The focus is back on the health of the global economy after a series of reports trickling in from various organizations last week indicated that the growth rates in a number of emerging economies are sagging.
The most recent news—slowing of the Chinese economy. The second largest economy grew by 7.6% in the second quarter of 2012: the slowest growth rate it has recorded since the global financial crisis in 2009. Besides the sub-8% growth—a rarity in China’s growth story during the past three decades—the more serious concern is that the rate of expansion in the country’s gross domestic product had slowed for a sixth successive quarter.
That the Chinese economy was losing momentum was also apparent from its trade figures. In June, export growth had declined to almost 11% as compared with 15% a month earlier, while import growth halved over the same period.
At the same time, the Asian Development Bank (ADB) has, in its latest assessment, pointed out that forces that fuelled growth in Asia have been slowing in the first half of 2012 on the back of sluggish demand in the major economies. ADB’s prognosis, based on the signals emanating from major economies in the region, is that growth will slow in the second half of 2012.
While in the past, the slowing of the Chinese economy appeared to be a deliberate attempt by the authorities to cut growth rates in order to make the growth “more sustainable”, recent weeks have witnessed a series of measures that have been taken to offset the downward spiral.
These measures make it quite apparent that the government is pulling out all stops to prevent any further decline in the growth momentum.
As part of these moves, the People’s Bank of China (PBoC) effected two cuts to benchmark interest rates within a month. The latest of these took place earlier this month, when loan rates were decreased by nearly a quarter of a percentage point. Alongside, banks were allowed to offer bigger discounts. The discount that banks can now offer on loans has been widened to 30% from 20%.
The government’s intent to stimulate the economy was made clear in a cogent manner in the China Financial Stability Report 2012 released by PBoC. The report emphasized the need to channel more funds to “beef up support to the real sector”, another signal that it was keen to get the economy back on the high-growth track quickly.
The route to higher growth is not simple for China. The high level of domestic debt has put a question mark over its ability to implement an expansionist strategy of the kind adopted in the wake of the downturn after 2008. An important development that has occurred on this front is that the Chinese authorities are now endorsing the view held by the rest of the world thus far that the debts accumulated by local governments have the potential of destabilizing the national economy.
A senior lawmaker in the National People’s Congress (NPC) law committee has not only revealed that local governments have run up debts that are currently valued at over 10 trillion yuan, he also emphasized that the potential risks of this accumulated debt should be highlighted.
Steps are now being taken by China to strictly regulate local government debt and prevent risks amid the global economic slowdown.
Two weeks earlier, NPC removed an article that allows local governments to issue bonds directly, following a trial programme last November, citing increasing concerns over local government debt risks.
In the new law, a draft of which was submitted at an NPC committee, the ministry of finance can issue bonds on behalf of local governments only in accordance with the laws and regulations issued by the state council. The amendment reversed an earlier decision that was reflected in a previous draft first presented in December 2011, which included an article allowing local governments to issue bonds within a quota set by the state council and approved by NPC.
With China finding itself embroiled in a process of major internal adjustment that may limit its ability to provide growth momentum, the onus is clearly shifting towards India to provide positive impulses.
Although in its current state it may be difficult to imagine India playing such a role, policymakers in India need to recognize that the country can play an important role in the unfolding global economic dynamics. This it can do by taking decisions that are necessary to unshackle productive forces of its economy. It is a no-brainer that improvements in the investment climate hold the key to this turnaround. Such improvements must benefit all investors, both domestic and foreign. Perhaps the significance of the partnerships between these two sets of investors cannot be more emphasized than at the present juncture.
Biswajit Dhar is director general at Research and Information System for Developing Countries, New Delhi.
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