Home » Business » Biz Commentary
China is heading toward economic 'soft landing'
October 13, 2011, Thursday
|
Print Edition
Print Edition
THE deepening eurozone debt crisis and a possible double-dip recession in the United States or Europe have recently dominated coverage of the international economy. But paradoxically a fallout from these trends, at least in the short term, should aid China in achieving an economic 'soft landing' - that is a mild slowdown from rapid economic growth accompanied by an uncomfortably high level of inflation.
The transmission mechanism aiding China is that the economic slowdown in the US and Europe is leading to sharp falls in international commodity prices. The Dow Jones-UBS Spot Commodity Index by the end of last week had fallen by 18.6 percent compared with its April peak - as seen in the chart. The fall in some individual commodities was much greater - international benchmark oil prices had fallen by 32 percent since May, and copper had fallen more than 30 percent.
These falls in specific commodities are already positively affecting China's price pressures - last week China reduced petrol prices by 3.2 percent and diesel prices by 3.5 percent.
The chief problem China has had to face is that until very recently international food prices remained stubbornly high. The Economist index of international commodity food prices peaked as recently as August 30. This has, however, now fallen by 16 percent. In addition to this exerting direct downward pressure on China's food inflation falls in commodity prices such as fuel will tend to reduce pressure on agricultural prices.
There is no reason to expect a dramatic drop. The fall in international food prices, which are crucial for China, are significantly less than the overall fall in commodity prices. But there is no longer significant international upward pressure on food prices, and falls have commenced, aiding China's fight against inflation.
Wrong analysis
It is important to draw attention to these international trends as some commentators had mistakenly attributed price rises in China primarily to increases in its own money supply. That such an analysis is wrong can be seen simply by looking at comparable BRIC economies where, taking the most recent data, inflation was 7.2 percent in Russia, 7.3 percent in Brazil and 9 percent in India. China's money supply expansion did not affect any of these countries but in all of them inflation was higher than in China. China's inflation was therefore clearly primarily rooted in international trends.
This decline in international commodity prices will give China's economic policy makers greater room for maneuver. As was shown in 2008, when it launched its stimulus package to confront the international financial crisis, China has more powerful mechanisms for dealing with economic downturn than the US and Europe. The US and Europe relied on indirect methods, such as budget deficits and "quantitative easing," to halt the investment fall which has been the core of the international economic downturn. China used state-owned companies and state-owned banks to directly stimulate investment. The problems of non-performing loans flowing from this are moderate, and readily containable, compared with the renewed banking crisis which is now hitting Europe and the US.
China also has additional instruments for dealing with inflation to those available in the US or Europe - direct control of prices and potential use of very large foreign exchange reserves for subsidized imports. But China's mechanisms for dealing with inflation, particularly that originating internationally, are not more powerful than those available to the US and Europe to the same degree as its mechanisms for dealing with economic downturn.
No severe recession
A severe global recession, which appears unlikely, would certainly cause China problems by reducing its export expansion - although if inflation falls China has room for stimulating domestic demand. But simply slow growth or mild recession in either the US or Europe will not cause China major problems as it will take the inflationary froth off international commodity prices, aiding the battle with inflation. Only huge new monetary expansion in the US, which the Federal Reserve is not currently projecting, would be likely to offset this. Therefore, with moderate or falling international inflationary pressures, by the end of this year China's economic policy makers should have greater room for maneuver if economic loosening or stimulus were required.
Finally, it may be noted that China's economy in the most recent years has actually been growing significantly above its historical trend. Since 1978, the annual average growth of China's economy has been 9.9 percent but in the last five years its growth has averaged 11.2 percent. A mild slowing is therefore likely simply from the point of view of averages.
From not only a structural but also an immediate economic point of view, China should enjoy a soft landing whether the US or Europe merely pass through a period of very slow growth or whether they suffer a recession.
John Ross
Columnist
John Ross is currently visiting professor at Antai College of Economics and Management, Shanghai Jiao Tong University. He was consultant to Fortune Global 500 companies and from 2000 to 2008 London's director (currently equivalent to vice mayor) for economic and business policy. He has written on China's economy for 20 years.
