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LAST WORDS: Still Navigating the Global Recovery
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altThere’s a shopping mall in Tianjin, just off the newly opened Number Two Metro Line – an enormous complex with a sprawling parking lot one might expect to see somewhere in America’s mid-west. As I walked into the main entrance through a well-lit store, attendants waited eagerly in front of neatly stocked shelves of cosmetics and toiletries. Upon exiting the store, I passed through a food-court featuring different types of Chinese and international cuisine. It was 6:00 pm and I sat with my boss in a Japanese ramen shop – from the start to the end of the meal we were the only customers. As we exited the store, the clerks were still idly standing waiting for potential customers. 
 
I couldn’t help but wonder to myself, “There are over 11 million people in Tianjin; where is everyone?”  Maybe I was reading too much into it, but this wasn’t the first time I’ve encountered this type of phenomenon and it got me thinking about the bigger picture. Coupled with grumblings of an over-heated housing market and bleak unemployment and inflation forecasts, a question came to mind, “Is the Chinese economy for real?”
To an outsider looking in, that question seems ludicrous. After all, look at the facts: China’s economic growth has been unprecedented in modern history. Near double-digit growth for over 30 years is astonishing. The upward mobilisation of a quickly developing middle class is also impressive, especially considering the size of the population and the number of people who have risen from poverty.  
 
Even as the global economy was plummeting and international markets were on the brink of collapse, China seemed to walk away unscathed.  Propped up by large infusions of government capital, the economy hummed along.  China emerged with loads of new overseas investments, a coffer packed with over three trillion dollars in foreign reserves and seemed poised to take the global economy by storm.
 
Since that time however, the Chinese economy has shown that it isn’t impervious to the shockwaves that have been rippling through global markets since 2008. A stagnant US economy, along with instability in the Euro zone, have combined to expose some weaknesses, the most important of which has been decreased consumer-spending in the West which has calmed the appetite for cheap Chinese exports.  
 
Third quarter growth marks the seventh consecutive one in which the economy has slowed and net exports continue to decline.  Growth slipped to its lowest point since 2008 and many economists have predicted that the days of 9-11% growth are now a thing of the past – in fact, some are projecting 5.5%-7.5% to be the “new normal”.
 
This trend is developing at a precarious time; on 8 November, China underwent a historic once-in-a-decade power transfer.  Some have speculated how the recent turn of events will affect the legacy of outgoing premier Wen Jiabao and president Hu Jintao.   
 
Criticism in many respects should be unfounded, as these were the men that oversaw the fastest ten-year growth period since the Party’s founding in 1949.  Critics, however, may point out that more could have been done in the past ten years to predict some of these problems and put measures in place to curb them. But fine-tuning policies while in the midst of scorching hot growth is not always an easy (or popular) task.  
 
altAs the new leadership was ushered in, premier Wen and president Hu spoke about current trends and a way forward. Their statements will help shape the policy enacted by incoming president Xi Jinping and the newly appointed leaders of the CPC.
 
The catch phrase uttered time and time again was “reform”, as each outlined broad strategies- namely encouraging an increase of domestic consumer spending to offset reductions in exports, assessing ways and means to maximise the return on State Run Enterprises, tackling widespread graft and encouraging foreign investment.
 
These ideas are fine in concept, but are also easier said than done. In a recent article on FT Daily, former ambassador to China Stapleton Roy stated that, “The issue is not whether the new leaders introduce reforms; it is whether they can implement those reforms.”  
 
In spite of good intentions, it’s questionable whether these reforms are realistic. These are big problems which require strong leadership and, maybe more importantly, the will to implement changes in the face of certain criticism and a potential economic slowdown.  
 
For example, in a quote from the Wall Street Journal, Michael Pettis argues, “The arithmetic (for increasing domestic spending) simply doesn’t work. China must rebalance its economy because its over-reliance on exports has become toxic. For China to maintain GDP growth rates of even 7% to 8% implicitly requires that household consumption grow by 10% to 12%, something never before achieved even under much better economic conditions.”
 
That said, not everyone is so bearish on the Chinese economy. The day I wrote this article, I read a story in the South China Daily which suggested that China’s economy has hit its “bottom” and fourth quarter growth is expected to rebound – but these predictions are contingent upon outside factors such as the US handling of its looming “fiscal cliff” and the ongoing turmoil in European markets. 
 
I’m not an economist by any measure, but I often feel that economics is nothing more than a confidence game.  If you read enough Bloomberg reports or listen to the interviews with the brass in the US treasury, the talk is always about “restoring confidence in the markets” and “consumer confidence” being on the mend.  Nobel laureate economist Paul Krugman often jokes about “Very Smart People” and their mythical “Confidence Fairies” that will bring US economic growth back to life.  
 
I’m of the opinion that China, just like the US, India and others, has become addicted to flooding the market with money in order to prop up economic growth.  Developing countries can use these big infusions of cash to improve infrastructure, and this can be a good investment, but the spending is often poorly planned and wasteful.  These periodic injections of government spending may be a good short-term strategy, but how long is it sustainable and how much of the growth generated is real?
 
Only time will reveal the answers to these questions; in the meantime, we’ll have to wait and see if the “Confidence Fairies” have enough magic left to re-boot the Chinese economy and help bring the West out of its long doldrums.  
 
 

By Christopher Ribeiro 
 
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