Impact Of A Lower Growth Chinese Economy
After years of
unprecedented
growth, China’s
economy is cooling
off a bit.
by Dan Watson
China Correspondent
watsoncw@rodpub.com
Historically, the United States has been the primary engine for growth that has kept the global economy humming
along at a comfortable pace. Given that, at least
for the present, the United States can no longer
be that engine, it’s important to look at what is
happening inside the country that has become
the shining light in an otherwise gloomy and dismal global economy (i.e. China).
China has experienced a remarkable growth
spurt over the past two decades such that today
it is number two in the world and rapidly overtaking number one, (i.e. the U.S.). In the current,
less than sparkling economy, China’s demand
for imports could be critical to keeping the
global economy afloat. However, after a couple
of decades of greater than 10 percent growth the
robust Chinese economy appears to be cooling
off and slowing down a bit.
This “cooling off” is partly due to the overall poor health of the total global economy and
in part due to China’s need to curb inflation. The
effort by the Chinese to bring its economy under
control continues to be a delicate balancing act.
Too much pressure to slow down the economy
could wipe out significant gains by the emerging middle class in China and seriously impact
on China’s export ability.
Although China is attempting to redefine itself from a mostly export economy, it isn’t at a
point where exports are not important to its survival. Recent overtures by the U.S. Government
to have China “revalue” its currency have been
met with less than enthusiastic response by the
Chinese. In fact, the Chinese had been allowing
a gradual appreciation of their currency. The
Chinese Yuan exchange rate appreciated 4. 27
percent against the US Dollar during the last 12
months. Historically, from 1981 until 2011 the
USDYuan exchange averaged 7.03 reaching an
historical high of 8.73 in January of 1994 and a
record low of 1.53 in January of 1981.
The Yuan revaluation process was largely
undertaken in order to counter inflation, which
had risen to dangerous levels. By allowing the
Chinese currency to rise in value, import prices
were suppressed somewhat, thereby mitigating
the need for a rise in domestic prices.
In addition, this revaluation action allowed
the central bank to not have to print more
money in order for China to purchase needed
foreign currency. In essence, gradual appreciation became a legitimate anti-inflationary policy
at a time when China’s inflation appeared to be
out of control. Fortunately for the Chinese that
is no longer the situation.
The overall inflation rate in China appears
to be in a steady decline. Inflation appears to
have peaked, given that it declined from 6. 8
percent in July to 6. 5 percent in August and
6.1 percent in September. While this level of
inflation is still too high for comfort, the Chinese authorities appear confident that inflation
will continue to decline.
The reason for their belief is due in part to
the impact of the slowdown in the global economy and China’s own monetary policies that
were put into place to fight rising inflation. In
fact, there has been a noticeable reduction in
China’s export growth. This decline in exports
has contributed to slowing the growth of the
Chinese economy. This decline in exports is attributable to the overall decline in the global
economy and also to the rise in the value of the
Chinese currency.
Behind the scene and less obvious to the outside observer is the impact on export prices that
comes from increases in worker wages and infrastructure cost. As manufacturing costs go up
along with the value of the Yuan, China exports
become less attractive in the global marketplace.
It’s not likely that wages or infrastructure cost
will decline so the authorities have decided to
curtail its effort to allow the Yuan to revalue.
Failure to back off from those actions that
slow down the economy could cause the economy to slow down much more than desired. It
must be remembered that the unemployment
level inside China is estimated at approximately
30 million. A significant slowdown in the Chinese economy would add millions more to this
number and possibly throw the country into a
