Balls Of Fury

BALLS OF FURY Although far from perfect, China’s stimulus package has the potential to get the dragon rolling again, says Sray Agarwal of 4Ps B&M The Chinese economic growth saga will just not be a ‘one-of-itskind’ economic lesson of this century, but will also mark the conceptualisation of a new economic theory in economic history. This erstwhile 8th largest economy (in late 90s) has successfully surpassed most of its predecessors and today stands as the world’s 3rd largest economy (behind mighty US & Japan). If one goes by expert predictions, it would not take much time for China to even surpass Japan and book the second slot for itself. However, the global economic debacle has affected all, especially China, as the country’s overdependence on trade is costing it heavily. This is especially evident when one reads China’s economic growth meter. As per recently announced statistics, China’s economy grew at the slowest pace in almost 10 years in the first quarter. The Gross Domestic Product (GDP) grew at a snail-paced (considering China’s previous growth rate) 6.3% yoy. When plunging stock markets, bank bailouts and expanding recession were acting as nightmares for economies China’s economy was relatively unhurt. But then how long can an economy remain untouched from negative externalities, say experts with a shrug, when so much of China’s spectacular boom comes from global trade? Economics we say, leaves none!! In spite of fighting recession through its pre-planned economic stimulus packages, Chinese growth rate was unable to grow at its normal pace (which is 12-13% per year). It’s for the first time in last 60 years that China is facing any kind of economic turmoil. Many economic pundits credit this slowdown to decreasing export rate. China’s exports decreased by whopping 17% as the

international trade took a backstage in recent times. However, contrary to perceptions, it’s just not the export that is acting like the proverbial frog (pulling all indicators down) for Chinese economy. The Chinese growth rate didn’t fall due to decrease in its export quantity but instead because of tight credit policies that was designed in 2007 for preventing the economy from facing a US like fate. Against the populist notion, China is not so dependent on exports. Agreed that exports constitute 40% of total GDP but less than 10% of total workforce is involved in the same. GOOD,

BAD,

UGLY

The slowdown is more because China largely depends on domestic consumption and its citizens have cut down their consumption. But then, the Chinese government seems all set for the revival. With a four trillion Yuan (equivalent to $590 billion) stimulus plan, China successfully revitalised its manufacturing and banking sector for a pretty long time. Remember, China’s fiscal stimulus is not just the biggest but is a well planned one too. Their stimulus package is well aimed at infrastructure development. Take, for instance, transport – where investment has increased by three-folds in just one year. Additionally, construction of six new railway systems & 14 expressways, upgradation of 12 ports and expansion of 10 airports are also on the agenda. However, major concentration on infrastructure development may lead to an intense catch-22 situation. On pondering deeply into China’s investment trend, there’s one concern that comes to mind – the Chinese government seems to be investing heavily in order to upgrade its production capacity, rather than looking at expanding it. In a country where poverty is still a plaguing problem, upgrading existing infrastructure and production facilities will only help the upper crust of the society and not the common man. What China needs is to search for a brand new way to increase the common consumers’ spending and not just upgrade infrastructural facilities.

Furthermore, you do not need to be Sir Isaac Newton to comprehend that a distressed social safety net is preventing the Chinese from increasing their spending. Instead, they are saving a huge part of their income to meet their medical expenses. When consumer spending for a country accounts for 35-40% of total GDP, it becomes imperative to focus on basic infrastructure development to encourage people to save less and spend more. Moreover, millions of workers (more than 20 million) have lost their jobs due to shutdowns of factories. With around 5-6 million Chinese ready to hit the job market, this unpromising state may lead to a social unrest, especially among the youth. A few weeks back, hundreds of textile workers protested and demanded their pending wages. Agreeing to our hypothesis, Bhaskar Roy of South Asia Analysis says, “China’s last official statistics published in 2005 reported more than 87 thousand cases of social unrest in urban areas due to retrenchment, nonpayment of wages and pensions, and government usurpation of landed property. Since then, no statistics on unrest have been published, leading to questions that the situation may have gone worse.” However, the situation is not so gloomy as it appears. Even though the current growth rate is lowest in the last decade, the 6% growth rate is still very high compared to an average 4-5% growth rate of western economies. If numbers are to be trusted, retail sales are growing at a respectable 15% (around 3 trillion Yuan). Domestic sales are also getting better and even the stock market has improved by two-folds since the quarter ending December 2008. Per capita spending of urbanites is now around 4,800 Yuan. Even the organised sector is seeing a promising future. Sales of cars (2.60 million units) and other consumer durables have seen a comeback. China’s massive $586 billion stimulus package is showing some positive signs. Thanks to the stimulus, industrial production grew by 8.3% (up from 3.8%) in March on a yoy basis. China’s spending on infrastructural development is not only boosting domestic investment, but is also generating huge demand for fuel, metals and other input related raw materials. This means US and European countries, which are chief importers of Chinese goods, may see some growth in their trade. Roy

adds, “This is not a doomsday scenario. China has the instruments and the resilience to wade through the problems. The downturn has not affected defence spending, which rose to about $70 billion in declared figures this year.” Even World Bank, Asian Development Bank and OECD are optimistic about China’s stimulus package and predict that China’s GDP will get back to its normal pace in Q2 itself; that means only three months to go!!!