x Abu Dhabi, UAESaturday 22 July 2017

China's fate will show whether the 'new silk road' is real or rhetoric

Should the old Chinese slogan of 'the East is red' change to 'the East is in the black - just'? Frank Kane looks at a slowdown in the Dragon economy.

The slogan of Chinese communists in the revolutionary era, before the country embraced totalitarian capitalism, was "the East is red".

Now, the Chinese slogan could be "the East is in the black - just". Latest figures for the Chinese economy show a continuation of the gentle slowdown in growth that has been its main feature for the past two years.

At 9.1 per cent in the third quarter, GDP growth is still impressive, and is a statistic governments in the US and Europe can only dream of. But it is a sign of the overarching importance of the Chinese economy to the state of the world that the figure was analysed, qualified and reassessed in minutiae.

With the American economy stalling and the euro zone in a state of semi-permanent crisis, what happens in China is becoming the most important factor for global economic health.

Its economic dynamism after the 2008 global crisis (admittedly with the help of India and South East Asia) pulled the West out of a recessionary nosedive, and the rest of the world is hoping Beijing can pull off the same trick again.

In the Gulf and the wider Middle East, that hope is just as sincere. So much expectation has been pinned on the "new silk road" that policymakers in the region must be looking anxiously eastwards to see whether the relationship is real, rather than just a slogan.

On a practical, everyday level, the Gulf states will want to know whether Chinese demand is sufficient to hold up world oil prices, by far the most important economic indicator in the region.

So will China ride to the rescue of the West again, and will it help to keep the crude flowing at US$100-plus a barrel? There are more doubts now than at any time since the 2008 crisis.

For the US, China's rise is a double-edged sword. Americans love the cheap goods coming out of Chinese factories, and are grateful too for a seemingly inexhaustible market for their debt (although there are signs China's appetite is waning here). But increasingly, Americans resent the looming economic hegemony of China and distrust its motives across the geo-financial horizon. They will not go cap in hand to Beijing for assistance should the US economy dive again; an aggressive protectionist reaction is just as likely.

Europe does not have the "superpower" hang-ups of the US, but it is unlikely China has the means or the motivation to bail out old Europe. Its policymakers look askance at the chaos of the past few months and shake their heads in confusion.

One Chinese politician was reported as asking: "How did these countries ever become imperialists? They cannot organise themselves, let alone the Asians as well." It's a sign of the long-term nature of China's worldview.

So beyond the odd purchase of some euro-zone bonds, and maybe some cheap property in swanky Paris, Rome or Madrid, the Chinese are not going to bail out Europe. Even for them, the size of euro-zone debt is prohibitive.

Where does this leave the Middle East? The rhetoric of the "new silk road" hinged on the geographical advantages the region has as a trading post between East and West.

But if one end of the road (the West) has a sign saying "no entry, economic growth too low", the focus has to switch to trade between the Middle East and China. In this respect, the traditional model - cheap Chinese goods in exchange for expensive oil - looks increasingly unsustainable.

The long-term trend in the Chinese economy is for labour, land and investment capital to become more expensive, robbing the Chinese of the advantages of export-led growth, while domestic consumption will rise.

For Gulf producers, the oil price is vulnerable to any sudden downturn in world economic activity. So far, most experts believe China is heading for a "soft landing" in the near term, which would probably be enough to sustain oil prices at or near their current benign (for the Gulf) levels.

The caveats, however, are significant.

The Chinese property market is showing all the signs of "bubbling", and we know what effect that has had in the West; centrally directed infrastructure investment, the real reason for Chinese resilience after 2008, cannot go on without stoking further inflationary fears; and social and political instability is never far from the surface in China, even if the party normally manages to keep a lid on it.

A "black swan" event in China could throw the whole global economy up in the air. Now, more than ever, all eyes are on the East.