The European debt crisis made headlines in recent discussions on the prospects of the global economy in 2012. Most agencies in the business of predicting economic trends have warned of yet another slowdown. This was even before France lost its AAA rating earlier this month and several other countries in the region were downgraded by rating agencies. These agencies have predicted that some of the better-performing regions, in particular, Asia, will slow if Europe is unable to manage its debt problems.
It seems that the parameters on which these predictions were made need to factor in developments that have taken place in China over the past few months. There are signs that the Chinese economy is cooling down, but the jury is out on whether the country’s policymakers will be able to manage a “soft landing”. Official figures show that in the fourth quarter of 2011, the Chinese economy’s growth rate dropped to 8.9%, which was marginally below the level recorded in the preceding quarter, but was higher than the widely expected 8.7%. These numbers, along with the reining in of inflationary tendencies over the past few months, suggest that Chinese policymakers have indeed been able to manage a “soft landing”, at least for the present.
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However, this picture changes somewhat if China’s demand for capital goods during the last two quarters of 2011 is considered. This indicator provides a very useful counterpoint to the gross domestic product (GDP) figures, which, if the WikiLeaks cables are to be believed, were described as “man-made and, therefore, unreliable” by a senior government functionary. Since the third quarter of 2011, China has been cutting its demand for a range of capital goods—ranging from earthmoving equipment to automation technology—produced by the major firms in Europe and the US. More recently, manufacturing activity in China has begun to slow; the country’s manufacturing activity contracted in November for the first time in almost three years, and the downward trend has continued since. These figures portend a further slowing of the Chinese economy in the current year, and given some of the other imponderables that it faces, there is almost a temptation to concur with those who have predicted a “hard landing”.
Uncertainties in the real estate market in China are just beginning to surface and only the initial assessments of a slowdown in investment in this sector on the country’s GDP growth are available. Some of these assessments indicate that a cooling of the real estate market may shave off almost 2% from the previous year’s growth rate. In other words, China could grow no better than 7% during 2012.
The slowing of the Chinese economy has begun to get reflected in the country’s external trade numbers as well. Exports have started to dip, a trend that has adversely affected China’s trade surplus for the first time since the 2008 crisis. These are signs that the euro zone crisis has already cast its long shadow on the China’s economy, and this strong negative impulse has negated the buoyancy which has been seen in its trade with the US. China’s balance of merchandise trade with the US since the beginning of the 2011 had reached $272 billion by November, almost 8% higher than that registered during the corresponding period in the previous year. Clearly, the level of engagement, at least in terms of merchandise trade, between the two largest economies is on an upswing: the US consumers are dependent on Chinese producers than ever before. Coming as they do at a time when President Barack Obama promised more jobs for the American public through initiatives such as creating manufacturing employment opportunities in his State of the Union address, these numbers will no doubt bring fresh demands by the US administration to make the value of the yuan more “realistic”.
China’s economic uncertainties are beginning to attract more attention ever since the reports came that the country’s foreign exchange reserves have declined by more than $20.5 billion during the last quarter of 2011, the first time such a decline occurred since the Asian financial crisis. What is significant is that the reserves have declined consecutively in November and December, and in these two months the decline was more than $92 billion. This decline in reserves occurred as concerns over the country’s slowing economic growth in the wake of the euro zone crisis, together with expectations of weakening of the yuan, triggered capital flight.
The tendencies shown by the Chinese economy have created doubts about its potential impact on the global economy in the near term. The slowing of the second largest economy, particularly the easing of exports, will be seen by some of the strongest critics of China’s trade policy, including the US, as a move in the right direction. This would inevitably result in a lowering of the trade surplus that China has been able to generate, and which will, in turn, affect the ability of the country to build its foreign exchange reserves. Is global rebalancing in the offing?
Biswajit Dhar is director general at Research and Information System for Developing Countries, New Delhi.
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