Dragon Pillow Talk

 Dragon Pillow Talk

There are doubts, Chinese Whispers really, being expressed about China’s economic health. Neil Gough recently wrote in the New York Times that the Chinese GDP figures are suspect. Implying that, like all totalitarian states of yore, modern-day China cooks its figures. He writes that the currently lukewarm export numbers are being boosted with book-entry exports to Hong Kong, its increasingly troublesome outlier province.

And that the various Chinese provinces have reported growth figures that don’t tally with the national figures; that the total is actually higher than the reported sum of all the parts. But the bottom line is, though China’s growth may have softened below its own domestic needs, it is far from stagnant. The good news for others rejoicing at lower commodity prices, is that Chinese   demand won’t cause them to spike upwards.

Gough says China’s debt, presumably internal, to its own closely controlled banks, has risen to 250% of its suspect GDP at the end of June 2014. This up from 150% of the GDP five years ago per the Standard Chartered Bank.  On the other hand, let us remember that China does have a spectacular $ 4 trillion in foreign exchange reserves! An economic crisis in China is therefore not imminent, even as it attempts to make fundamental and structural changes in the way its economy is composed. It has a lot of spare manufacturing capacity built over its roaring growth years. Likewise sizeable infrastructure building and contracting ability is sitting on its hands at present.

And that is why India with its needs in precisely those underemployed regions, is being eyed as something of a savior. The backlog of mistrust and border tensions has to be addressed, but this strategic shift towards India is acknowledged to be a policy direction appropriate to the times in the Chinese matrix.  

The current Chinese GDP growth figure and target, in the modest region of 7.5% per annum, is still very respectable, though down from double digits and thereabouts for 25 consecutive years. But China deliberately wants to cool down its overheated economy now. It is more concerned about excessive debt and the potential effect on its fixed price currency. The policy is now to get away from credit-fuelled growth, and substitute it instead with domestic consumption.

This again, is not to be dismissed, even if it falls short of China’s gargantuan appetite. At some 12% increase in retail sales this year, there is nothing wrong with the level of consumption. There is also a lot of purchasing going online, a trend that is the shape of the future internationally, and some analyst estimates reckon this is at six times the retail brick and mortar sales value. But can domestic consumption alone ever replace the huge growth over the last three decades?

The Chinese leadership understands the situation, and does not mind if retail consumption falls below projections. What they want is to bring down the debt, and cool the economy before it implodes, like so many in Europe have done, and where the US economy, the most powerful, hovered for several months after January 2008.

This chequered Chinese outlook comes on top of all the tension-making economic news from Europe. The warring in West Asia, the Ebola threat from Africa, tensions with Russia and the Ukraine, the perpetual and disruptive security threats emanating from the global terrorist networks, are all giving prominence to the CBOE VIX ‘Fear Index’, and promoting volatility in the global stock markets.

The sharp US dollar strengthening, based on pronouncements and hints from the Federal Reserve Bank on the end of tapering and the beginning of interest rate increases, whether it will come sooner than anticipated, signalling tighter liquidity, or later; are also causing global investments to be shifted about abruptly.

 This may also particularly impact the Emerging Markets (EMs), including, as it stands, China and India though India expects to out- perform based on its strong Government, better economic parameters, reform and  promise.

Nevertheless, if The US economy revives convincingly, much of the global investment money is expected to relocate to the traditional ‘safe haven’ of the American bourses. The recent and sudden, about 10% sell-off in the US indices on Dow Jones, S&P 500 and NASDAQ, is considered a healthy blood-letting, and the nascent revival from those lower levels, augurs well for a fresh bout of global bullishness. This, with the European bourses, having little to cheer about locally, following the US cues instead.

Will China sink the flotilla going forward? It does not seem likely, despite being in the throes of its economy in transition.

(765 words)

October 21, 2014
Gautam Mukherjee