Tuesday, July 24, 2012

Banking too much on heady China growth

Straits Times: Tue, Jul 24

NOT a moment too soon, some who believed the party would never end are coming around to the view that it is unwise to over-rely on China as the main driver of global economic growth. As one might have expected, China's economy is encountering adjustment realities after a lengthy hot streak. Inherent weaknesses are too much reliance on exports and too low consumption for an economy of its size. From average growth of 11.2 per cent between 2006 and 2010, the most optimistic rate for this year is around 8 per cent. Second-quarter growth of 7.6 per cent just reported was the slowest in three years. Even if American and European consumers returned to their old spending ways, China's export dominance which had paced double-digit growth could become less dominant as rising wages and input costs cut its price advantage. And for consumption to reach developed-nation levels, requisite political and social adjustments, that would enable private spending to grow in tandem with urbanisation, will take years to eventuate.

A reality check at this stage is useful but should not be overdone. It is the expectation that growth may decline faster if consumption does not get a boost sooner, coupled with indefinite sluggishness in Western economies, that has deepened pessimism in some quarters. Some analysts even talk of an imminent calamity of trade and market failure, if India's faltering growth is added to the mix.

However, it is fortunate Chinese planners have not run out of policy tools to keep growth at desired levels. As inflation and real estate are coming off their peaks, stimulus can be exerted through rate cuts, expanded lending and state spending to steer growth to a level that will not overheat. What has transpired has been a soft landing.

The stakes are high because of the risk of social upheaval if growth dips well below 7 or 8 per cent, the minimum level for the economy to absorb new job seekers each year. Compounding the risk is public anger over rampant land grabs and petty abuses by local officials. For now, various studies are predicting China can hold steady with 7 to 8 per cent for the rest of the decade.

This is a far cry from the 14.2 per cent chalked up in the year before the global financial crisis struck. Hence, smaller economies should recalibrate expectations and be prepared for slower growth. China's present formula of boosting growth will prevail for a while more but it is not robust. The search for the economy's elusive stabiliser - consumption as main contributor to GDP - will continue to be a long-term policy challenge. Given this, it pays for others to widen their options to keep their economies humming.

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