continuously updated blog about China & India
You will be living in their world, very soon
Beware the Waking Dragon
Reuters: “India’s economy grew at 4.4 percent in the June quarter, its slowest rate since the first three months of 2009 and weaker than analysts’ consensus of 4.7 percent in a Reuters poll.
With the rupee still trading near record lows and a ballooning current account deficit alarming investors and policymakers, several investment banks are worried about the road ahead.”
via Outlook weak for India economic growth: analysts | India Insight.
The Economist: ““JUST the other day we were afraid of the Chinese,” Paul Krugman recently wrote in the New York Times. “Now we’re afraid for them.” He is among a number of prominent commentators contemplating calamity in the world’s second-biggest economy. Three measures seem to encapsulate their fears. Economic growth has slowed to 7.5%, from its earlier double-digit pace. The investment rate remains unsustainably high, at over 48% of GDP. Meanwhile, the debt ratio—ie, what China’s firms, households and government owe—has risen alarmingly, to 200% of GDP, by some estimates.
Concerns about the first number were assuaged a little this month, when China reported strong figures for trade and industrial production (which rose by 9.7% in the year to July; see chart). Yet beneath the cyclical ups and downs, China has undoubtedly seen its momentum slowing.
It is the combined productive capacity of China’s workers, capital and know-how that sets a maximum speed for the economy, determining how fast it can grow without inflation. It also decides how fast it must grow to avoid spare capacity and a rise in the numbers without work. The latest figures suggest that the sustainable rate of growth is closer to China’s current pace of 7.5% than to the 10% rate the economy was sizzling along at.
For many economists, this structural slowdown is inevitable and welcome. It marks an evolution in China’s growth model, as it narrows the technological gap with leading economies and shifts more of its resources into services. For Mr Krugman, by contrast, the slowdown threatens China’s growth model with extinction.
China, he argues, has run out of “surplus peasants”. Chinese flooding from the countryside into the factories and cities have in the past kept wages low and returns on investment high. The flood has slowed and, in some cases, reversed. So China can no longer grow simply by allocating capital to the new labour arriving from the fields. “Capital widening” must now give way to “capital deepening” (adding more capital to each individual worker). As it does so, investment will suffer “sharply diminishing returns” and “drop drastically”. And since investment is such a big source of demand—accounting for almost half of it—such a drop will be impossible to offset. China will, in effect, hit a “Great Wall”. (The metaphor is so obvious you can see it from space.)”
CNN.com: “After many years of euphoria over China’s rapid growth and the country’s apparently inevitable rise to global economic dominance, the China story has taken a serious turn for the worse. China, it now seems, is about to collapse, and along the way it may well bring the world economy down with it.
Fortunately, the new story may be as muddled as the old one.
China’s economic model has relied heavily on investment and debt. It shouldn’t be a surprise that after many years of tremendous growth driven at first by badly needed investments, Chinese spending on infrastructure and manufacturing capacity is slowing down.
During the same period, debt levels surged as borrowed money poured into more highways, airports, steel mills, shipyards, high-speed railways, and apartment and office buildings than the country could productively use.
Michael Pettis
A few economists predicted as far back as 2006 that China would face a serious debt problem. By 2010, it became obvious even to the most excited of China bulls that this was indeed happening.
To protect itself from the risk of a debt crisis, China must bring spending to a halt. Beijing now wants to rebalance the economy away from its excessive reliance on investment and debt, and to increase the role of consumption as a driver of growth.
But this cannot happen except at lower growth rates.
China debt Fareed’s Take: China’s slowing growth
So what happens next — will China collapse? Probably not. A financial collapse is effectively a kind of bank run, and as long as government credibility remains high, banks are guaranteed and capital controls are maintained, it is unlikely that China will experience anything like a bank run.
What is far more likely is that in the coming years, China’s gross domestic product growth rate will continue to decline as the country focuses on stimulating consumption.
