On China slowdown

When China sneezes, the world catches a cold, they say. Apparently, much of the West has been nursing a cold this summer. First the mid-year Chinese stock-market rout rattled market nerves. Then, Chinese government data suggesting "around 7 percent" GDP growth failed to lift spirits. Later, the surprise Yuan devaluation led investors to feel that Beijing, which had smartly traversed the post-Lehman whirlpool, was out of ideas.
Last Friday, Caixin, China's manufacturing PMI, reportedly tumbled to a 77-month low. Mostly due to sharp decline in new orders and employment on the back of weak European demand and cheaper currencies of major trading partners, the August preliminary reading came to 47.8, signalling a contraction in factory output. The news sent stock indices across the Pacific and Atlantic packing.
A pall of suspicion seems to hang over the Chinese governments toolkit. However, IMF sounds sanguine. Its officials are not calling it a "China crisis" as yet, sticking to their forecast GDP growth of 6.8 percent. It is evident that Chinese policy mandarins are consciously trying to transition to the more-sustainable, consumption-oriented economy. And this rebalancing will be bumpy before normalization is attained.
Although market participants outside China do not seem to be buying into that hope-narrative, a few things need to be kept in focus.
First, only about 9 percent of Chinese household wealth is said to be invested in stocks, so the hard fall Chinese stocks have been suffering over the summer barely classify as a systemic risk to household consumption. And generally, Chinese households who are invested in equities seem to have done so to try out "another investment avenue" - not for life support. Moreover, stock markets are deemed to be the last resort to raise company financing in China.
Second, the "size effect" mustn't be ignored. China was a $2 trillion economy in 2004; in 2014, the scale had expanded fivefold to over $10 trillion (World Bank). So, a growth rate of around 7 percent per annum is still impressive for an economy that large.
Third, the same growth recipe may not work anymore as diminishing returns are bound to catch up. As it gradually became the global factory, China has averaged nearly 10 percent GDP growth since 1978, the year when Deng Xiaoping was finally in firm control of the CCP and started rolling his game-changing "opening up" policies.
You would come across forecasts that claim that by 2020-21 China will overtake the US as the world's largest economy. (With that, China would have the unique distinction of dominating global economy for 20 of the 21 centuries.) But the next phase of growth will likely be financed by more of domestic consumption and infrastructure development than the hitherto singular reliance on exports and inward FDI.
Fourth, one mustn't underestimate the Chinese Politburo's fiscal power. The party's next development push seems geared towards central and western regions, which were somewhat left unaffected by post-reform modernization that struck eastern and coastal China in the last two decades. Estimates for poverty in China (at $2 a day) range between 27-30 percent of population. According to UNs IFAD, about 40 percent of the poor in China live in the country's seven autonomous regions in central and western China.
The "Silk Road Economic Belt" - a major component of President Xi Jinping's "One Belt, One Road" economic program - plans to bring modern transport and communications infrastructure to these under-developed regions, which will help link up coastal China with Central Asia, Middle East, and Europe, tracing the original Silk Road.
All this planned readjustment and refocused-development is a long-term project, fruits of which may be too far off in the future to assuage panicky brokers today. So, expect the cold to last for some more time before folks make peace with it. The Chinese are presiding over a difficult but needed transition at home, one that needs to remain peaceful for positive impact. It may well be that the living standard of these 1.3 billion people may determine the lifestyle of the rest of the world. The world should wish them luck.