CHINA CATCHES COLD - WILL THE WORLD GET A FEVER?

By Ruma Dubey

The second largest economy in the world, China, no doubt is slowing down. And as its fast moving wheels start reducing speed, the sudden brakes are sending sparks all around the globe. When it does come to a slow trot, the impact on the rest is sure to be felt.

What we are seeing in the world today is two of the largest economies in the world pulling into two different directions. America, the largest economy in the world is moving towards growth, getting ready to reduce interest rates. On the other hand, Chinese economy is slowing sharply and it is this divergence which is sending ripples across the globe, especially in the emerging economies. As cheap credit from USA and boom time in China comes to an end, for many it is an end to the high life.

The Chinese markets which had adopted an air of uncertain calm for a couple of days, was down again today. The yuan grew weaker, copper today hit a six-year low hit a low and coal futures have fallen to a 12-year low. Chinese exports had showed a 8% fall in July and there is fear that August export figures could come in lower. Over capacity has caught up with China and this show’s in the output prices which have fallen 41 consecutive month.

Is China slowing down or more importantly, can the world afford to have a slowing Chinese economy when it is on the verge of recovery?  Analysts in China are of the opinion, not surprisingly, that this slowdown is just a ‘seasonal’ factor. Europe is China’s biggest market and when that entire region is sluggish, naturally, China is taking some hit. More importantly, a lot of systemic changes are being initiated in the Chinese economy, shifting from a purely export driven economy to spurring domestic demand through the Third Plenum like reforms in financial sector, insurance, housing, privatization of the banking sector. Thus it is shifting to a more market driven economy and this shift is causing this pain and slowdown.

But even as dismal numbers come out of China, many fear that the slowdown within is actually more than what we are seeing. There are many who question the veracity of the Chinese economic data. With so much control over all information, doubts are raised time and again about the information itself being meted out. Transparency is a bad word in China and human resource simply means hands which produce goods. Despite all this, China continues to draw one and all like a magnet. Everyone worth their name in salt has set up shop in China or has outsourced manufacturing to China. Every single piece of data which comes out is dissected and debated and usually, makes it to the front page of every business newspaper around the world.  Is it the draw of its US$3.3 trillion forex reserve, the sheer panache with which it delivered the Beijing Olympics or its infrastructure wonders like Three Gorges Dam, the world's highest railway line to Lhasa, the Beijing-Shanghai high-speed rail link; the list is endless. Did you know that five of the world's top 10 contractors, in terms of revenue, are now Chinese?

Thus if we look at this logically, we cannot ignore China as it looms large over the globe today simply because it so humungous; towering like the Mt. Everest. Like mountaineers vying to climb the Everest, with unpredictability threatening at every step despite years of experience, China too is an enigma. No one, not even the best brains at Goldman or Moody’s or GE or Apple, are able to lay a finger on the exact working of its development model. Forming alliances with some of the most dangerous and authoritarian countries in the world, while signing the dotted lines with developed countries, one cannot really fathom what really lies beneath.

Coming to the basic question – can the world today cope with a slowdown in China? Well, it will hurt; there is no beating around the bush there. If the fastest growing economy slows down, which are like wheels of an automobile, naturally, if one or two wheels develop a puncture, slowdown is certain. A few years ago, one could have never ever imagined China becoming what it is today. But that is how the changed equation of the global economies stands today.

Seen the disaster movie ‘2012’ where the world comes to an end? That movie to a large extent depicts the global scenario – it was an Indian scientist at NASA who predicts the end of the world but it is China which is assigned the task by USA to build a huge structure which will withstand the disaster and thus save a few human beings after the entire earth is destroyed.  One can shrug this off as movie fiction but it is the perception that is a learning. That’s the way things stand – India can be the grey cells to the world but it will neither earn enough moolah nor will it help save the world. But it is China which the rest of the world thinks is capable enough to build infrastructure of mammoth proportions. Huge and strong enough to save the world. “Made in China” anyone?