Growth rates during the administration of President Xi Jinping are unlikely to exceed 3% to 4% on average if the economic rebalancing is managed well.
Will the slower growth rate be a disaster for China? Certainly, it would be huge departure from the growth rate of roughly 10% a year for nearly three decades. Would much lower growth rates create high unemployment and huge dislocations for the economy? Some are worried about such scenarios. But the Chinese economy has so far shown a lot of resilience despite passing storms such as the global financial crisis.
Beijing has huge challenges ahead. China’s growth has been a boon to large businesses, the state, the powerful and the wealthy elite. What the Chinese government needs to do is recalibrate growth so that average household incomes can rise and consumers have more money to spend.
This will not be easy to pull off, but there are positive signs. Xi’s government seems determined to make the necessary changes, even at the expense of much slower growth.
Even if GDP growth declines but average Chinese household income grows at 5% to 6% a year, it would put China in the right direction.
As for the rest of the world, there’s no reason to panic over China’s economic slowdown. Contrary to popular beliefs, China is not the global engine of growth; it is merely the largest arithmetic.”
BBC: “China has unveiled a series of moves aimed at boosting growth, indicating that policymakers are concerned about the slowdown in its economy.
The steps include tax breaks for small businesses, reduced fees for exporters and opening up of railway construction.
China’s economic growth rate has slowed for two quarters in a row and there are concerns that it may slow further.
But the cabinet said the economy was in a reasonable shape and it was pushing for reforms to stabilise growth.
“The economy is still running in a reasonable range,” the cabinet said.
“We must look at now and beyond to let restructuring and reform play an active role in stabilising growth.””
via BBC News – China unveils fresh measures to boost growth.
See also: https://chindia-alert.org/economic-factors/china-needs-to-rebalance-her-economy/
BusinessWeek: “The latest less-than-encouraging news from China’s economy: Service-sector companies are seeing lackluster business, according to two separate surveys released July 3. That follows disappointing news showing China’s manufacturing growth is also slowing, announced just days earlier.
A government survey by China’s National Bureau of Statistics and Federation of Logistics and Purchasing of 1,200 nonmanufacturing companies in 27 industries, including retail, catering, construction, and transportation, showed business activity losing steam, with a reading of 53.9 in June, down from 54.3 the previous month (a reading above 50 shows expansion). A separate private survey conducted by HSBC and Markit Economics, covering 400 private service-sector companies, showed business basically unchanged, at 51.3 in June, compared with 51.2 the month before.
“The underlying growth momentum is likely to be softening for services sectors, along with the slowdown of manufacturing growth,” warned Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC (HSBA:LN), in a statement released July 3.
This is not good news for China’s new leaders, who have recently reiterated a national goal of economic rebalancing. That means moving from an emphasis on investment to one more reliant on consumption, with a crucial need for a bigger, stronger service economy. China’s service sector, now at 44.6 percent of the economy, is up 2.7 percentage points from 12 months ago. Still, that’s well below the 60 percent of GDP common in most developed countries, reported China’s official Xinhua News Agency on May 29.”
via Growth of China’s Service Sector Slows – Businessweek.
See also: https://chindia-alert.org/economic-factors/china-needs-to-rebalance-her-economy/
BusinessWeek: “While a dwindling number of migrant laborers is helping drive up salaries in China’s assembly-line industries and other low-skilled employment categories, a surplus of college graduates for available white-collar jobs is eroding the bargaining power of those with university degrees.
Wages have been steadily rising for China’s 260 million migrant workers—who take jobs in factories, on construction sites, in restaurants, and in other sectors with minimal entry requirements. According to the government-led All-China Federation of Trade Unions, the average monthly earnings of migrant workers across China rose 11 percent from 2011 to 2012, to 2,290 renminbi ($370). That exceeds the rate of China’s GDP growth.
