Fat Dragon cannot remember such a gloomy start to a new year: Fears of a US recession, a record sell-off of Chinese stocks, power blackouts, a blocked transport grid, migrant workers marooned at railway stations…
It has been a tough few weeks for Beijing. First, spooked by widespread reports of a severe US slowdown, investors dumped mainland stocks.
In mid-January, the Shanghai exchange dropped 12% in just two days. Even after an 8% rally on the final day of trading before the Chinese New Year holiday, the market finished more than US$500 billion down on its peak late last year.
Then, as snow storms worsened and much of the country ground to a halt, fears of the economy overheating turned to anxiety about economic shutdown. Factories were forced to run on empty and commodity prices went through the roof.
Most economists now expect economic growth to slow by at least 2% this year. The World Bank dropped its growth forecast to 9.6%, while Barclays Capital is predicting 8.4%, which would make for China’s slowest economic expansion in seven years.
Mostly this reflects a reduction in the net export contribution to GDP, as demand from the US and Europe falls. But there are also signs that industrial production has moderated and investment is expected to slip as exporters tighten their belts.
So why do central government officials, who see fast growth as a means of maintaining social stability, seem far from worried?
Sure the snow storms were cause for temporary alarm. The Chinese New Year is always a socially sensitive period: For many migrant workers, it is the only chance to go home, so disruptions to the transport network must be dealt with swiftly.
Economically, though, the heavens couldn’t have picked a better time to vent their fury. With factories devoid of workers and the country preparing to eat, drink and make merry, the Chinese New Year period is always economically sluggish.
Moreover, the extra investment targeted at easing transport bottlenecks will mitigate much of the economic damage and ensure the country is better prepared to handle a similar crisis in the future.
The fallout from a US slowdown could have a more substantive economic impact – but this also looks far from debilitating. In fact, slacker export growth may be welcomed by Beijing as it is likely to deliver reduced capital inflows, thereby easing the excess liquidity and inflationary pressures that remain the chief economic concern.
It’s important to note that Beijing has little to fear from a pronounced global downturn as it can always fall back on loosening credit controls and stimulating domestic demand. Shifting the economy away from investment and export-led growth to a more sustainable, consumption-based model remains the holy grail of Chinese policymaking – so the hope is that consumption will take up some of the economic slack created by slowing exports.
Despite recent headlines in the Chinese media that consumption is now contributing more to the economy than investment, the consumption share of GDP remains stubbornly at just over 38% – the same figure as the previous three years.
But with exports set to play a smaller economic role this year and imports on the rise, the tide may at last be turning.
Should Beijing succeed in sloughing off a global slowdown by persuading its famously frugal citizens to spend more, that would surely be enough to dispel the new year gloom.