15 per cent. “The biggest winners this year will be manufacturers of consumer products,” says Lee Eun-taek, analyst with Dongbu Securities. Morgan Stanley anticipates that China will sell 6.5 per cent more cars during 2009. River boat man Jiang has no reason to study these numbers. He just waits for the return of the big ships. First up-river with parts for the factories, then down-river with consumer goods for the rest of the world. He does not care that his beer sales follow the same pattern as China’s export growth. He has already given the crisis a name: the “big-ship-not-buying-beer-crisis”.
Frank Sieren is based in Beijing. Andreas is a specialist in international relations and development aid
For how long can Americans stay away from buying? Their shoes will wear out, they may keep their old car for another year, but eventually, replacement will be needed. America will return to the market place soon.
On the other hand, Chinese consumption is buoyed by incentives. People do not need new appliances every year. A new car will last many years. You can only build so many roads before saturation point is reached. So, unless
exports return, the Chinese economy will sputter by its own consumption alone.
America will return to modest growth soon, 6-18 months. China will fly at a lower altitude as its economy matures, 5-8% in the next 10-15 years. After that, Chinese growth may be reduced to 4-6% growth aflter 2025. China's economy may not overtake the US economy for another 35-40 years.
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