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.
These are issues that are in urgent need of a solution. To do that, the People’s Bank of China should reduce market liquidity on the one hand, while clearing up black-market financing on the other. The problem is that this will be most felt by banks that do not have sufficient working capital, and this could drive up overnight interest rates to 30 percent. This in turn will have an impact on companies’ working capital and cause the stock market to fall.
The effect of all this is rapidly being felt and becoming increasingly pervasive in this transitioning economy. At the same time, China’s financial woes are becoming ever more apparent in the global market.
There are many Taiwanese businesspeople in China who have been caught up in the difficulties of this economic transition. Whether they can adapt to the pace of change is crucial to their survival. The government should provide some form of technical and financial support to guide them through this difficult period.
China takes in about 34 percent of Taiwanese exports, and a slowdown in China will significantly affect Taiwan’s economy. Given this, Taiwan is not even assured of a 2 percent economic growth rate for this year.
China’s new leadership is currently faced with a complex, high-risk economic transition involving a large number of variables. Chinese Premier Li Keqiang (李克強) needs to strike the right balance in his economic policy moving forward: If he gets it right, China will continue to go from strength to strength, but one false move could spell disaster. He knows the importance of caution at this point.
Norman Yin is a professor of financial studies at National Chengchi University.
Translated by Paul Cooper