x Abu Dhabi, UAESaturday 20 January 2018

Can China's shoppers save the world?

The Asian giant has emerged as an uneasy saviour of the global economy with its decision nearly a year ago to implement a 4 trillion yuan fiscal stimulus plan.

Foreign brands are taking advantage of the boom in the Chinese economy.
Foreign brands are taking advantage of the boom in the Chinese economy.

The latest Chinese edition of Vogue weighs in at a hefty 1.5kg, with the Hong Kong actress Maggie Cheung staring from the cover of the style bible.

Inside, Vogue is crammed with advertisements from foreign cosmetic companies and fashion houses keen to shore up crippling losses at home by selling to China's millions of consumers. It is the very public visage of a transformed China, a country that has emerged in the year since the onset of the recession as an uneasy saviour of the global economy. Suddenly the world's fourth-largest economy is no longer emerging ? it is here.

The Olympics may have marked China's re-emergence on the global stage after 30 years of reform and opening up, but it was China's decision nearly a year ago to implement a fiscal stimulus plan valued at 4 trillion yuan (Dh2.15tn), or 14 per cent of GDP, that marked its true coming-out party. "There is always a delay in processing these kinds of shifts. It takes things like the financial crisis to help people focus on this. China is big and buys a lot of commodities. But it's not big like the US and Europe, in terms of final demand," says Arthur Kroeber, the managing director of Dragonomics Research.

The stimulus has kept the Chinese economy on track for growth of at least 8 per cent this year, while the rest of the world still struggles with the downturn. Goldman Sachs raised its forecast for Asian economic growth this year, largely based on a stronger outlook for the US and China. The US investment bank expects China to grow 9.4 per cent because its growth momentum remains strong and policy tightening was behind the curve.

The stimulus plan saw manufacturing growth pick up for the sixth consecutive month in August, according to figures from the state-sanctioned China federation of logistics and purchasing. The purchasing managers' index gives a better indication of China's true economic health and its prospects, because it is forward looking and includes areas such as export orders. The stimulus is working, but whatever happened to the exports that built China's economic boom of the past decades? And are Chinese consumers going out and buying the impressive range of D&G and Prada products on offer in Vogue?

Doubts about China's prospects linger, however, in the area of exports. Michael Pettis, a professor of finance at Peking University and a senior associate at the Carnegie Endowment for International Peace, believes the notion of China as a global saviour is overdone. "It makes no sense at all. Any saviour must replace US consumption, and that's not happening in China. Chinese consumption is only a little higher than French consumption," says Prof Pettis.

"The growth has been achieved because of a burst in investment, not a burst in consumption. Investment doesn't really solve the problem. Growth in consumption feeds into higher GDP growth. Net consumption is the key measure." Three to four months ago, people were more optimistic about growth, but more and more people are concerned about the quality of the growth in China these days, he says. What is undeniable is China's enlarged status in the global economy, and in its influence in the world.

Soon after the collapse of Lehman Brothers, the Chinese president Hu Jintao was organising a meeting of the Group of 20 (G20) developed and emerging economies with the outgoing US president George W Bush aimed at finding a solution to the global crisis. China began to match its growing economic might with a new political and diplomatic muscle, backed up with a US$2tn (Dh7.34tn) bank account. It warned the US to look after Chinese investments in its treasury bonds and suggested it might start looking for an alternative reserve currency to the dollar. The Chinese premier Wen Jiabao berated US consumers for their profligate ways.

China had a high savings rate, it did not issue subprime loans and the lack of sophistication in its financial system protected it from much of the collapse in the more complex financial instruments. "China looks a little bit better by comparison with the rest of the world because of their primitive financial system, which means it was not as affected by the crisis," says Mr Kroeber. How China deals with its new influence depends very much on whether that edition of Vogue, with its advertisements for Tod's, Chanel, Guerlain and Christian Dior, succeeds in encouraging Chinese consumers to loosen their purse strings.

Most of the forecasts looking ahead for China are at least cautious, and some are downright bearish. Things will change globally, and not always to China's advantage. For example, when the director of the US president's national economic council, Larry Summers, talks about boosting American savings rates and increasing the export market, this could pose a problem for China's economic model. The Chinese government, too, is fearful of irrational exuberance, particularly as it watches so much of the stimulus money flood into stocks and property, possibly creating bubbles.

Global demand for Chinese exports has to pick up in a sustainable way if the government's 8 per cent growth target is to be more than a stimulus-fuelled one-off. In a piece that has caused a real stir among China watchers, John H Makin, a visiting scholar at the American Enterprise Institute in Washington, makes the point that the country will meet its target because of the way statistics in China are based on recorded production activity, rather than being a measure of expenditure growth, which is defined as the sum of consumption, investment, government spending and net exports.

Mr Makin writes how the fiscal stimulus plan effectively reversed measures previously introduced to stop the economy overheating by restricting money and credit flows. "The quick transition from tight to easy credit conditions was accompanied by measures directed at boosting domestic demand and infrastructure spending in particular. "While the entire stimulus package probably was not an addition to existing plans, and probably will not be fully implemented during 2009, it is sufficiently large to generate 8 per cent growth during the year - at least in the way China measures growth," Mr Makin writes.

He puts forward a negative scenario for China, with ever-accelerating inflation putting pressure on stability, in the event that the big industrial economies fail to recover in the second half of this year, coinciding with the stock market and property market bubbles bursting on disappointment about the sustainability of China's growth target. Albert Edwards, the Société Générale strategist, also sees problems from without for China. He describes US consumer fundamentals as "shockingly bad", and because they are such a key decider in China's long-term health, he writes: "I agree wholeheartedly with the bogus nature of Chinese 'recovery'. If the US in 2007 was a slow-motion train wreck with carriage after carriage coming slowly off the rails in turn, China will at some point soon be pile-driving straight into the buffers."

Wang Tao, the head of China research at UBS, believes the stimulus boom is probably over, but she remains upbeat on China's prospects. Ms Wang believes that the stronger than expected recovery in growth, concerns of rising inflation expectation and an asset bubble, as well as worries about non-performing loans, mean that the extreme expansion of the past six to nine months has ended. And she does not foresee any large fiscal package or liquidity being made as freely available as before.

"We expect the economic recovery in China to continue, supported by continued government stimulus, a sustained recovery in property construction and an expected turnaround in net exports," Ms Wang says. "However, the free flow of liquidity we saw in the first half of 2009 will not be sustained." Still, she expect exports to recover and the trade surplus to start to rise. Mr Kroeber believes the jury is still out on post-stimulus China and reforms are needed if the country is to really lead the way.

"The stimulus allowed China to buy some time," he says. "The financial return from the stimulus plan will be very low, [but] it keeps the wheels of the economy turning. "If they do carry out reform, you can expect to see growth at a rapid rate. If they don't, you will see an economy with too much capacity and lots of bad debts. The stimulus buys time - if you use that time to do reforms, then you'll see growth of influence."

While China is a globalised economy, it remains a massively underdeveloped one. It is not big enough economically to keep the global engine ticking over, accounting for 5 per cent of the world economy, compared to the US with 28 per cent. The world needs to find a saviour elsewhere, despite what the glossy pages of Vogue in China might suggest. business@thenational.ae