The transmission mechanism aiding China is that the economic slowdown in the US and Europe is leading to sharp falls in international commodity prices. The Dow Jones-UBS Spot Commodity Index by the end of last week had fallen by 18.6 percent compared with its April peak - as seen in the chart. The fall in some individual commodities was much greater - international benchmark oil prices had fallen by 32 percent since May, and copper had fallen more than 30 percent.
These falls in specific commodities are already positively affecting China's price pressures - last week China reduced petrol prices by 3.2 percent and diesel prices by 3.5 percent.
The chief problem China has had to face is that until very recently international food prices remained stubbornly high. The Economist index of international commodity food prices peaked as recently as August 30. This has, however, now fallen by 16 percent. In addition to this exerting direct downward pressure on China's food inflation falls in commodity prices such as fuel will tend to reduce pressure on agricultural prices.
There is no reason to expect a dramatic drop. The fall in international food prices, which are crucial for China, are significantly less than the overall fall in commodity prices. But there is no longer significant international upward pressure on food prices, and falls have commenced, aiding China's fight against inflation.
Wrong analysis
It is important to draw attention to these international trends as some commentators had mistakenly attributed price rises in China primarily to increases in its own money supply. That such an analysis is wrong can be seen simply by looking at comparable BRIC economies where, taking the most recent data, inflation was 7.2 percent in Russia, 7.3 percent in Brazil and 9 percent in India. China's money supply expansion did not affect any of these countries but in all of them inflation was higher than in China. China's inflation was therefore clearly primarily rooted in international trends.
This decline in international commodity prices will give China's economic policy makers greater room for maneuver. As was shown in 2008, when it launched its stimulus package to confront the international financial crisis, China has more powerful mechanisms for dealing with economic downturn than the US and Europe. The US and Europe relied on indirect methods, such as budget deficits and "quantitative easing," to halt the investment fall which has been the core of the international economic downturn. China used state-owned companies and state-owned banks to directly stimulate investment. The problems of non-performing loans flowing from this are moderate, and readily containable, compared with the renewed banking crisis which is now hitting Europe and the US.
China also has additional instruments for dealing with inflation to those available in the US or Europe - direct control of prices and potential use of very large foreign exchange reserves for subsidized imports. But China's mechanisms for dealing with inflation, particularly that originating internationally, are not more powerful than those available to the US and Europe to the same degree as its mechanisms for dealing with economic downturn.
No severe recession
A severe global recession, which appears unlikely, would certainly cause China problems by reducing its export expansion - although if inflation falls China has room for stimulating domestic demand. But simply slow growth or mild recession in either the US or Europe will not cause China major problems as it will take the inflationary froth off international commodity prices, aiding the battle with inflation. Only huge new monetary expansion in the US, which the Federal Reserve is not currently projecting, would be likely to offset this. Therefore, with moderate or falling international inflationary pressures, by the end of this year China's economic policy makers should have greater room for maneuver if economic loosening or stimulus were required.
Finally, it may be noted that China's economy in the most recent years has actually been growing significantly above its historical trend. Since 1978, the annual average growth of China's economy has been 9.9 percent but in the last five years its growth has averaged 11.2 percent. A mild slowing is therefore likely simply from the point of view of averages.
From not only a structural but also an immediate economic point of view, China should enjoy a soft landing whether the US or Europe merely pass through a period of very slow growth or whether they suffer a recession.
John Ross
Columnist
John Ross is currently visiting professor at Antai College of Economics and Management, Shanghai Jiao Tong University. He was consultant to Fortune Global 500 companies and from 2000 to 2008 London's director (currently equivalent to vice mayor) for economic and business policy. He has written on China's economy for 20 years.
- About Us
- |
- Terms of Use
- |
-
RSS - |
- Privacy Policy
- |
- Contact Us
- |
- Shanghai Call Center: 962288
- |
- Tip-off hotline: 52920043
- 沪ICP证：沪ICP备05050403号-1
- |
- 互联网新闻信息服务许可证：31120180004
- |
- 网络视听许可证：0909346
- |
- 广播电视节目制作许可证：沪字第354号
- |
- 增值电信业务经营许可证：沪B2-20120012
Copyright © 1999- Shanghai Daily. All rights reserved.Preferably viewed with Internet Explorer 8 or newer browsers.