Meanwhile, as central-government investment has allowed China to increase university enrollment and graduation rates massively, the demand for college graduates has not kept up. The number of university degrees awarded annually has risen fourfold in a decade, to about 8 million today.
Among those new graduates who did find employment last year, 69 percent had starting salaries that paid less than 2,000 renminbi per month—in other words, their jobs paid them less than they might have earned as migrant laborers, according to figures reported by a the 21st Century Business Herald newspaper on Tuesday.
Those grim numbers won’t, however, dent the hopes of millions of high-school seniors who will be taking China’s three-day college entrance exam the first week in June. The exam, called gaokao, is widely criticized for stressing rote-memorization skills over critical thinking. Critics have called for reforming the test for years, but for now, it’s still a key hurdle—the first of many—for students aspiring to steady jobs and a middle-class life.”
via China’s Lopsided Labor Force – Businessweek.
See also:
BBC: “India‘s economy grew at its slowest pace in a decade during the 2012-13 financial year, figures show.
The economy grew by 5% over the year, after having grown at an annual pace of 4.8% in the January-to-March quarter.
India was recording annual growth of 9% until two years ago, but in recent months it has seen a sharp decline blamed on a slowdown in its manufacturing and services sectors.
Foreign investors have also kept away due to delays in key reforms.
One factor is India’s weakening job market.
“Companies now want a perfect candidate. Because of the global recession they are cutting down the job opportunities.”
Falling orders and fewer jobs
According to the latest figures released by the ministry of statistics, India’s manufacturing sector grew at an annual pace of 2.6% during the latest quarter while farm output rose by just 1.4%.
The figures are in line with official estimates. In February, India lowered its growth forecast to 5% for the year, underlining the challenges it faced in reviving the sluggish economy.
Last month, Prime Minister Manmohan Singh said the current downturn was “temporary” and he was confident the country’s economy would bounce back to an “8% growth rate”.
However, the mood has remained pessimistic in the business community with industry leaders worried over high rates of inflation.
The slowing economy has also meant that Indian companies are putting less profit back into their businesses.
Annual capital investment growth slowed to 3.5% in the first three months of 2013, down from 4.5% year-on-year in the previous quarter.
Meanwhile, complex business regulations are often blamed for driving foreign companies away.
Foreign direct investment into India has fallen, while the amount of corporate money leaving the country is on the rise.
“The government needs to go all-out to turn around investment sentiment,” said Yes Bank chief economist Shubhada Rao.
via BBC News – India’s economic growth at slowest rate in a decade.
The Times: “Fund managers who between them control more than $1 trillion in assets were warned yesterday that China was in the grip of a debt addiction that could destabilise its financial system.
Speaking at the annual CLSA China Forum in Beijing, Francis Cheung, the brokerage’s China head, said that the country was hooked on an “unsustainable” pace of growth requiring ever-greater injections of debt to keep going.
Fifty per cent of the Chinese econ-omy is made up of investment, an unprecedented level for a country at its stage of development, sucking in increasing amounts of credit, effectively to buy growth.
Total debt in the world’s second-largest economy soared from 148 per cent of gross domestic product in 2008 to 205 per cent of GDP last year and is expected to hit 245 per cent by 2015, Mr Cheung said in a report.
But despite the rising tide of investment being poured in to build everything from houses and roads to railways and power plants, China’s credit habit is becoming less effective, with the same amount of debt generating lower returns every year.
China’s annual GDP growth has almost halved from 13 per cent in 2007 to an expected 7.5 per cent this year, while total debt has more than doubled in the same time, a development model that President Xi Jinping also has called “unsustainable”.
“China is running just to stand still … China is not a rich country; it is a lot of debt for a country at this GDP level. What I worry about is unregulated lending,” Mr Cheung told the forum.
With Chinese industry suffering from overcapacity in every sector from steel to cement to solar panels, the country “cannot use any more stimulus policies to boost growth”.
