China’s inflation accelerated more than expected in June, driven up by rising food prices. Simultaneously, China’s industrial sector has been plagued by deepening deflation in a sign that the world’s economic powerhouse continues to lose steam. Meanwhile, the IMF is cutting its global growth outlook to below 3.3% because of what it says is a marked slowdown in the top emerging economies. Earlier, IMF Managing Director Christine Lagarde made clear that the global growth forecast for this year would be scaled back. She said that the emerging economies were to blame. VoR discussed the isssue with Peter Ferdinand, Associate Professor of Politics and International Studies at the University of Warwick.
Why are the Chinese leaders reluctant to loosen their monetary policy?: They were actually quite generous in terms of flooding the economy with credit in the past year or two because they were afraid that the global turndown would severely impact the growth and for a while they did keep the Chinese economy going pretty quickly but the trouble is that I think that the People Bank of China and the Ministry of Finance become concerned about the extent of the credit that has been building up and in particular the debts that have been built up by local governments in China rather than the central government and so they are trying to scale that down a bit in case they have some Chinese equivalent of subprime crisis in the US and which spread to Europe in 2007-2008. Do you think the government will be able to control inflation and reverse the slowdown or it will it fail? I think that they will be able to slowdown the inflation rate but I am not sure that they are going to be able to revive the growth rate to a kind of level that we saw around 2005-2006 or even 2009. What they will have to do is to accommodate themselves to a somewhat slower growth rate. But by Will standards to have a growth rate of 6 or 7% is still pretty good. However, what the government is aware of is that if the growth rate tails off quite considerably and fewer people seem to be benefiting from the increase in the national economy, then there will be greater dissatisfaction that manifests itself in unpredictable ways. Are there any factors in the world economy that can change the situation in a way that the government’s task becomes easier? Since China has become such a big international exporter, clearly one of the things that has benefited China over the past decade or more has been the enormous expansion in exports to the developed world. The US of course has been barely growing over the past few years, Europe is now generally in a position of stagnation at best. So, the demand for Chinese goods in the developed world has rather tailed off. What China had hoped is that they might be able to compensate by exporting to other parts of the world and certainly you can see increased Chinese exports to Africa and especially to Asia as well but the demand that has got to be observed by that isn’t enough to compensate for the losses that have been sustained from the developed world and lessened until global growth goes up quite a lot. It is difficult to see how China is going to be able to get back to anything like the level that it had before. Many analysts believe that the Chinese economy is overheating. Do you agree with that? And what are the signs of overheating in general? Yes, I think it is overheating and partly it is shown in increase of the inflation rate and partly in the nervousness in the People’s Bank of China at the end of last month and the beginning of this month which stopped making funds available for Chinese banks to lend to each other on a short term basis because they were afraid that the inflation rate was going to escalate to a non-sustainable level. So, it is that kind of thing which is the sign of concern about this but it is true that the Chinese economy is still significantly managed by the state and so the actual figures may be rather more difficult to pin down than you might expect in a more transparent market economy. Investors around the world are worried over the worsening economic situation in China? Is it time to stop to invest in China? It depends whether investors think that there is going to be some significant improvement in the economy in the foreseeable, shorter than medium future. I doubt that people are going to stop investing in China because one of the potent attractions for them has been the potential size of the Chinese market with the population of 1.3 billion people even if there is quite a lot of quite poor people, but still a lot bigger middle class now than there was and so demand for goods is growing. But whether the foreign investors are going to be able to extract profits from that is something which depends upon their relationship with the Chinese state and in any case there are a lot of rather energetic, rather competitive Chinese companies that are now seeking to take more of the domestic market shares themselves. So, it is becoming a more competitive environment and I imagine that there is going to be a number of investors, so we think where previously they depended upon low wages as a pre-condition for low manufacturing costs, in China that is no longer so attractive. Wage costs are rising and so companies, foreign companies are certainly looking to other countries, especially in Asia as alternative places where they could set up new manufacturing facilities. What could be the point when you think the investors could go to those other countries you’ve just mentioned? It has already started. You can see the ripple effect spreading out to Vietnam, to Thailand, to some extent even to the Philippines, which didn’t use to be thought of as being an attractive source of foreign direct investment and also to Indonesia. So, a lot of that is happening already. I am not sure whether the markets in those countries are large enough to sustain the same kind of size of investment to the Chinese market offered in the past that would depend upon some kind of reduction in tariffs between, say, the states in South East Asia or in Pacific Asia as a whole as a way of stimulating international trade between them. But there are obviously investors too who are looking to other parts of the world as alternatives. Some of the costs for instance for exporters from China to the US as I understand it, have now risen to a point where it is cheaper for some foreign investors to invest in Mexico to satisfy the American market rather than to invest in China and the economics of international trade are changing quite rapidly where transport costs compensate for wage rises or relatively high wages that appears in other parts of the world. Source: Voice Of Russia
