Home' Trinidad and Tobago Guardian : June 21st 2015 Contents SBG16 FINANCE
SUNDAY BUSINESS GUARDIAN www.guardian.co.tt JUNE 21 • 2015
For years, Chinese growth rates
have been a byword for
extremely fast economic
development, and the phrase
is still used that way.
Unfortunately for China, the country doesn t
actually have "Chinese growth rates" anymore.
And pretty much nobody is expecting them to
China grew 7.4 per cent per cent last year,
missing its own 7.5 per cent target and notching
its slowest expansion since 1990. Some analysts
think even that is a massive overestimation.
This is unlikely to be a temporary setback.
The slowdown is the new normal for the world s
second-biggest economy. Within the next
decade, China is very likely to be recording
growth rates less than half of what it did in
the 1980s, 1990s, and 2000s.
That may not seem like such a bad thing.
After all, the growth rates that are projected
for China are still stronger than pretty much
any Western country is expecting for itself.
But there are some compelling reasons for
both China and the rest of the world to worry
about a Chinese slowdown.
Why does China matter?
China has headed up the emerging-market
credit splurge since the 2008 financial crisis.
While the recessions in advanced economies
threw some cold water over borrowing in the
developed world, emerging markets have been
racking up debt at quite a speed, with China
first among them.
The combination of low inflation and lower
growth is a poisonous cocktail as far as paying
off debt is concerned. If you borrow on the
presumption of, say, five per cent inflation and
10 per cent growth in gross domestic product,
you have a lot of wiggle room; within five years,
your economy (and hopefully your business)
will be a lot larger, making your debts look pro-
The inflation chips away at the value of the
money you owe, too; a US$100 loan principal
is worth less after five years of compounded
inflation than it was at the time you took it
It s worthwhile for developing countries to
use public debt when they are industrialising
rapidly, but that doesn t mean those bets can t
turn sour if the economy doesn t develop as
rapidly as anticipated. Chunks of that debt
went to poor investments made by profligate
local governments: Chinese research indicates
as much as $6.9 trillion (£4.39 trillion) was
invested wastefully from 2009 to 2014.
The middle-income trap
A pessimistic take suggests China may be
drifting into a scenario that has haunted coun-
tries around the world during the past 50 years:
a middle-income trap.
A joint IMF-Chinese report published in 2013
notes that very few countries actually escape
the middle-income trap. For many countries,
making the transition between genuinely impov-
erished and middle-income seems relatively
easy in comparison with catching up to the
The chart shows how this has worked out
for a bunch of middle-
Most of those that have
made it out have, like China,
been located in East Asia.
But that s not a guarantee of
China has made huge
efforts to pursue its own path
of development, and it is
perhaps uniquely reticent
about following the models
preferred by international
institutions such as the
World Bank and the Inter-
national Monetary Fund
As a result, the country is
part capitalist but with a
huge amount of state control.
It wants its currency to be
of global importance in
finance and trade but frets
about whether to allow it to float freely on
We still don t know how this new system
copes with shocks exactly, or what the future
role of the state will be in Chinese markets.
Until recently, implicit backing from the gov-
ernment seemed to be there to prevent Chinese
companies from defaulting. But this year there
have been major examples of defaults, and the
government hasn t stepped in.
The Chinese stock bubble
China is moving massively away from huge
investment in property toward huge investment
in equities. As a result, Chinese stocks have
exploded in the past year, with the main indices
more than doubling in value.
That has been driven by an explosion in ordi-
nary retail investors opening accounts. Such
investors are unsophisticated and tend to follow
market trends in a herd-like manner. People
are talking about when, not if, the China stock
bubble will collapse.
How Beijing reacts to any collapse in stocks
is hitting a wall
...it's going to affect everyone
is a big question --- but given the relative finan-
cial development of China s economy, for now,
it s a local question.
The risk of contagion
In 2011, an IMF report named China as the
biggest source of real economic spillovers in
the world---the trade links between China and
the world s other major exporters are now
larger than they are for any other region in
the world---Beijing leapfrogged Brussels and
Washington between 2000 and 2008.
There are still other countries that can shock
global economy more---a US banking crash
would (and did, in 2008) have a bigger effect,
but a Chinese slowdown is no longer some
emerging-market crisis that the advanced
world can read about in the media and generally
shrug off---the impact would be felt around
That s not to say the rest of the world would
be thrown into a slump by Chinese growth.
The global growth figure in recent years has
indeed been fed largely by Chinese growth, so
the rate at which the global economy is growing
would be brought down. That doesn t mean,
however, that growth rates of other specific
regions would be largely affected.
The current account is China s financial
balance with the rest of the world; how much
it exports in goods, services, and income,
against the amount it imports. A strong surplus,
as Pettis says, would mean China is not a
major contributor to global demand, or at least
is not a net contributor.
China s failure to break out of the middle-
income trap would not affect someone living
in the UK or US tomorrow; even most pes-
simists on China aren t expecting a severe
If the Chinese economy takes a bad path,
it will not cause ripples as large as the 2008
crisis. But it will mean an economy of nearly
1.5 billion people is left permanently smaller
than it otherwise would have been; probably
a much weaker market for Western goods, and
a less prosperous world in general.
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