Chinese economy to raise speed and help the world grow

(From right to left) Wen Jiabao, Chinese Prime Minister, Herman van Rompuy, President of the European Council and José Manuel Barroso, President of the EC at the podium. The 8th EU/China Business Summit, 20/09/2012. (EC Audiovisual Services).

(Click to enlarge graph)

According to the Organisation for Economic Cooperation and Development (OECD), the Chinese economy is bound to resume in strength in 2013 and attain an enviable 8.5% growth rate, after a relatively slow year in 2012, when it marked its slowest yearly GDP increase for years at 7.5%.

OECD insists however that the relative slow-down of the Chinese economy in 2012 “…reflected weak export market growth and the effect on domestic demand of government measures to cool inflationary pressures. This objective has now been achieved, including for property prices, and the authorities have started to ease the stance of macroeconomic policy. Going forward, the economy will still face external headwinds, but housing and infrastructure outlays are likely to revert to their longer-term trend.

With domestic demand gathering renewed momentum, the current account surplus is set to shrink to 2¼ per cent of GDP by 2014, compared with the peak of 10% in 2007”.This positive assessment of China by OECD is to have a benevolent effect also to the country’s main trade partners. The key point is that the Chinese authorities seem to have now relaxed their restrictive macroeconomic policies, considering that there are not any more inflationary dangers.

In this context they will support internal demand across the vast country and presumably they will direct the economy to operate with lower trade balances. In this way they are favouring China’s trade partners all over the world.As a result the large size of the Chinese economy is expected to have tangible and positive effects on global growth. Actually this is a gift by Beijing to the rest of the world and has to be fully appreciated by the country’s main trade-partners, the US and the European Union.

EU – China relations

But what is China for Europe? The answer comes very eloquently from Karel De Gucht, European Commissioner for Trade. De Gucht speaking recently in London at a China- Britain Business Council Lunch on EU China Relations said: “I know that those bonds help you achieve a shared objective – growing the European economy through trade and investment.

That kind of cooperation, based on mutual interest and pragmatism, is what I want to focus on in my remarks today. Because I think it is a good description of the kind of relationship that the European Union needs to have with all of our trade and investment partners. And it is a very good description of how we should view our relationship with China.

That relationship is already strong. The speed of its expansion over the last thirty years is nothing short of breath-taking. Our trade has grown from 4 billion euro a year in 1978 to almost 430 billion last year. Europe is now China’s largest trading partner and China our second largest.

But we have a mutual interest in making this relationship even stronger because we are both going through moments of transition.  China’s first wave of growth was driven to a great extent by the abundance of low-cost labour. But the Chinese leadership knows that new skills will be needed to avoid the middle-income trap and to facilitate the move to the next stage of economic development”.

China on the global economy

Returning to the current affairs, one should focus also on the expected positive effects on the Chinese economy from abroad during this year, with more vivid demand for its products. This global betterment is expected to help China attain this 8.5% growth rate in 2013 and 8.9% in 2014, as predicted by the OECD.

It must be stressed again however that the Chinese economy is now directed by the economic authorities to a new long-term growth path, where internal demand is to play an increasing role as a growth powerhouse, with housing and infrastructure outlays to have the prerogative in this new environment. The country’s trade partners are to profit from that.

The table published is very eloquent. It describes a very balanced economy with a slightly negative fiscal balance at -1.7% of the GDP, meant to help internal demand and a rather low (for the Chines standards) current account surplus at 2% of GDP in 2014.
China is also relaxing its controls on capital transactions. According to OECD, “further interest rate deregulation and greater freedom for long-term capital movement would support growth”.

Internal assessments

It’s not only the OECD that predicts a much better year for China in 2013. According to Lian Ping, chief economist at the Bank of Communications, who spoke recently to the country’s media, China’s economic growth rate is likely to accelerate to 8.5 percent this year from around 7.8 percent in 2012.

Lian added that, “the economy will grow briskly in 2013 if we look at the infrastructure projects fast-tracked by the government in recent months and the momentum of economic reforms”.

He went on explaining that, “the government accelerated its approvals for the construction of new highways, ports, railways and sewage networks in the second half of 2012, with investment in infrastructure projects greenlighted by the country’s top economic planner exceeding 5 trillion yuan (795 billion U.S. dollars) in the third quarter.

Speaking about overall investments the bank’s executive said he expects fixed-asset investment to increase 23 percent in 2013, compared with growth of less than 21 percent in 2012.

Incidentally it must be noted that the Bank of Communications is one of the top 5 commercial banks of the country and has an internal network of over 2,800 branches covering more than 80 major cities. It has also a strong and very old presence in Hong Kong, and has established overseas branches in New York, Tokyo, Singapore and representative offices in London and Frankfurt.

Assessing the overall prospects for the Chinese economy this year the balance is obviously positive and must be also noted that this vast country by learning to operate with fewer trade surpluses, it will help the rest of the world to overcome the present global static conjuncture.

In reality foreign companies with huge investments in China, like the German automotive firms Audi and Mercedes-Benz count a lot on the internal Chinese demand for their cars. Car sales in Europe are at the best stagnant, while the demand in China goes from one record breaking to the next. The same is true for a large number of foreign companies with a strong presence in the retail Chinese market. The list is very long and contains apart the European automotive firms, practically all the global technology pantheon and all the European luxury product names. All of them count on their internal Chinese sales in order alleviate their problems with the European recession.