COVER STORY of CHINA – ECONOMICS
GLOBAL IMPACT
As an UPSC civil services aspirants you may know the economic condition of different different countries its is very important forIAS aspirants also .
The slowdown has significant ramifications, both for China and the region. For Beijing, the fate of an ambitious reforms agenda unveiled by President Xi Jinping at the Party’s Third Plenum in 2013—from reforming and curtailing the power of bloated state-owned enterprises to giving a greater play to the market and opening up key sectors for private participation—remains in the balance after the market turmoil. “The reform agendas are ambitious and therefore much harder to imple¬ment for a variety of reasons,” says Li Wei. “Coordination of the reforms is a daunting task. Strong resistance from interest groups does not help either. A more uncertain global econ¬omy and geopolitical environment are also distractions.”
For India and the region, the slowdown in China suggests the start of a painful transition where economies have to recalibrate their dependence on Chinese growth. The results,
economists say, are a mixed picture: falling oil prices could help—crude oil is down from around $100 a barrel at I the start of 2014 to under $40, largely I because of China’s slowdown—but the overcapacity in China’s steel industry, which has kept prices high, could be painful for Indian steel producers.
Gold prices fell to a five-and-a-half year low in July to less than $1,100 per ounce, down from close to $1,340 a year ago, but have since rebound- I ‘d slightly following China’s move to devalue the yuan.
“There is a realisation that China is not going to be growing the way it was,” says Chris Solarz, MD of US hedge fund floodwater, who closely fol¬lows Asian markets. “For the past 20 years, China became the major glob¬al market for most industrial com¬modities, buying more than half of all margin demand in a number of com¬modities. These commodities were used for building the country’s infra¬structure but much went into stockpile as well. This sell-off in Chinese equi¬ties and slowdown in Chinese growth I J can very well lead to a liquidation of these stockpilings, which has already occurred over the past few months. ”
The biggest challenge now for China, says Xu Bin of CEIBS, is to nurture new sources of economic growth this news was on the top in the UPSC.
For China and the rest of the world, that means a bumpy road lies ahead.
on August 25, there wasn’t a single mention of the market meltdown in the People’s Daily, prompting ridicule from Chinese social media users.
F or Li—and millions of other Chinese— the stock market was a logical choice. A slowdown in the real estate sec¬tor and unattractive state-controlled interest rates meant that there were few other options. And when party mouthpieces gave the market their vote of confidence, there was a wide¬spread consensus that this would cer¬tainly be a safe bet—surely the state wouldn’t allow otherwise.“There were reports saying there would be 200 per cent growth. Investors were rarely warned about market risk,” says Li. As tens of thousands rushed to buy shares, the government-backed bull run almost became self-fulfilling, driving up the Shanghai market from under 3,000 points in December to a high of 5,166 by June 12. Following the crash, the market is now back to where it was before the run began.
“The market did go crazy in some way that economics doesn’t explain. It didn’t run according to common sense. Usually, an annual growth rate for an entity isn’t likely to go beyond 30 per cent. Here, everything was growing at 100 percent in a year,” she adds. For the Communist Party, social stability is its biggest concern. More than seeing listed companies lose market value, it is the sight of angry investors venting at brokerages in Shanghai and Beijing
that is the bigger concern—investors, from retirees to college graduates, who took the government at its word when it talked up the market and put their savings in stocks, only to see a crash wiping out their wealth.
DEVALUATION DILEMMA
A similar concern prompted China’s second surprise intervention on August 11, when the People’s Bank of China, the central bank, moved to devalue the yuan currency by 2 percent—the biggest drop since 1994. The timing of the move led to the per¬ception in some quarters that the slow¬down was indeed worse than Beijing had let on, and that the government was concerned enough to move to support its exporters. Beijing, howev¬er, argues that the yuan is overvalued and the new peg would only bring it closer to a market-determined rate.
This intervention, says Li Wei, the economics professor at the Cheung Kong school, was more justified. “The Chinese central bank has been pushing for more market determination for years. It got its wish granted this time because economic conditions are different today. After the yuan has appreciated significantly, nominally and more so in real terms since 2005, it is very likely overvalued today. I believe that most analysts over-interpreted China’s currency move.”
At the same time, Beijing’s
devaluation is certainly also aimed at assuaging concerns of exporters after a foreign trade has collapsed in the past few months. In July, exports were down by 8.3 percent. The deval¬uation “gives some breathing room” for export firms, says Xu Bin, profes¬sor of finance at the China Europe International Business School (CEIBS) in Shanghai.
SLOWING GROWTH
A snapshot of what is at stake as China slows is on display in Guian, a sprawl¬ing new city that is being built among the rice fields and green hills of west¬ern Guizhou province. In February, the Chinese government gave the green fight to build a $ 10-billion high- tech zone that would be the centre of innovation for all of the western China.
The Guian New Area project flagged off by no less than Premier Li Keqiang in February, is a key pillar of Beijing’s larger plan to transform the economy and avoid a prolonged slow-down or “hard landing” for the slowing economy. There is no doubt among Beijing’s planners that the state invest¬ment-driven, the export-led model that propelled China’s growth over the past two decades is nearing the end of its shelf fife. Investment-driven growth is becoming less and less productive and has left a burgeoning debt prob¬lem among local governments