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Boom in China may hurt global liquidity

Boom in China may hurt global liquidity
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First Published: Sat, Apr 21 2007. 12 01 AM IST
Updated: Sat, Apr 21 2007. 12 01 AM IST
When China shines, investors reach for their umbrella. Or so it seems these days. The response to an 11.1% GDP growth in the People’s Republic was a 1.7% drop in the Japanese stock market, followed to a lesser degree around the world. The fear is that the Chinese government will tighten financial conditions, depriving global markets of one of their main supports—liquidity.
The government is concerned. As Wen Jiabao, the Prime Minister, put it, the current growth pattern is “unstable, unbalanced, uncoordinated and unsustainable”. The numbers back up the worries. Inflation is too high at a reported 3.3%, money supply growth is excessive at 17% for the M2 measure, and the trade surplus doubled from last year to a troubling 7.1% of GDP.
But Wen is probably most worried about a different imbalance. The 43% of the population that lives in cities have average incomes three times higher than their rural cousins. And urban income grew faster—17% against 12% in the year that ended in March.
That divergence is a recipe for social unrest. If the market worries are right, then the government will be pushing hard to slow down investment and moderate the growth rate. But if Wen’s main concern is actually keeping the peace between country and city, and between the prosperous coast and the less developed inland, then he won’t want to do anything too radical.
After all, the messy Chinese model of development is working extremely well. China is still very poor—GDP per person is only $2,000 (Rs84,000)—but it has grown rapidly with hardly a hiccup for almost three decades. For much of that time, overheating and crisis seemed to be around the corner. But the nation’s skills, investment and wealth have kept on increasing.
That line of reasoning suggests that the big trade surplus, currently running at a $200billion annual rate, is unlikely to shrink in a hurry. Why make big changes when consumer spending is already increasing at a 15% rate? Investors should be grateful. The excess funds, which have been invested carelessly, are an important source of global financial market liquidity.
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First Published: Sat, Apr 21 2007. 12 01 AM IST
More Topics: Money Matters | Global Markets |