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Aug. 14 – The current economic crisis is rolling back due to the significant progress made by countries in Asia like India and China said the United Nations Economic and Social Commission for Asia and the Pacific Executive Secretary, Noeleen Heyzer, during a U.N. Economic and Social Council session held last month.
In citing the financial stimulus packages and reforms announced by these countries, Heyzer said that this would help in creating a more integrated and coordinated Asia that builds up on collective regional strengths and resources.
Heyzer highlighted the need for appropriate investments in infrastructure to create economic corridors that link less developed countries to economic centers in the region, thereby increasing intra-regional trade. “The recovery of larger economies like China, India and South Korea will have greater reciprocal positive spin offs for their smaller neighbors,” Heyzer was quoted by The Times of India as saying.
However, while the mainstream media has generally been bullish on Asia’s performance, I remain somewhat skeptical about what lies in store for China. My own concerns lie in several areas: the overreaction to China’s first half GDP figures, the lack of economic modeling reform, and the weakness of China’s banks.
The 7.9 percent growth rate that China announced for its first half year performance may have made a lot of people feel better, however, a recovery requires rather more substance than hype. We would do well to note that such growth comes at a huge cost coming from China’s economic stimulus plan injected into the economy at the beginning of the year. Were it not for this, I would suspect that China’s real growth during the period would be far lower at about 3 to 3.5 percent.
China can only pull off the economic stimulus factor once, and I cannot see where such a huge impetus is going to come from to be able to continue such figures into 2010. The government, in trumpeting the GDP figures so loudly, have effectively made a rod for their own backs.
There is also the matter of the sky-rocketing Chinese stock market mentioned in Jim Lowell’s article published last August 5. This year, the Shanghai stock market is up by 80 percent. While impressive in itself, unlike Lowell, I do not believe such a performance to be healthy.
Clearly, a mature market would not react in such a fashion. So what’s going on? Back to the Chinese economic stimulus plan again and the estimated 20 percent of the US$4 trillion stimulus plan that China injected has apparently been invested into speculation instead of infrastructure projects.
In an effort to curtail this practice, the central bank has begun curtailing bank lending. It’s also considering altering interbank bond holdings, as was reported last week in attempts to get its banks to be more careful when booking loans. China’s property sector too, has shown signs of a bubble developing. Again, speculative investments to make a quick buck rather than invest long-term into more necessary projects has hijacked the good intentions.
Longer term, China’s current economic model during the financial crisis has shown strong signs of stress mainly through its reliance on exports with little appearing to have been done to radically shift the Chinese economy into a consumer driven society.
The hope that the United States will recover and start buying again seems to be the reason. When this will happen is still questionable as American growth still continues to shrink and it may be awhile before it starts to ramp up spending again. China’s economy remains addicted to 40 percent of its GDP coming from its exports. Until that unhealthy reliance can be altered, China has no choice but to await an American recovery.
While the rest of Asia- notably India- look like value for money, I suspect China doesn’t have a plan to project its economy forward in 2010. Its economic model is wallowing in America’s ocean of debt and its recent growth figures look manipulated by speculation and skewed by its stimulus plan. I cannot see what will come next to boost growth. China businesses would be wise to concentrate on investing and building their domestic infrastructure for the next two years rather than expect an immediate return to healthy dividend declarations.
Chris Devonshire-Ellis is the founding partner of Dezan Shira & Associates and lived in China for 21 years. He is now based in Mumbai.
