China in face of the West's 'Great Stagnation'

I have a new article at China.org.cn which analyses the impact of the present 'Great Stagnation' in the developed economies on the prospects for China's economy.

It concludes:'Given extremely slow growth in the developed economies, and that examination of underlying macro-economic factors such as savings and investment indicates no reason to expect a substantial growth acceleration, this places China in a new international economic situation. For almost the entire period since China launched its economic reforms in 1978, it has been growing more rapidly than other economies but in an international context where the developed economies were growing significantly. The only serious previous recession in the advanced economies during China's reform period was right at its beginning, in 1980-81, when China was scarcely integrated in the international economy. The international slowdowns in 1990 and 2000 were brief and mild and while the 1998 South East Asian financial crisis impacted China significantly, it did not originate in the developed economies...

'In economics and business there is no virtue in either optimism or pessimism, there is only a virtue in realism. Given current trends, China has to base itself on a perspective that for several years there will be slow growth of the developed economies and therefore slow growth of their imports. Developing economies, while growing more rapidly than developed ones, will not in the very short term be able to fully compensate China's exports for stagnation in developed economies.

'The international framework for China's economy is therefore clear. It is important to understand that what is faced is a 'Great Stagnation' not a new 'Great Recession' - that is there is no reason to anticipate major international economic downturn of the 2008 type. China therefore does not need a new huge stimulus program of the type it launched in 2008 - which would lead to severe economic overheating. But the international economic situation requires adjustments in emphasis.

'First, even more than previously, China has to rely on developing domestic demand. Greater analytical clarity on this is important as at present domestic demand is frequently confused with domestic consumption - the two are not the same.

'Second, while developing economies will not immediately be able to fully make up for the negative pressure on China's exports from the 'Great Stagnation', they provide an important addition to China's domestic demand - in the last fifteen years the percentage of China's exports going to developing economies have risen from 35 percent to 50 percent. All developing economies face the Great Stagnation, therefore all face constriction on exports to developed countries, while China's imports are continuing to expand. This will produce greater integration of developing economies with China in both exports and imports.

'Within developing economies many of China's top companies, such as Huawei, Haier, and Lenovo already have high brand values and the present situation therefore creates opportunities to further enhance the positions of China's international brands.'

The full article, including a brief comparative analysis of the 3rd quarter US GDP figures with previous US post-war business cycles, may be found here.

Comments

[John Ross]

Nathan,

Its a question of very different numbers in the US and Europe on the one hand and China on the other.

Obviously when China launched its stimulus programme in 2008 it knew the high bank lending would lead to an increase in the percentage of non-performing loans - banks were indeed instructed to increase provision for bad loans. But taking the change from the 3rd quarter of 2007 to the 3rd quarter of 2011 (as China did not publish quarter by quarter GDP changes until this year to make a comparison to the 3rd quarter of 2011 this is the data that has to be used) then in this four year period US GDP has increased by a total of 0.6% and China's GDP has increased by 42.2% of GDP. Even if were necessary to recapitalise a substantial part of China's banking system, which it isn't, the resources generated for the government by that GDP growth would permit this - at present China's budget deficit is under 3% of GDP. This is entirely different to the essential bankruptcy of the entire banking system which hit the US and Europe in 2008.

[nathan]

Hi john, Im a long time lurker that enjoys your blog. You make important arguments against our media's 'common sense' view of the chinese economy.

I was wondering whats your take on The chineses banking system, currently this seems to be the latest version of the 'China's dynamism will stall because..." meme that you frequently dissect.
-That china has a bubble within its shadow banking system similar to the credit crunch.