THE PROSAIC REALITIES OF CHINA

CHINA’S SLOWING, BUT IS THERE STILL VALUE?

Douglas Turnbull

IFA Online, March 22, 2012

Few regions polarise investor opinion to such extremes as China. However, the reality has been, and remains, more prosaic than headline writers would have you believe.

This is a reflection on the competence of the leadership in Beijing, which has a formidable track record of successfully implementing appropriate economic policy, walking a fine line between, on the one hand, cooling the economy so it does not overheat and, on the other hand, not cooling so much as to accidentally provoke a hard landing.
Growth slowdown

The first point to make when assessing the prospects for 2012 is that China has come into this year slowing down. It is visible everywhere from headline GDP figures each quarter, through year-on-year indicators such as industrial production, down to anecdotal evidence across a spectrum of companies.

However, much analysis seems to acknowledge this and go no further, foreseeing some inevitable impending doom. Nonetheless, the next question must be asked to have an understanding of how things develop – why is it slowing?

And to that question there is an obvious answer. It is not the decline in demand from China’s end export markets in the West, given that net exports play at most a supporting role to growth.

Rather, it is because policymakers in China have consciously been slowing growth, bringing it back to a sustainable level from what was a stimulated and potentially inflationary level immediately after the financial crisis. They have done so through a combination of retrenching fiscal stimulus and tightening both the cost and quantity of money.

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