Akhilesh B Variar
The year of the rabbit turned out to be one that promised transition but delivered more challenges than those it started off with. The Chinese economy showed all signs of the stress carrying over into the new year, 2012. Even as the world looked towards China to use its burgeoning forex reserves to salvage the euro by buying bonds, China’s own internal economic situation continued to be precariously poised to deliver growth amidst runaway inflation numbers, land markets , pressure of wages and local debts.
The much heralded Chinese growth was facing some serious threats by the end of the year with the Index of Industrial Production (IIP) dipping below the contraction point of 50 in November. The situation was somewhat salvaged with the easing of liquidity towards the end of the year, but restoring normalcy in the growth momentum is likely to take some more time.
Inflation was at the highlight peaking at 6.5 in July, overshooting the government’s conservative estimates of 4, before the effect of a six-time Reserve Requirement Ratio (RRR) hike and three-time interest ration hike kicked in and inflation moderated leading to change in policy stance, now to spur the dipping manufacturing sector. However, long term inflationary threats continue to persist.
Land markets continued to be a cause of concern with rising prices ‘forcing’ the government to impose, in characteristic style, restriction on home purchases besides promoting schemes on low cost housing.
Chinese media had reported, towards the end of the year, that with the fall in manufacturing activity, the surplus labour had led to a pause in upward pressure on wages which had been driving up costs, especially for the Small and Medium Enterprises (SME’s). This was seen as a positive, especially for SMEs which had been struggling with other challenges such as difficulties in access to bank credit.
However, on the larger question of wage rise, which is the only way to practically stimulate domestic consumption which, according to senior government officials, is the thrust of 2012 fiscal policy, such trends might not be the best of outcomes. This also points to the bigger challenge of securing an orderly reorientation of industry from export to domestic sectors and near universal wage hikes to ensure adequate purchasing power to consume and also sustain these industries.
The IMF warned that local debt amounting to about 15 trillion Yuan, if not contained, could burgeon and impede the government’s fiscal stimulus capacity. The good news in the banking sector, however, was that credit rating agencies upgraded Chinese banks rating to ‘A’ from ‘A-“signaling an increasing credit asset quality.
On the reform front, the Central Economic Work Conference agreed on tax reforms as also the important step of raising the poverty line threshold for farmers to 2300yuan ($ 362) which is slated to benefit 100 million people.
Ensuring resource availability and its management continued to be a difficult challenge, amply demonstrated by the rare earth regulation efforts. The extent of the Chinese monopoly on global rare earth markets dawned upon importers such as Japan when China decided to cut both production and export quotas by around 72 per cent in the latter half of 2011. The rationale was conservation of strategic reserves for domestic consumption.
The external economy continued on its path of declining trade surplus with most countries. The government repeatedly assuaged concerns of trade deficit of bilateral partners like U.S. China itself had trade deficits with intermediate goods producing countries such as those in South East Asia. Final figures registered a decline in a surplus to GDP ratio comparison, from about 3 per cent in 2010 to 1.4 per cent in 2011.
Chinese forex reserves measured $3.2 trillion, leaving European Union expectant and U.S. wary. Forex reserves contributed to inflationary pressures which forced the government to reduce U.S holdings by 3.1 per cent, the second such offload after a 0.8 per cent in February 2011.
The Yuan appreciation continued, though trade partners, especially the US, continued to complain about the slow rate and even contemplated legislation which materialised in the form of a senate bill to pressurise China. Slew of protectionist moves were evident on both sides with ‘anti dumping’ complaints being brought against both China and the U.S., especially in the automobile sector. The European Union too continued to have concerns on this front.
China’s friction with the WTO continued on the prospect of evaluating Yuan appreciation, with China citing that the issue was beyond WTO mandate and others such as a WTO ruling on raw material export restrictions (rare earth). However, the state controlled media continued to highlight the contributions made by China to the WTO, actual situation suggests that 2012 could be more eventful on that front.
As global economic situation continues to worsen, the year 2012 will check the extent to which the government is able to pre-empt the adverse effects of both imported crisis and those from its own economic contradiction by micromanaging a host of economic variables simultaneously. Chinese aggressive military posturing has evidently led to seemingly innocuous moves even in economic terms being construed by analysts around the world as attempt to acquire economic leverage thus making it challenging for China to seek cooperation at the international level.
The fact, however, remains that given all its contradictions China continues to grow at a phenomenal ‘near 9 per cent ‘ rate and until these very contradictions acquires the Frankenstenian characteristics that are ever so often cited as being possibly China’s waterloo, the world’s second largest economy continues to prosper.
(Akhilesh B Variar is a Research Assistant at Observer Research Foundation)