Slowdown for China needs careful handling

(CNS): China’s current growth rate is set to slowdown in the near future, but this does not necessarily mean it will have a knock-on downturn effect on the global economy, according to Peking University’s Professor Michael Pettis, who was speaking at this year’s Cayman Business Outlook Conference, so long, he said, as it was properly managed. Previously, countries such as Brazil, Japan and the Soviet Union had all achieved rapid growth in a short space of time, only to be followed by rapid declines. “This is not a co-incidence” Pettis said. “Their growth was unsustainable.”

In these countries their growth was unbalanced because it was based on trade, he said, which meant an undervalued exchange rate causing the cost of imports to be high and exports to be low. The effect on household income was therefore similar to imposing an import tax causing a decline in household income.

“In recent years in China wages have grown much slower than productivity which means a huge subsidy to employers,” Pettis explained. “With a rebalancing they can increase the share of household income and decrease their dependence on investment and a trade surplus.” This would mean raising the value of the currency in China. This would have the effect of slowing down growth and increasing consumption as households would have a higher share of the country’s GDP.

However, Pettis warned that China would create a problem if it did this too quickly because the price of tradable goods would go up too quickly, bankrupting companies and causing unemployment to rise and household income to drop.

An increase in interest rates there would have to be implemented slowly because Pettis worried about how much money was in fact indebted to China’s Central Bank by state owned companies which were barely profitable and were only making money because interest rates were so low.

Beijing was beginning to start discussion in this area and a debate was taking place, according to Pettis. Nonetheless, there were impediments to the slow implementation of slowing the economy, not least of which is the fact that China’s trade surplus will continue to rise in the short term and the rest of the world would need to be able to absorb the trade surplus, at a time when the US and peripheral Europe had huge trade deficits.

“Here we have an arithmetic problem,” he said. “The difficult global trade environment means trade relations will only deteriorate.”

When China slows down the rest of the world does not have to suffer – China’s reduction in trade surplus can mean growth for the world, according to Pettis, so long as there is a real attempt at rebalancing household growth.

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