The world’s factory is cutting shifts. The World Bank has recently projected that China’s till-now white-hot economy will grow at 7.5 per cent this year, its slowest rate of growth since 1990. This is not surprising, since the ‘Chinese economic miracle’ was based on the export- and investment-led model. Now that US consumers have discovered the perils of living beyond their means — mostly with borrowed funds — there is naturally less demand for made-in-China goods.
The future looks even bleaker. The Royal Bank of Scotland, JP Morgan, Credit Suisse and CLSA have all come out with reports that don’t rule out the possibility of China’s GDP growth falling further to 5 per cent over the next couple of years. If these projections do come to pass, then there’s a real danger that the unstated covenant between the ruling Communist Party of China and the Chinese people — whereby the party delivers unprecedented growth and prosperity in return for its unfettered right to rule the country — may break down. Since China’s one-party dictatorship doesn’t have the safety valves to release pent-up steam in the system, this could lead to serious political and economic disruptions.
This scenario is not as fantastic as it may seem at first. Economists agree that China needs to grow at a minimum of 8 per cent a year to absorb the 15 million new workers who join its workforce every year. If the party isn’t able to find new jobs or protect existing ones, the stranglehold it currently enjoys over the affairs of the state will almost certainly weaken.
So, China will have to find new ways to keep the wheels of its production machinery running. The $590 billion bailout package prepared by the Chinese government, though short on details, is reportedly aimed at turning the economy away from its export focus towards a more domestic consumption-led growth. But its implementation, which will be in the hands of the notoriously corrupt and nepotistic local party bosses, will have to be overseen very carefully for it to be effective. It is informative to note here that India, which consciously opted for a domestic consumption-led growth model at a time when the export-led model was all the rage, has escaped the global economic contagion with only a few minor bruises. So, were Messrs Singh, Chidambaram and Ahluwalia right all along? From the evidence at hand, the answer would seem to be a qualified yes.