It was generally held till the autumn of 2013, that China's growth "miracle" would go on and on and on. Economist Robert Peston however disagreed with this presumption and argued that that the world's number two economy was heading for a sharp slowdown in growth, partly because of it being dangerously dependent on debt-fueled investment, in infrastructure, housing and heavy industry. This presumption, as expected, was frowned upon by the Chinese authorities and also by most of the investors who were flocking to China in droves.Learning from the Chinese growth miracle
Chinese economists and policy makers took their changing economic evolution within their stride. Their short-term and medium-term planning enabled them to handle reality with care
Muhammad Zamir
Muhammad Zamir
It was generally held till the autumn of 2013, that Chinas growth miracle would go on and on and on. Economist Robert Peston however disagreed with this presumption and argued that that the worlds number two economy was heading for a sharp slowdown in growth, partly because of it being dangerously dependent on debt-fueled investment, in infrastructure, housing and heavy industry. This presumption, as expected, was frowned upon by the Chinese authorities and also by most of the investors who were flocking to China in droves.
Peston later explained that his opinion was based on the fact that China was continuing to invest at a globally unprecedented rate of 50 per cent of national income - greater than even Japan at its 1980s peak - and accumulating debts at an annual rate of more than 15 per cent of GDP. This situation raised the possibility of the kind of calamitous crash as had happened in Japan in 1990. It was underlined that the economic gospel in China needed to change, re calibrate and the rate of growth had to slow down. Some other economists also reiterated that the economy had to be re balanced and encouraged to move more towards consumer spending and technological innovation.
We all know that China did shift gears downwards post-2013. The annual growth rate that had touched 10 per cent before 2008 slowly came down to about 7 per cent. These new figures brought about, as expected, changes in the momentum China could provide to the global economy and also to the annual increments Chinese people could expect in the context of their living standards. This also cast its own shadow on the prices of commodities and energy and affected commodity and energy producers like Australia, Russia and Brazil. Other emerging market manufacturers, from Malaysia to Mexico, also felt greater anxiety from the possibility of Chinas devaluation and redoubled attempts to use technology to improve productivity. Andrew Walker has consequently noted that the declines in the prices of these commodities have created new dangers to financial stability in countries that export them and they have also hit the finances of those nations governments.
Chinese economists and policy makers took their changing economic evolution within their stride. Their short-term and medium-term planning enabled them to handle reality with care. The slowdown in the Chinese economic horizon continued but it was not all doom and gloom. The meeting of the International Monetary Fund in April, 2016 in Washington disclosed that Chinas latest figures showed that their economy had expanded by 6.7 per cent from a year earlier. This was good news compared to some pessimistic suggestions that the Chinese economy would weaken to a growth rate of about 4 per cent. It also showed that China had managed their economic transition after it had embarked on: a shift from a pattern of economic growth based on the rapid expansion of industrial output, exports and investment to one more driven by spending by Chinese consumers and growing service industries. It was also reported that the Chinese authorities are targeting a 6.5 per cent minimum growth for the next five years- pretty impressive by international standards. London Consultancy Capital Economics has however commented that Chinas success in this regard was questionable and concluded that- if China is shooting for a target that no other equivalent economy has reached, we have good reason to be skeptical that it can succeed.
The meeting also discovered about the extraordinary role played by investment - by the state and by business. The IMF reported that in 2015, according to data compiled by them, investment was 43 per cent of national income or GDP. It may be noted that very few countries can match that. This was particularly remarkable because such high rates of investment are bound to involve many projects that are not viable, especially in an economy that is slowing down. Such a scenario was also unique given that investors and lenders should have been worried about losses.
Despite anxiety expressed by many economists China appears to be doing much better than many had forecast. The Chinese economy has grown more than expected in the second quarter of this year and above expectations of 6.6 per cent. The Chinese Statistics Bureau has announced in July, 2016 that Chinas gross domestic product expanded by 6.7 per cent in the three months to June compared to a year earlier. This had also led to the government increasing its infrastructure spending. This can be interpreted as gradual stabilization of the worlds second biggest economy. Daniel Martin from Capital Economics has also commented in this regard that Growth is more likely to pick up over coming months than slow further, but a lasting turnaround is not still on the cards.
Other data released about the Chinese economy and its industrial output and retail sales have also beat forecasts. Industrial output has grown by 6.2 per cent compared to forecasts for 5.9 per cent (amid concerns about overcapacity). Retail sales have also risen by 10.6 per cent beating forecasts for 10 per cent growth. However, fixed asset investment appears to have missed expectation. It has grown by 9.0 per cent from January to June- as compared to the same period a year earlier. Economists had estimated that growth in this sector would be 9.4 per cent. The fact that China had done better than expected was reflected immediately in gains in stock markets in Wall Street and also in the Asian stock markets.
