In one of his more exuberant poems – at least at its start, W.H. Auden reports overhearing a lover’s declaration to “love you Till China and Africa meet.” Well, now they have, if not quite in the sense that the lover envisaged.
In recent years, China has been widely regarded as the engine that would drive economic recovery elsewhere. In the case of Africa, this would be through its appetite for Africa’s primary resources. For Europe and the Americas, it is as both a market for processed products and an investor, both directly and in sovereign debt.
China is perhaps no longer seen as needing to do all the work. The OECD’s latest Economic Outlook foresees a strengthening of the global economy over the next two years, though it suggests that urgent action is still required to further reduce unemployment and address other legacies from the crisis. “Advanced economies are gaining momentum and driving the pick-up in global growth, while once-stalled cylinders of the economic engine, like investment and trade, are starting to fire again,” OECD Secretary-General Angel Gurría said, launching the Outlook during the Organisation’s annual Ministerial Council Meeting and Forum in Paris in May.
GDP growth across the 34-member OECD is projected to accelerate to 2.2% in 2014 and
2.8% in 2015, according to the Outlook. The world economy will grow at a 3.4% rate in 2014 and 3.9% in 2015. Among the major advanced economies, the OECD regards recovery as best established in the United States, which it sees growing by 2.6% in 2014 and 3.5% in 2015. The euro area will see a return of positive growth after three years of contraction, while in Japan, the OECD expects growth to be dented by the launch of much-needed fiscal consolidation measures, hovering at 1.2% in 2014 and 2015. The BRIICS (Brazil, China, India, Indonesia, Russia and South Africa) are projected to see GDP growth of 5.3% this year on average and 5.7% in 2015. China will again have the fastest growth among these countries, with rates just below 7.5% in 2014 and 2015. While that may be an enviable growth rate seen from many other large economies, the Chinese government is mindful of the risks of overheating. According to the World Bank, recent growth rates have been significantly below the levels observed over the past decade
as drivers of economic growth shift from manufacturing to services on the supply side,
and from investment to consumption on the demand side, and as measures to rein in
the rapid accumulation of credit have come into force.
According to John Vail, Head of Global Investment Strategy, Nikko Asset Management,
the right thing for the country to be doing now is to be building up its service sector and
relying less on exports, lest China fall into the mercantilist trap as Japan did, where the cost was a trade surplus and a continually strong Yen. Nevertheless, he suggests, while fears of a crash are overdone, the transition may be rocky.
“The rest of the world has believed that China can do no wrong because it has done no wrong for the last 20 years,” says Crispin Odey, founder and CEO, Odey Asset Management. When the Chinese economy hits turbulence, he anticipates significant global nervousness. The presence of a large shadow-banking sector in China, he believes, shows that decent returns do not exist in the mainstream market. “Hidden dangers lurk behind attractively high yields,” he warns.
If China itself is not seen as a prudent destination for inbound investment, however, presumably a large swathe of domestic investors will feel the same. The Shanghai Composite index registered an 8.5% loss in 2013 and has continued to slide this year. Money that might previously have gone into the property market and is not comfortable with some of the riskier domestic alternatives to the listed markets will need to look for a new home.
A view from Washington
The International Monetary Fund (IMF), in its 2014 assessment of the Chinese economy, has expressed a positive view of China’s growth trajectory. It advised the country to adopt lower growth targets and to put more emphasis on enacting reforms made public last November. “Slower growth now will lead to higher, sustainable growth later,” it suggested, “but if reforms are not put in place, GDP growth may well plummet.” The IMF described the Chinese currency, the renminbi, as still “moderately undervalued”, warned of weakness in the real estate sector and pointed to a credit bubble which, if not properly handled, could lead to grave problems.
As it is, not all countries are looking to get closer to China economically. The Trans-Pacific Partnership (TPP) trade pact, negotiation of which should be concluded by the end
of the year, excludes China, while including Singapore, New Zealand, Brunei, Australia, Japan, Malaysia and Vietnam among its Asian participants. China is not participating, since a country needs to be invited by all the other negotiating members. An invitation is not believed to be in the post.
