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All roads lead to China

A lot depends on domestic demand in the world’s hottest emerging economy, but Chinese spending is on thin ice.

business Updated: Aug 21, 2009 21:43 IST

If last week’s global stockmarket volatility is any indication, the world is rather confused about the economic recovery, particularly in Asia. Since January 2009, the major Asian economies have seen their markets jump by over 40 per cent, with China rising almost 60 per cent.

Are the markets right? Are they giving us a signal of an incipient Asian recovery? If so, how are the various economies faring?

Earlier this week, the International Monetary Fund (IMF) predicted that the world is beginning to pull out of a recession, but stabilisation is uneven and the recovery is expected to be sluggish.

Sustaining the recovery would require shifting focus to exports to the United States and increased domestic demand within the Asian economies.

Growth figures are staying or turning positive, especially in the big economies like China, Japan, Indonesia and India. But the recent volatility of Asian stockmarkets is a reminder that today’s good news is not yet tomorrow’s happiness.
Behind this rebound are the demand-generating stimulus packages that countries across the world signed December 2009 onwards. The real confidence booster is evidence that China is picking up steam.

But stimuli are not forever. And China’s growth rests on cheap credit flows that cannot last. Money supply was up 28.4 per cent for the year ending July. This compares to the country’s average annual growth of 16.8 per cent the previous eight years.

“These growth rates are not sustainable,” said Ed Yaterini, economist with Yaterini Associates.

Hence the nervousness of China’s equity markets. As 60 per cent of the buyers are retail investors, there is a strong tendency for profit-booking. “The markets are high and valuations are getting ahead of the economy,” said Francis Lun of Fulbright Securities in Hong Kong. “Investors are starting to wake up to that.”

The hope is that the present growth would kickstart a virtuous cycle of Asian consumers spending more that would ultimately lead to greater trade flows between nations. Chinese, and to a lesser extent Indian, consumers are spending.
Don’t add any meaningful scale to this, however. For the world to grow, the two largest economies — the US and Japan — have to grow.

Neither is. Japanese exports are tumbling, while the US is in a recession. Credit rating agency Standard & Poor’s said only five of the 14 Asia-Pacific economies it covers will post positive growth this year, nine will still report contractions.

Even if the growth cycle kicks in, Asian economies will have to get used to the idea that the good times won’t be as heady as the past. American consumers are saving rather than spending. Ageing Japan will probably never again shop till it drops.

China is there, but so far, hasn’t been able to free itself of government-driven, investment-led addiction. If it does, the world economy will be revolutionised. If it doesn’t, the rebound may lose speed quickly.