Warning noises in China’s engine of growth

• Last Updated: April 17. 2009 9:30AM UAE / April 17. 2009 5:30AM GMT

Critical mass can be defined as the point at which a venture becomes self-sustaining, a concept that can be applied to nuclear chain reactions, social movements and even countries. As China reports that GDP growth slowed to 6.1 per cent in the first quarter of the year – a 10-year low – there are valid concerns about whether the economic engine is providing enough drive to keep the country moving forward. And particularly in the context of the global slowdown, the flagging momentum of the world’s most populous country has serious implications for the wider economy as well.

There is always much hullabaloo about the transformative force of China as a manufacturing base and emerging market, perhaps an overly exuberant assessment at times. But there is an incontrovertible point to be made about the country’s position as the bankroller of borrowers in the West, with about US$700 billion (Dh2.57 trillion) of US debt alone in its coffers. As national earnings contract, however, there may be considerably less appetite for Treasury bills and other investments in dollars, and greater freedom in spending their dollars domestically.

In part, then, the recent figures are yet another wake-up call about the binge-borrowing habits of western countries, in particular the US as the Obama administration launches a raft of public spending stimulus measures, and a sign that more attention should be paid to the balance sheet. If there is less demand, borrowers are going to have to pay a premium on the projected US budget deficit of 12 per cent of GDP this year.

The more immediate pain will be felt at home in China. Prognosticators have posited that anything less than 8 to 9 per cent growth a year spells recession, an assumption that could be debated. What is more certain is that China relies on economic growth as the key assurance of stability in the country, keeping people employed and improving standards of living. As ideology fades, the Communist Party depends on economic growth and increasing prosperity to legitimise the single hand at the helm of the state.

Beijing is painting the slower rate of growth in an optimistic light – “The economy has taken on several positive changes,” the China Daily quoted the leadership as saying. This would be the standard line, but there are actually signs of a silver lining. The declining growth rate is directly linked to slumping exports as consumers overseas tighten their belts. China can rely to a degree on the domestic market where consumption has shown more resilience; contrast it, say, to Singapore, also hit by declining exports but with a tiny local market, where GDP actually shrank by 19.7 per cent last quarter. There is the argument that in a global crisis the Chinese rate of growth could have been worse. The credit for cushioning the economy so far belongs in large part to national stimulus measures, this being the time for government-directed stimulus the world over, but questions persist about states’ ability to restart their engines through such measures.

One must be careful of drawing too many conclusions from one batch of numbers, and time will tell whether 2009 will see a rebound. If this is the bottom then it will have been a smooth ride. What it shows is that assumptions about China’s future role in the global economy are simply that: assumptions. While it is in Beijing’s interests to help out the staggering West, it may have its hands full at home.