China key to global economic recovery

Economic policy, however, is no surer, no more confident, certainly no more confident than the US Fed for example.

A China-based executive in the heavy machinery industry said orders at his firm and affiliates were down about 50 percent from a year earlier, mainly because of the sluggish real estate market, and he had his work cut out getting that message across to head office. Today, this growth stands around 7 percent. Even if we assume a 3% growth rate for the USA, it would take numerous decades for China to close the GDP gap. This will be possible due to the country’s proven process for success and unparalleled internal resources, especially its rich endowment of human capital as well as other American qualities. Judging by O’Neill’s prediction, China is now doing quite well. In the past one and a half years, more than 10,000 companies were registered each day in China.

The sheer size of China’s economy has also meant that the internal effects of this shift have spilled over its borders. In H1 high-tech manufacturing value-added industrial output grew by 10.5 percent year on year, outpacing overall industrial growth.

“If China’s scared, suddenly the rest of the world is scared as well”, says Eric Lascelles, chief economist for RBC Global Asset Management.

It is true that China’s stock market has dropped 40 percent from its peak.

The image of China as a backward, reverse-engineering, IP stealing, technological laggard is persistent but mistaken. Little wonder that China’s growth prospects are such a big deal for policymakers worldwide. They suggest China’s rise up the economic value chain will support its transition to a consumption-led economy with a widening scope for export growth.

That sharply reduced estimate would barely exceed Goldman’s forecast for 2015 growth and only match the tepid pace of expansion last year, a sign the economic recovery is running in place rather than sprinting ahead as many economists were predicting late last year.

A plunge in China’s stock market over the summer and a surprise devaluation in the yuan have roiled global markets, and raised doubts inside and outside China over Beijing’s ability to manage its economy. The nation contributed roughly 30% to world growth in the first half of this year, as much as could reasonably be expected considering the current intricacy and volatility of the global economy.

The impact of China’s economic downturn on other developing and Asian countries as well as in the United States of America and European Union is felt in other ways.

The sooner real GDP growth loses its totemic significance, the sooner we are likely to receive more accurate data. The risk is reducing. While growth is slowing, earnings growth rates remain high at over 20%.

In dealing with deficient domestic demand, the typical recommendation has been to encourage more household consumption. According to EIA data China accounted for 55 percent of the increase in global petroleum consumption between 2005 and 2013. Misguided priorities and needless aggression during the Bush administration paved the way for USA vulnerability and the threat of constant terrorist attacks, resulting in the astronomical cost of fighting terrorism and providing homeland security. This certainly leaves room for the Chinese to spend their incomes on quality goods and services. China’s reform efforts to instill rule of law, market discipline and strength of institutions, have introduced more uncertainty into policy. Anchoring its currency to the dollar, the Chinese built up a huge stake in US Treasuries, which helped the U.S. fund record budget deficits. Its complicated and non-transparent tax system needs to be simplified and less punishing.

Sixth, service sectors maintained good momentum. After over a decade of lagging behind, the consumption contribution to growth is now bigger than the investment in China. It requires re-structuring the economy, allowing the inefficient enterprises to die and new companies to thrive. It should make the rules more business friendly and transparent. Corruption so prevalent in the last ten years have to be stamped out. These principles have not changed, but a few adjustments are now required in the path China is taking.

Similarly, policies to promote continuous technological innovation and industrial upgrading can increase productivity.

The last two decades have seen many China naysayers losing their credibility.

Despite such gloomy predictions, however, the USA will remain the superpower of the world, and as always, it will be able to successfully emerge from any crisis as it has in the past. There will be no shortage of pessimists going forward, but China will again disappoint them. But in a scenario where China’s economy is in such dire straits, that stability is threatened, relying on a single figure to persuade that things are great is unlikely to prove an effective political strategy. It’s just the beginning of a new chapter of this great story.

The author is a professor of economics at the Chinese University of Hong Kong. Zuberi is vice chairman of Avenue Ventures.