MONTREAL — As if Europe’s ability to blunder itself into a double-dip recession wasn’t enough to worry about, skittish investors have persuaded themselves that China will be the next big domino to come crashing down on the world’s prosperity.
Earlier this week, Chinese stocks hit a six-month low on the latest bit of bad news out of Beijing: trade statistics that, despite an unexpectedly strong export number, contained a weak figure for imports. This latter figure suggested to pessimists that Chinese demand is collapsing as the economy screeches to a near-halt.
Happily, it doesn’t look as if this gloomy forecast is anything like inevitable. In fact, a number of credible analysts just plain disagree.
That’s not to say that this is an easy call. “Even people you respect in China have very mixed views,” notes Aron Gampel, deputy chief economist at the Bank of Nova Scotia.
Not surprising, perhaps, since the Chinese slowdown has indeed gone on longer than many had anticipated and isn’t over yet. Gampel’s best guess is that growth in the world’s second-biggest national economy will stabilize sometime in the second half of this year.
That’s of more than passing interest to a trading nation like Canada, since China plays an outsized role in determining world demand — and therefore prices — for the resource products that make up so much of our export earnings. Even commodities sold mostly in the West will have their prices influenced strongly by the vigour of Chinese demand.
The Scotia forecast is that growth in China will slow, but average 7.8 per cent this year, actually exceeding the official Chinese government target of 7.5 per cent. Then growth should strengthen to 8.4 per cent in 2013.
Such a performance would be welcome news for Canadians exporting everything from wheat to copper, since it should put a floor under their earning power that’s pretty close to its present level.
This is not to say that the next couple of years will see a smooth ride for commodities. Gampel expects to see plenty of drama on issues like Europe’s debt crisis and the U.S. political deadlock on economic policy, which could mean major volatility even if prices aren’t trending down.
At BCA Research, analysts Yan Wang agrees with Gampel and some other forecasters that China’s growth will come in above this year’s official target, but he sees 2013 as uncharted waters — a period of continued soft and possibly choppy growth, thanks to the uncertain outlook in Europe, China’s biggest export customer.
But even Wang’s cautious view doesn’t leave much room for a disastrous meltdown. That’s because when he looks closely at China’s domestic economy, he simply doesn’t see the fragile, unbalanced economy that some investment analysts portray.
A key imbalance pointed to by those who worry about the sustainability of Chinese growth is the remarkably small role played by consumer spending, a relatively stable element of economic activity which is a remarkably low 35 per cent of China’s GDP, according to official statistics. That’s far below the more typical 50 to 60 per cent for an industrial economy.
But Wang notes that Chinese statistical reporting isn’t always accurate and that this anomaly flatly contradicts both observations on the ground and other, likely more reliable, statistics like those for auto sales, which have shot up tenfold since 2000. Such sales are a reasonably good indicator of consumer spending.
Meanwhile, consumer spending on health care has supposedly dropped in the past decade, lowering this component of consumer spending. But that’s just not credible in a period of widespread privatization of health-care costs.
Similarly, housing costs are said to be less than one per cent of GDP, compared with 10 to 20 per cent in industrial countries.
Again, this form of spending is alleged to have fallen during a decade of privatization that has actually driven up the cost of housing considerably.
Once you adjust these crazy numbers, it’s not hard to reach a more plausible estimate that would boost consumption to a perfectly normal 50 per cent of GDP.
Looked at through this lens, China looks much less like a disaster waiting to happen and more like a successful economy that needs reform, but still contains significant elements of resilience.
» Jay Bryan is a Postmedia News columnist with the Montreal Gazette.
Republished from the Brandon Sun print edition July 13, 2012