Peter Jones: China economy crisis is over-egged
An OLD economic saw had it that when America’s economy caught a cold, Britain’s got the flu. That was when America was unquestionably the world’s biggest economy and Britain’s biggest trading partner. But now China challenges US economic dominance and is slowing down. Should we be wrapping up warmly? Actually, maybe not.
We should certainly be paying attention to the other side of the world. Both the size of the Chinese economy – about 15 per cent of the global economy – and the speed at which it grew to that size – annual average growth rates of about 10 per cent enabling it to be now about 20 times bigger than in 1990 – underpin present worries.
According to the International Monetary Fund (IMF) the Chinese economy in 2013 was $17.6 trillion, slightly higher that America’s $17.4 trillion. Many folk regard this Chinese number with deep suspicion, arguing that the IMF calculation is somewhat artificial and the statistics on which they are based highly suspect. So you can find estimates which put Chinese real economic weight in the world at a measly $11 trillion. Even so, that is about four times the size of the British economy and roughly 40 times the size of the Scottish economy.
So, figures suggesting that Chinese growth has dipped to about 7 per cent (though some think that inflated and, if they were occurring here, would have British policy-makers ordering shiploads of champagne) are nevertheless a worry for the world economy, for recent rapid Chinese growth has driven a lot of world growth.
In our own case, the post-1990 surge in manufacturing brought down the cost of many everyday items, from washing machines to mobile phones, allowing all of us to have increased spending power, benefiting our economy.
For many countries producing commodities such as iron ore, the 20-year boom in Chinese construction was a sizeable income boost. But now that growth has slowed, consumption of commodities has fallen as have prices which, excluding oil, are down about 20 per cent in a year.
This hits the economies of countries as diverse as Malaysia and Australia, both big commodity exporters, and is one factor weighing heavily on the value of their currencies. Against the US dollar, virtually all of the Asia-Pacific currencies have fallen in value, a decline which has been spurred recently by rising expectations that the US Federal Reserve will increase US interest rates.
Add in other factors such as Brazil and Russia (two of the once much-heralded Bric economies) now being in recession, and you begin to get the feeling that the world economy is a bit too wobbly for comfort. So do the IMF and the World Bank which have trimmed back their world growth forecasts for 2015.
However, these institutions’ reduced expectations, at 3.3 per cent and 2.8 per cent respectively, still sound fairly respectable. What that tells you is that bad news in the Chinese economy, even though it causes ructions in much of the Asia-Pacific region, is not having much effect on the developed world economies of Europe and North America.
This lesson is underlined by what has been happening in Chinese stock markets. The Shanghai composite index, for example, has plunged by about 30 per cent from a peak in mid-June to a trough in mid-July. One day alone saw a fall of 8.5 per cent.
If that had happened in London or New York, the panic would have been enormous. The lights in the Bank of England, the Federal Reserve, and the UK and US Treasuries would have burned all night as officials grappled with a major financial and economic crisis with world implications.
But there has been no such reaction to the Chinese market falls. That’s because foreign investors own only around 1.5 per cent of Chinese shares and less savvy Chinese investors have tended to see stocks as more of a short-term betting casino than an investment market, causing wild fluctuations with lots of short-term bubbles and consequent bursts.
In short, Chinese stock market movements bear little relation to the overall economy and their busts can harm no more than the 7 per cent of the country’s population estimated to have bought shares and the infinitesimal fraction of the world which has bought into them.
These markets are in their infancy and, for all its formidable size, the Chinese economy is still in its teen years.
That leads some to think that, far from economic upheaval in this vast population of 1.4 billion people being a bad thing for the rest of the world, it might actually have benefits. Andrew Sentence, a former member of the Bank of England’s monetary policy committee and now an economic adviser to PwC, accountants and consultants, can see three potential gains to developed economies such as Britain’s.
Firstly, he notes that the rapid expansion of manufacturing and construction which has mainly fuelled growth so far could never have continued indefinitely. Now that both are slowing, that should keep the prices of commodities such as rubber, steel, and oil at their presently depressed (compared to recent peaks) values for some time, helping developed economies which have to import these goods by keeping inflation at low levels.
Secondly, he points out that the costs of labour in China are rising which makes it less attractive for our manufacturers to shift production to China and more attractive to bring some exported production back home. According to a survey by EEF, a British manufacturing body, one in six UK manufacturers has re-shored some of its work in recent years.
Thirdly, the Chinese government is clear about the need to make the economy less dependent on manufacturing and construction by developing services and retail activity. If this is accompanied by an opening of the Chinese market to foreign firms, then British companies could well gain.
This is the most problematic of Mr Sentence’s scenarios, for a government-controlled economy such as China’s is not well-placed to permit the enterprise and innovation that most suits service and retail development. Even so, I’d put the odds on Chinese growth, albeit slower than in recent times, continuing to benefit our own growth.