Zhixing Zhang and Matthew Bey have referred to Chinas first overseas investment in November 1979; when the Jinghe Share Holding Co. opened its doors in Tokyo, marking Chinas first overseas investment and the start of the countrys transformative economic opening. Today, China has become the worlds second-largest investor and biggest supplier of capital. While other markets are facing recession, Chinas economy has continued to grow, however slowly.
This gravity of the Chinese economic matrix, coupled with its ever-expanding reach into global affairs, is definitely securing its place of influence in the international system for decades to come.
Consequently, for China, as for most countries, investment and acquisition have become key components in its strategy for development and, to some extent, national security. From 2008 to 2013, China spent some $111 billion in acquiring the worlds mining, oil and natural gas assets. This however has dropped since then to just $7.8 billion. Beijing is now gradually replacing its focus from just acquiring the developing worlds energy and natural resources to the acquisition of the developed worlds value-added industry assets. At the same time, the governments traditional dominance in outward investment is weakening, making room for private enterprises to invest alongside their state-owned peers. Furthermore, China is becoming more careful about its investment decisions. Instead of hasty purchases they are making a more careful search for quality buys.
By all appearances, for the past two years, even as Chinas scale and size of investments overseas have steadily risen, this new phase of its investment strategy reflects a deeper transformation being underway a change in Chinas vision of its place in the world.
It may be noted here that Chinese foreign investment has surged over the past decade. Beijings insignificant portfolio worth about $2.9 billion in 2003 and accounting for only 0.45 percent of global investment has slowly climbed to a record-high of $120 billion by 2015- scattered over many different nations. It is no longer just a global factory attracting investors from the rest of the world. Beijing is now cultivating its image as a benign emerging power and that is reflected in its partnership in the economic activities of many countries including Bangladesh. This economic transition of China has also found its place in its efforts associated with software, hardware and biotechnology. It is now trying to follow its developed peers up the value chain. These industries are now receiving most of Chinas attention and funding. It would be important in this regard to note that over the past two years, Beijing has completed nearly $15 billion worth of mergers and acquisitions in the semiconductor sector alone, and in 2015 its computer chip imports nearly 14 percent of its total imports was valued at over $231 billion. Such measures indicate that China is hoping that the hardware companies it is currently purchasing, like the energy assets acquired earlier, will eventually enable it to produce such items itself.
This trend has resulted in the aggressive flow of Chinese funds into the technology-related sectors of developed states of Western Europe, Asia and North America. Data published by international financial analysts have revealed that in 2016, thus far, Chinese mergers and acquisitions in these sectors have crossed $150 billion, with more likely to flow in by the end of the year. By comparison, Chinas deals in the developing world total only about $25 billion. Now, private Chinese companies such as Alibaba, Tencent and Baidu are among the firms most assertively buying up foreign assets. In many ways this is also proof the broader changes underway in China, where an expanding economy has given rise to a flourishing private sector. In its own way, the active participation of private Chinese companies in the countrys investment cycle abroad has also imposed certain limits on the politicization of Chinese business decisions. Nevertheless, despite this inter-active engagement, strategists agree that Beijings investment strategy remains tightly entwined with its broader geopolitical ambitions, particularly in the developing world.
It would be pertinent at this point to refer to Chinas evolving strategy of the One Belt, One Road initiative. It is representative of how China perceives its strategic position and priorities abroad within the context of its significant economic transformation at home. It is evident that today Beijing places some emphasis on China linking itself to its neighbors through infrastructure and transport projects. Price Waterhouse Coopers, the Consulting Group has pointed out that China has agreed on nearly $250 billion in such projects, including the ambitious China-Pakistan Economic Corridor and the Bangladesh-China-India-Myanmar Corridor. These measures suggest that China will likely continue to channel its readily available pool of capital into regional connectivity projects in the short term.
Moreover, Beijing is also working hard to promote advanced manufacturing and nuclear engineering as a way of boosting Chinas position in the global value chain and expanding its international presence. In this context it is pursuing several related state-led contracts, despite daunting technological challenges and interpretations of the term- national security- with countries in Central and Southeast Asia as well as Europe. A classical example of this was the recent spat with London over the final approval of the British Hinkley Point nuclear plant (agreed to between China and Britain during Chinese President Xi Jinpings visit to Britain in 2015) by the new British Prime Minister Theresa May. This has since been resolved. In conclusion, one can only observe that China today has not only a global economic vision but also a global strategy. This is assisting them in expanding their international outreach.
Muhammad Zamir, a former ambassador, is an analyst specialised in foreign affairs, right to information and good governance. He can be reached at [email protected]
