One Man’s Opinion: Will The Chinese Economy Send Shock Waves In Future?

Latest data from China showed CPI had been broadly stable, while industrial production data held its ground and came in stronger than most economists had forecast, suggesting there’s still quite some momentum left in the Chinese economy, said Julian Callow, chief international economist at Barclays Plc.

Industrial production was up 9.7 percent year-over-year in July, which is rather encouraging and indicates China will be able to grow at a rate of over seven percent. Latest investment data shows a lot of strength coming through in the infrastructure sector, up just below 25 percent year-on-year in July, which is a paradox since growth has been so dependent on borrowing and debt. There has been such an imbalance on the investment side in the economy and yet the country continues to print relatively encouraging numbers, he noted.

Asked if the latest string of data, which has been quiet encouraging, indicates the economy has stabilized, Julian said the economy may witness some disappointments down the road, though there may not be strong headwinds. If the Chinese economy is compared with advanced economies before the crisis hit in 2008, there are striking similarities.

There has been a very large expansion in borrowing (debt) and real estate investment in China, and both have historically been very good indicators of a looming crisis in emerging economies as well as advanced economies. So, investors need to be cautious on China’s growth story.

That being said, the country seems to have the ability to generate some good numbers and there’s certainly some scope for easing on the monetary side. At the moment, the central bank and the government are trying hard to squeeze the shadow-banking sector and are keeping bank liquidity very tight because they want to wean the economy away from the debt-fuelled expansion, Julian observed.

The latest CPI number shows food inflation has been quiet high. Asked how the country could tame those numbers while balancing growth, Julian said though inflation is a matter for concern, its growth and jobs that matter more for the Chinese. For the system to function, it’s essential the economy continues to generate growth and rising standards of living.

The aggregate inflation has been about 2.7 percent, which is tolerable. It is true food inflation has been stronger and some strength in pork prices, which is a significant component in the Chinese household budget, is yet to come through, and that probably explains why the Chinese central bank is showing not much desire to ease the monetary policy or cut reserve requirements or reduce interest rates.

At the same time, there’s a lot of excess capacity in the industrial sector and though the latest PPI number has been less negative, it’s fundamentally in a deflation which can have global consequences.

The excess Chinese capacity in many sectors is actually a deflationary force for the global economy. There’s no doubt that China is going to reorient demand from the investment side to the consumption side. It probably would want to grow exports also as growth slows down in the investment channel, Julian concluded.

You can watch the video here.