The fastest-growing debt is that shouldered by local governments, with the undisclosed sum estimated to have hit 20 trillion yuan (£2 trillion) last year — a doubling in two years. Local governments are being forced to pay more to service their debts, while their ability to raise money through selling land is slowing.
The biggest risk, Mr Cheung said, came from the growing use of unregulated loans generated by “trust companies”, financial sector intermediaries that make money from offering risky loans known as “wealth management products” to private companies unable to get credit from state-run banks.
A report published by Moody’s yesterday found that China’s “shadow banking” sector had hit an estimated 29 trillion yuan (£3 trillion) last year, posing a “systemic risk” to the financial system, despite a partial clampdown in March. The credit ratings agency also warned of the threat of contagion, stemming from little-regulated shadow lending that has swollen by 67 per cent in the past two years.
Last month China sudffered its first sovereign credit rating downgrade in 14 years as Fitch lowered its appraisal amid fears that its debt problems would necessitate a government bailout.”
via An addiction that could spell economic disaster | The Times.
See also today’s reblog from China Daily Mail about the property bubble.
Reuters: “China’s urbanization drive could fuel social unrest over land disputes and pose financial risks if money is thrown around recklessly, a senior communist party official and a leading economist said on Thursday.
Shifting people from the countryside to cities is a policy priority for China’s new leaders as they seek to sustain economic growth that last year slowed to a 13-year low of 7.8 percent. The government hopes 60 percent of China’s population of almost 1.4 billion will be urban residents by 2020.
The urban population jumped to above 700 million from less than 200 million in the previous three decades, but that explosion has triggered sometimes violent clashes over expropriation of farmland for development as well as water shortages, pollution and other problems.
“These are severe challenges as we are trying to sustain the urbanization process,” said Chen Xiwen, head of the Office of Central Rural Work Leading Group, the top body which guides China’s farm policy. “Many people have worries and such worries are understandable,” he told a news conference on the sidelines of China’s annual parliament session.
The government must protect farmers from losing their land in the process as local governments have been relying heavily on land sales to finance local investment, Chen said. “If the urbanization process becomes a process of depriving and harming farmers’ interests, it cannot be sustained and society cannot maintain stability.””
via China faces social, financial risks in urbanization push | Reuters.
China Policy Institute: “As the new Chinese leadership takes over, their biggest economic challenge remains generating growth for another 30 years. In addition to re-balancing the economy and stimulating more productivity, a key aspect will be the re-defining the role of the state. After over 30 years of marketisation and reform, China remains a mixed picture of state-led policies and a growing number of facially neutral laws with some exemptions for state-owned enterprises.
In addition, the state-owned commercial banks continue to benefit from official “financial repression” policies, such as the preservation of a spread between lending rates and deposit rates. It helps to generate margins for banks and facilitate their recapitalisation. This policy also enables the state-owned commercial banks to continue to support government policies ranging from fiscal stimulus to supporting state-owned enterprises, though not without cost to overall economic growth as financial repression distorts the allocation of capital.
The high levels of capital formation (some 40% of GDP) in the past two decades and the inefficient allocation of capital away from more productive private firms are worrying. The Twelfth Five Year Plan (2011-15) plans to re-balance the economy towards greater domestic demand and less of a reliance on exports. A key part of the plan is to increase consumption and other parts such as more urbanization and services development would support investment in developing larger urban areas where migrants can settle and government services can be dispersed more efficiently.
This plan in actuality has an implicit 30 year time horizon as these policies of migration, urban development and boosting consumption cannot be achieved in a short time period. Unless China can re-orient its growth model including towards more efficient investments by private firms, then it could find it difficult to sustain a strong growth rate. Part of this challenge will include creating a more secure welfare state.”
via China Policy Institute Blog » The next phase of growth.
continuously updated blog about China & India
continuously updated blog about China & India
continuously updated blog about China & India
CHINDIA ALERT: You'll be living in their world, very soon 