China slows


The Chinese economy’s growth has slowed to the lowest in three decades, imperiling world security as the second largest economy and a principle trader.

Weaker Chinese export growth has reduced demand for imports of intermediates and raw materials, inflicting losses of iron ore and copper and like products mostly on emerging exporters markets of key global commodities.

But policymakers’ bigger worry is that the latest data showed a loss of momentum in the three engines of the world’s second-largest economy – exports, investment and consumption.

Beijing’s “Socialism with Chinese Characteristics” has chilled liberalization, heightened mercantilism, raised bureaucratic hurdles to trade and investment, weakened the rule of law, and strengthened resistance from vested interests that impede more dynamic economic development.

The economic slowdown may be more severe than official statistics indicate, and poses serious challenges for a government whose legitimacy depends more and more on its ability to raise living standards. Much will depend on how successful Prime Minister Xi maneuvers to consolidate power for a third term. His activities make it harder to analyze measures that might be taken in the tightly controlled economy. But his strategy to achieve Chinese dominance of high-tech sectors already has engendered pushback from global rivals.

All land in China is state-owned and protection of foreign intellectual property is inadequate. The judicial system is dominated by government agencies and the Chinese Communist Party. Corruption remains endemic, and the leadership has rejected fundamental reforms such as requiring public disclosure of assets by officials, creating genuinely independent oversight bodies, or lifting media political constraints.

Eliminating the minimum capital requirement has made it easier to launch new business, but the overall regulatory framework remains an obstacle to development with complex and uneven requirements. The labor market remains tightly controlled with. guidelines on labor issues often differing from agency to agency, and labor laws applied differently in different localities. The government subsidizes numerous state-owned enterprises and is still committed to price controls for essential goods and services.

Economic models suggest a fall of 2 percentage points in Chinese growth relative would cut world growth by around 0.5 percent, leaving it at 2.3 percent, the slowest since 2009, not far off global recession. The slowdown coincides with the trade dispute with the U.S., weakening domestic sentiment and global demand, and alarming local governments doing large-scale off-balance-sheet borrowing.

The Shanghai Stock Exchange Composite Index was the world’s biggest loser in 2018, posting a fall of 24.6 percent. Beijing authorities were trying to chip away at one of the highest debt mountains in the world: 253 percent of GDP. But their strategy coincided with the slowing of the big European export market and U.S. President Donald Trump’s tariff tantrum.

China’s economic growth has been steadily decelerating over the past decade, from a 14.2 percent in 2007 to 6.5 in the third last year. The 6.4 percent growth of the fourth quarter was the lowest since the 1992 when Beijing began publishing quarterly GDP data.

There is no real indication of when recovery will come. Beijing has had success at playing a dominant role in the economy, and it will be impossible to wean policymakers off the model.

But the China model inevitably leads to confrontation between China and the West. Current trade talks dramatize their differences: The U.S.’ small-government, free-market ethos is very different from the Chinese command-and-control model. China gives significant financial and non-financial support to major companies, which it owns or controls. In the U.S., companies in trouble trade, merge or die.

The Chinese economy has one positive element: the worldwide plunge in energy prices which will offset some of China’s difficulties.

Sws-02-03-19

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