China Crash or Soft Landing?

Politics

China Crash or Soft Landing?

China's economy is slowing and it's implications for the globe are perhaps decisive as it has become the globe's economic engine.

This Report from the IMF - answering key questions and providing analysis: China’s growth rate is set to moderate to around 8 percent this year due to measures by authorities to cool the economy, and the global slowdown, say IMF economists in their latest assessment of the world’s second-largest economy.

In an interview, the head of the IMF China team, Markus Rodlauer, says with the right policies, and global collaboration, he is confident that China can meet its immense challenges.

Q: The IMF recently downgraded its outlook for the global economy. What do you see as the implications of this for the Chinese economy?

Rodlauer: China’s economy has now been slowing for six consecutive quarters. This started early last year when the government deliberately put in place policies to slow the economy, which had been growing very fast. Now, on top of that, has come the global slowdown—mainly related to the euro crisis—that has slowed down the economy more than expected and somewhat more than the authorities had themselves probably intended. So, earlier this year, they switched gears and started to moderately support the economy to ensure a ‘soft landing’.

So, we are seeing growth in China slowing down, as I have said, but we don’t see it slowing down too much. GDP growth in the second quarter came in at 7.6 percent, which was slightly better than expected. On current trends, we expect growth of around 8 percent this year which, of course, is still formidable compared to other countries in the world.

Q: Is 8% too high? Too low?

Rodlauer: We believe that growth at around 7-8 percent a year is sustainable for China and is very doable. It is also what the government set itself as a goal in its own Five-Year Plan, which was put in place last year. That being said, in order to achieve that pace of growth over the medium term for many more years, China will have to change its growth model. Over the past few years, growth in China has relied very much on high and rising rates of investment. So, investment has been very strong, capacity has been built, infrastructure has been added, but it cannot continue at this rapid pace forever. Instead, over the next few years, there needs to be a smooth handover from investment to domestic consumption as the main source of growth in China.

Q: What’s needed to rebalance the economy to domestic consumption?

Rodlauer: Savings in China are extremely high compared to international levels. Generally, [in most developing and developed countries] one tends to spend about 70 to 80 percent of income and then you save 20-30 percent. You either put it aside for a rainy day or invest into future productive capacity. China, on the other hand, saves over 50 percent of its income, which means there is room to consume more.

So, what would one consume? First of all, we see that, in particular, low-income earners in China still have a way to go before they can easily afford ordinary, consumer goods—such as durables like washing machines, or electronics, or services like travel or insurance. They save a lot partly because they feel that they are not so well provided for in their old age since the pension system is not very strong, the health system may not provide for the emergencies they might face, so that is why a very high proportion of their income is saved, and then either invested or put abroad into savings.

Also, corporate savings in China are very high, and there is room to distribute some of these savings either to the budget (through higher dividends of state-owned enterprises) and salaries. So that too has to change. Savings should come down, and people need to spend more on goods for everyday life: consumer goods, furnishing their homes, but also maybe on better health care and other services like travel and insurance. So it’s domestic consumption that really will need to provide more of an engine of demand in China going forward.

Q: You made reference to housing. That was something that was a great worry a few quarters ago because of fears that there was a housing bubble in China. What’s your assessment now?

Rodlauer: Here, in particular, the government has put on the brakes quite strongly. They saw that housing prices were rising very fast, construction of new housing was almost going through the roof. And that has consequences for the financial sector—with fears of a bubble—and the instabilities this creates.

But, equally important, in China they saw that this had a profound distributional impact, that many people—because of the very rapid rise of housing prices—were starting to be priced out of the market. That is a big concern for the government. So they set themselves the goal of slowing down this boom and slowing down the rising real estate and housing prices—in fact, engineering some decline in prices. And they seem to have been successful here as we have seen a slowdown of the boom in the housing market.


Details

Language: Chinese (simplified)

Year of Production: 2012

Length: 4 min

Country: China

License

Creative Commons License

China Crash or Soft Landing? by DiplomaticallyIncorrect.org is licensed under a Creative Commons Attribution Share Alike 3.0 License.


Directors:

  • Muhamed Sacirbey (IMF)

Producers:

  • Susan Sacirbey (IMF)