Last Updated : 15 April 2013 at 15:35 IST
Why the question—'who will bailout China?'—should be asked now?
After all, the scenario embedded in the question is not the least plausible one, one can argue. China is still the growth engine of the world; Chinese GDP for the first quarter at 7.7% may not be excellent, but is still good enough, one can say. China still accounts for the majority of imports in crude oil, copper and other commodities exhibiting the underlying strength of the economy. China has excess of $3.3 trillion in foreign exchange reserves.
So why the premature question now?
The reasons stated above that would pre-empt necessity of asking of the question—'who will bailout China?'—are the very reasons that prompts the question in the first place. China is the growth engine of the world. China accounts for a big chunk of crude oil imports as well as metals, China has trillions in US Dollars in reserves.
In short, 'who will bailout China' is a question that you can ignore at your own peril. It may be premature, but worth asking. At least we should start thinking about it even as we realise that China is acutley aware of the risks and dangers that engulf them.
First, let's start with the first quarter GDP figures. China growth has slowed down to 7.7% when compared to expectations of 8% predicted by most analysts. Is that actually a good figure? It has to be noted that parts of Eurozone are witnessing negative GDP growth rates and Chinese growth rate is not a bad figure at all.
“See, you can view this in two ways...a Goldman Sachs study says that China is cutting down on growth in a deliberate manner; that China is actually slowing down fully aware of it. Other view point is that China is experiencing a real slow down with domestic consumption down and exports turning sluggish,”said Srikanth Kondapalli, Professor, Centre for East Asian Studies, Jawaharlal Nehru University, New Delhi.
“I go with the latter view because a deliberate slow down of even 1% can dent Chinese employment figures by a whopping 20 million. Since that can create socio-economic problems, I don't think that China is deliberately slowing down. It is the external—sluggish exports—and internal factors like declining domestic consumption that are resposible for Chinese slow down.” Professor Kondapalli added.
“Persisting labour wage growth is yet another factor that is adding to the slow down; there are reports that with the island tussle between China and Japan aggravating, several Japanese companies are moving to Vietnam. There are at least 80,000 Japanese companies (compared to 600 in India) which has set up shop in China. If they withdraw on a large scale, then that too can be a valid reason of growth decline,” Professor said.
But will this state of subdued Chinese growth would result in a collapse of China?
“On the macro economic front, I see no impending collapse”, the Professor said. The Chinese seem to be diversifying...”
China is doing all it can to raise the stature of the Renminbi and they are doing it cautiously.
“On that front, they are really like RBI, really very conservative,” said the Professor. “They are playing a very cautious game.” he noted.
Property bubble and local government debt
There are weird things happening in China!
“One is the property bubble...” the Professor noted. “But the Chinese are aware of the problem and they are taking preventive measures in this regard as well. For instance, they are now doling out low-interest rate loans and have also introduced restrictions on purchase of second homes,” Professor said.
He also invited attention to the $1.65 trillion debt the local governments there have incurred so far. The figure is more than half of Chinese foreign exchange reserves.
“ The reason behind the Chinese local governments incurring huge debts has a reason in a certain contradiction” said Jabin T. Jacob, Assistant Director & Fellow, Institute of Chinese Studies; New Delhi. The Chinese local government officials are always under pressure to perform and show off results. “At the same time they are also under strict orders not to create unnecessary infrastructure and waste money.” he noted.
But for one to have promotions, the official should show that he has come out with some spectacular results. The stories of inaccurate stats from China, originate from this contradiction!
Is that a catastrophe in waiting? What would happen when China is stormed by a Black Swan event; something really unexpected occurs in China that will take us by surprise?
“As we talk about the issue here, we should also understand that the Chinese are doing all they can to tackle the possibility of its occurrence.” said Jabin.
“China is too big to fail.” he said.
However, Japan with its trillions in pension funds can come to the rescue of the international system, mainly the US, if something untoward occurs, Professor noted. The latest data suggests that Japan has exceeded China in holding of US Treasuries.
Note: Maybe with the drop in gold prices as currently underway, the Chinese may realise that it is better to hold US Treasuries rather than gold.
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