China's Downturn

China's Downturn

The downturn in world's largest growing and second largest economy, China, in the present scenario is the most drawn out since the Asian Tigers Crisis of 1997-98, surpassing the 2008 levels. After a couple of false alarms, it's now established that the country is actually flashing red with signs of weakness from slackening factory output to poor export growth. These are indeed not seasonal or cyclic fluctuations, but sends out a graver message of a fundamental downshift. The economy which boomed at an average of 10% GDP in the past three decades is now sagging at near about 7%, slowest pace f0r 13 years.

What China is facing is 'the middle income deceleration' wherein it has surpassed the $5000 per capita income level and now has slowed down, even if it's still not stopped to catch up with the other richer economies. Such scenario can be attributed to a wide range of reasons, starting from the persistent producer deflation. It has lasted for 15 months now as against the 12 month period during the Global Financial Crisis. The next biggest concern for China is its own housing bubble. Post response to the 2008 financial crisis, it opened its credit tap so wide open that there is much more money in circulation than in US. Much of it went to speculation in real estate, which now has turned into escalated real estate prices.

One school of thought argues that fundamentally, China is going through a transition period, a structural shift from resources-and investment-driven growth to a more balanced and more sustainable pattern. Hence, the pain is unavoidable, as the economy experiences a deflating of the global demand and domestic investment bubble. However what cannot be overlooked is the invisible debt burden. The $2.5tn foreign exchange reserves make everyone believe that China is the world lender. The fact which is ignored is the local debt of households and corporations amounting to 130% of GDP; nearly 200% if the banking sector is included.

Some further triggers include drying up of rural labour, lack of demographic dividend, increasing labour costs, too much focus on investment and the myth of the missing consumer. The rural labour faced a drastic decrease due to the urbanisation trend. However, even now when the urbanization is slowed to about 5mn per year, the rural labour tends to be elusive. Further, the one child policy of China since 1979 has now shown repercussions in terms of darn fall in terms of people entering in the working age, in both relative and absolute terms; 5mn in present decade as against 90mn in 2000-10. It is now been contemplated that China will grow old before it gets rich. Wage inflation is another factor contributing to slow progress, as the supply has dried up pushing up labour costs. Growth figures of the past indicate that the boom of the last decade was mostly due to the extensive expenditure in the infrastructure.