Sun, Jul 21, 2013 - Page 8 News List

Chinese economy in a transition

By Norman Yin 殷乃平

The IMF recently revised down its world economic growth forecast for this year to 3.1 percent, citing slower growth among emerging economies such as China, Russia and India as a reason. Of these, the degree of slowdown in China’s economic growth is exceptionally serious.

Chinese exports last month dropped 3.1 percent compared with the same period last year, while imports also fell by 2 percent. Growth in the consumer price index for the same month, at 2.7 percent, was the highest in four months. All these economic indicators are pointing to a contraction, suggesting that the economy is running out of steam.

The monthly growth in money supply also slowed in the first half of the year, with M2 growth decelerating from 16.1 percent in April to 14 percent last month, and M1 growth sliding from 11.9 percent to 9.1 percent in the same period.

Another starker indicator is the level of foreign exchange reserves which, at US$3.5 trillion, rose by only US$60 billion in the second quarter of this year — not even half the US$130 billion increase seen in the first quarter.

Major foreign investment agencies have adjusted their outlook for China, suggesting that Beijing would struggle to achieve 7 percent economic growth this year and that growth would further slow to 6 percent next year. Is the Chinese economy facing a hard landing?

China is now feeling the pressure of an economy in transition. Since the latter half of last year, the yuan’s appreciation, coupled with rising wages, meant increasing costs for labor-intensive industries. With orders falling, China’s small and medium-sized enterprises (SME) — in particular those in Wenzhou — have found themselves in trouble.

Official government policy orientation was diverted to capital and technology-intensive industries, while the government established a financing platform for SMEs to keep them financially solvent and help them upgrade, so that they can produce higher-quality, value-added products.

However, such financial assistance is just a band-aid for the problem and does not get to its roots. If the orders stop coming in, many SMEs will go under and the country will still be wracked by the labor pains of an economy in transition, further encumbered by black-market financing.

In the first half of the year Chinese industries — from construction to high-tech, including steel, cement, coal and glass to polysilicon, solar panels and wind turbines — were operating at a surplus. However, some products faced slow demand on global markets, while others were subjected to anti-dumping tariffs by the West. With supply exceeding demand, the chaos on the domestic market caused global prices to drop.

The world’s factory is now facing a host of problems, and while the high-tech and emerging industries are safe for the time being thanks to their being the focus of government policy, many companies are unable to find financing, and that is posing a major barrier to industrial transformation.

For more than two months now, the cash shortage in China has drawn wide concern. Those who advocate tightening money supply believe that there is too much liquidity in the market, that the demand for non-bank financial institutions is misleading capital flows, that the so-called high return financial products are gradually replacing traditional bank deposits and loans, and that all these are cause for concern. Even more worrying is the havoc caused to financing by illegal, dishonest, fraudulent financing practices.

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