BALLS OF FURY

Although far from perfect, China’s stimulus package has the potential to
get the dragon rolling again, says Sray Agarwal of 4Ps B&M

The Chinese economic growth saga will just not be a ‘one-of-its-

kind’ economic lesson of this century, but will also mark the
conceptualisation of a new economic theory in economic history. This
erstwhile 8th largest economy (in late 90s) has successfully surpassed
most of its predecessors and today stands as the world’s 3rd largest
economy (behind mighty US & Japan). If one goes by expert
predictions, it would not take much time for China to even surpass Japan
and book the second slot for itself.

However, the global economic debacle has affected all, especially China,
as the country’s overdependence on trade is costing it heavily. This is
especially evident when one reads China’s economic growth meter. As
per recently announced statistics, China’s economy grew at the slowest
pace in almost 10 years in the first quarter. The Gross Domestic Product
(GDP) grew at a snail-paced (considering China’s previous growth rate)
6.3% yoy.

When plunging stock markets, bank bailouts and expanding recession

were acting as nightmares for economies China’s economy was
relatively unhurt. But then how long can an economy remain untouched
from negative externalities, say experts with a shrug, when so much of
China’s spectacular boom comes from global trade?

Economics we say, leaves none!! In spite of fighting recession through

its pre-planned economic stimulus packages, Chinese growth rate was
unable to grow at its normal pace (which is 12-13% per year). It’s for the
first time in last 60 years that China is facing any kind of economic
turmoil. Many economic pundits credit this slowdown to decreasing
export rate. China’s exports decreased by whopping 17% as the
international trade took a backstage in recent times. However, contrary
to perceptions, it’s just not the export that is acting like the proverbial
frog (pulling all indicators down) for Chinese economy. The Chinese
growth rate didn’t fall due to decrease in its export quantity but instead
because of tight credit policies that was designed in 2007 for preventing
the economy from facing a US like fate. Against the populist notion,
China is not so dependent on exports. Agreed that exports constitute
40% of total GDP but less than 10% of total workforce is involved in the
same.

GOOD, BAD, UGLY

The slowdown is more because China largely depends on domestic
consumption and its citizens have cut down their consumption. But then,
the Chinese government seems all set for the revival. With a four trillion
Yuan (equivalent to $590 billion) stimulus plan, China successfully
revitalised its manufacturing and banking sector for a pretty long time.
Remember, China’s fiscal stimulus is not just the biggest but is a well
planned one too. Their stimulus package is well aimed at infrastructure
development. Take, for instance, transport – where investment has
increased by three-folds in just one year. Additionally, construction of
six new railway systems & 14 expressways, upgradation of 12 ports and
expansion of 10 airports are also on the agenda.

However, major concentration on infrastructure development may lead

to an intense catch-22 situation. On pondering deeply into China’s
investment trend, there’s one concern that comes to mind – the Chinese
government seems to be investing heavily in order to upgrade its
production capacity, rather than looking at expanding it. In a country
where poverty is still a plaguing problem, upgrading existing
infrastructure and production facilities will only help the upper crust of
the society and not the common man. What China needs is to search for
a brand new way to increase the common consumers’ spending and not
just upgrade infrastructural facilities.
Furthermore, you do not need to be Sir Isaac Newton to comprehend that
a distressed social safety net is preventing the Chinese from increasing
their spending. Instead, they are saving a huge part of their income to
meet their medical expenses. When consumer spending for a country
accounts for 35-40% of total GDP, it becomes imperative to focus on
basic infrastructure development to encourage people to save less and
spend more. Moreover, millions of workers (more than 20 million) have
lost their jobs due to shutdowns of factories. With around 5-6 million
Chinese ready to hit the job market, this unpromising state may lead to a
social unrest, especially among the youth. A few weeks back, hundreds
of textile workers protested and demanded their pending wages.
Agreeing to our hypothesis, Bhaskar Roy of South Asia Analysis says,
“China’s last official statistics published in 2005 reported more than 87
thousand cases of social unrest in urban areas due to retrenchment, non-
payment of wages and pensions, and government usurpation of landed
property. Since then, no statistics on unrest have been published, leading
to questions that the situation may have gone worse.”
However, the situation is not so gloomy as it appears. Even though
the current growth rate is lowest in the last decade, the 6% growth
rate is still very high compared to an average 4-5% growth rate of
western economies. If numbers are to be trusted, retail sales are growing
at a respectable 15% (around 3 trillion Yuan). Domestic sales are also
getting better and even the stock market has improved by two-folds
since the quarter ending December 2008. Per capita spending of
urbanites is now around 4,800 Yuan. Even the organised sector is seeing
a promising future. Sales of cars (2.60 million units) and other consumer
durables have seen a comeback.

China’s massive $586 billion stimulus package is showing some positive

signs. Thanks to the stimulus, industrial production grew by 8.3% (up
from 3.8%) in March on a yoy basis. China’s spending on infrastructural
development is not only boosting domestic investment, but is also
generating huge demand for fuel, metals and other input related raw
materials. This means US and European countries, which are chief
importers of Chinese goods, may see some growth in their trade. Roy
adds, “This is not a doomsday scenario. China has the instruments and
the resilience to wade through the problems. The downturn has not
affected defence spending, which rose to about $70 billion in declared
figures this year.” Even World Bank, Asian Development Bank and
OECD are optimistic about China’s stimulus package and predict that
China’s GDP will get back to its normal pace in Q2 itself; that means
only three months to go!!!