CHINA MAY NOT SAVE THE WORLD AGAIN AS MACRO DATA CONTINUES TO FADE
SUNDAY night, as currency markets were preparing for yet another desultory opening of the week’s trade, marked by yet more stress in the Eurozone and a seemingly perfunctory statement from the G8 which was long on platitudes and short on any concrete policy measures, risk currencies did something unexpected – they rallied. Despite the gloom and doom that surrounds the euro these days forex traders became optimistic, pushing euro, Aussie and cable higher as trading started in Asia. What was the cause of this sudden burst of enthusiasm?
A story in the China Daily stated that the country’s premier Wen Jiabao called for greater fiscal stimulus during a weekend inspection tour to Wuhan, capital of Central China’s Hubei province. “The relationship between maintaining growth, adjusting economic structures and managing inflation must be properly handled,” Wen said in comments reported by Xinhua News Agency. “We should continue to implement a proactive fiscal policy and a prudent monetary policy while giving more priority to maintaining growth.”
For currency traders who remembered that China near singlehandedly dragged the global economy out of recession after the 2008 credit crunch, those words were enough to spark a fresh rally in risk. However, the key question going forward is whether China can act as a locomotive of growth for the G20 world once more given its massive internal problems.
In 2008, in the wake of the post-Lehman credit crunch that saw most of the industrialised world teeter on the edge of another Great Depression, China took dramatic policy action, increasing its fiscal stimulus to nearly 8 per cent of GDP – far larger than the paltry 1 to 2 per cent moves made in most of the G7 economies. The bet paid off, as the Chinese economy continued to grow at a near double digit pace, helping to fuel profits for American multinationals, German exporters and Australian commodity producers and helping pull the global economy back into expansionary territory.
However, the stimulus was not without cost. The easy money created a massive real estate bubble in China and fueled food inflation that sparked widespread social unrest. Most troubling of all, however, was the huge wave of corruption that followed this boom and that remains a very serious problem for China going forward as it enters a more mature stage of economic growth.
There is no doubt that corruption was always present: growth papered over many sins. Now, however, Chinese growth has slowed markedly while corruption continues to siphon off much needed capital for unproductive means – there is a reason why Macao has become a bigger gambling Mecca than Las Vegas. The recent Bo Xilai scandal has only hinted at the extent of problems within the Chinese leadership and laid bare the myth of vaunted efficient “communist” capitalism.
For all its progress, China remains an autocratic state with little protection for property rights and investors are no longer enamoured with the country as they once were. If China is to progress to a truly modern society it will not only have to become more market oriented but more democratic as well. That transition is unlikely to be smooth or easy, with the state and the country’s elite continuing to exert an iron grip on policy and resources.
That’s why the prospect of a second Chinese stimulus may not prove to be as effective as the first. Recent economic data from China has shown consistent slowdown, especially among the key middle-market manufacturing sector, indicating that problems with the export driven economy may be turning structural. More importantly, the latest trade balance figures showed a marked slowdown in imports, suggesting that domestic demand is cooling as malinvestment in real estate takes its toll.
All of this troubling economic data indicates that China may not be able to print its way out of slowdown this time. That means investor optimism regarding any potential stimulus will quickly fade.
The Aussie dollar, which serves as a proxy for Chinese growth in the currency market, has already fallen hard, breaking the parity barrier last week for the first time this year. Some of the more bearish analysts believe that Chinese growth may slow to as little as 6.5 per cent this year, which would mean that Aussie could tumble to $0.9000 as the market begins to fully appreciate the magnitude of the slowdown in Asia Pacific.