The International Monetary Fund (IMF) in its latest China Economic Outlook expects China’s GDP to grow 8.25 percent in 2012, gathering speed in the latter part of the year and climbing to 8.75 percent in 2013.
The purchasing managers index (PMI), a barometer of the country’s manufacturing activity, rebounded to 50.5 percent in January 2012 from 50.3 percent in December 2011, a sign that the growth engine has regained a solid footing.
But economists are divided about whether China is making a drastic enough switch to broader monetary easing.
Wang Tao, an economist at the UBS, wrote in a research note that the policy objective has clearly changed to support growth, as indicated by a rebound in bank lending at the end of 2011.
“In 2012, we expect the government to increase bank lending by at least 8 trillion yuan ($1.27 trillion), likely to be supported by two or three additional cuts of the reserve requirement ratios (for lenders),” she said.
But Fan Wei, an analyst with the Beijing-based Hongyuan Securities Co. Ltd., disagreed.
“Full-fledged monetary easing is less likely as China’s reliance on exports is less than it was during the 2008-09 downturn,” he said.
In addition, real inflation may be even worse than what the CPI data suggested, prompting policymakers to take a more neutral policy, said Fan.
China’s efforts to rebalance the economy to rely more on domestic demand are drawing worldwide attention.
China has taken a number of encouraging steps, including appreciating the yuan, making substantial investments to the social safety net, expanding pension and health care coverage, raising the minimum wage, and beginning to raise the cost of inputs to production, it said. Greater efforts are now needed to raise household income and shift the growth structure from exports and investments toward consumption.
Policy incentives to boost residents’ income are already in the pipeline. Last year, the country raised the cut-off point for personal income tax to 3,500 yuan ($556) from 2,000 yuan ($317). Moreover, the Ministry of Human Resources and Social Security recently announced that the country will increase the basic pension of retired enterprise employees by 10 percent in 2012, the seventh consecutive year of hikes since 2005.
The Chinese government, pundits argue, learned the lessons of 2008 when America’s economic freefall subsequent to the Great Financial Crisis and Europe’s persistent economic malaise robbed China of its biggest and most secure export markets. The ensuing global economic collapse precipitated a 10.7% decrease in world trade volume in 2009 and slashed China’s annual exports from 26% annual growth to 27% contraction. Not surprisingly, the Chinese economy experienced its lowest period of growth in decades and only a huge fiscal stimulus package saved China from following the industrialized west into a profound slump.
China has begun a massive program to reorient the Chinese economy away from its perilous over-dependence on foreign investment and exports. Most importantly, it has embarked on a program to energize China’s moribund domestic consumer demand by investing heavily in the domestic economy.
Thus, in late 2011 Chinese officials informed the U.S. that Beijing is investing more than $1.7 trillion dollars on the strategic domestic sector over the next five years.
he share of China’s GDP going to the household sector has historically been pegged below 50%, meaning that the average Chinese household has no capacity for consumption on non-necessary goods. Even more, Beijing’s frantic expansion in domestic investment increased the investment share of GDP by more than 10 percent from 2002 to 2010 – a rise that was mirrored a ten percent decline of the domestic consumption share, from 44 percent to 34 percent.
“No country,” acclaimed New York University economist Nouriel Roubini writes, “can be productive enough to reinvest 50% of GDP in new capital stock without eventually facing immense overcapacity and a staggering non-performing loan problem. China is rife with overinvestment in physical capital,” idle capacity, weak consumption and financial bubbles. “Commercial and high-end residential investment has been excessive…overcapacity in steel, cement, and other manufacturing is increasing further… [which will lead] to serious deflationary pressures, starting with the manufacturing and real-estate sectors.
Any measures taken to wean the economy off of its addiction to exports since 2008 have the potential to knock an already rickety domestic economy further on its heels. The increase in wages required to increase consumption as a share of GDP would almost inevitably bankrupt China’s state-owned enterprises and drive out foreign firms, almost all of which are export dependent. Small and mid-sized factories run by independent Chinese capitalists would also be adversely affected, constricted by credit crunches and enticed by sunnier prospects abroad. Coupled with rising global prices for raw materials and food stuffs, long-term declines in labour surprises, such a chain of events has the potential to derail consumer spending.
China, no longer a nascent economy, is experiencing the maturity pangs of over-accumulation just as the export market that fuelled its economic boom is drying up – highlighting the intrinsic contradiction at the heart of the modern incarnation of the Chinese economy. These contradictions threaten to bring to bring China to the very precipice of economic ruin, the effects of which would be devastating on the global economy.