Why is Chinese economy slowing? - Inside Story



a normal cycle of Correction for the Chinese economy or is the government losing control new government data shows the slowest economic growth in China for a quarter of a century so what's gone wrong and should the rest of the world be worried this is inside story hello and welcome to the show I'm Sammy's Aidan or countries around the globe and nervously watching what's happening to the Chinese economy and fear the potential knock-on effects new government statistics say China's GDP grew last year by almost 7 percent now many countries around the world will be absolutely delighted with that but in China's case that is the lowest growth for 25 years and another sign the heady days of record-breaking economic expansion might be gone well the true situation could be even worse some analysts don't even believe the official data there's the world's second-biggest economy stalls again countries which export commodities such as oil and iron ore to China are suffering with the possibility of even worse to come Florence lui has more from Beijing for years China has been the world's Factory relying on low manufacturing costs to make goods sold worldwide more than 20 years of record-breaking growth has propelled China from communism to consumerism now the Chinese economy is stalling and the slowdown is hurting many other economies worldwide commodity exporters have relied on China as a buyer for years are now also struggling analysts say a slowdown is inevitable given how much the Chinese economy has grown in recent years they say high-speed growth is unsustainable and a reset is needed the wet integers are true they see China is indeed in a moment of momentum transferring from old to new traditional industries are big in size while these emerging industries smaller so even though they're growing fast emerging industries cannot make up for traditional industries slow down so the overall economy is facing downward pressure slower growth is expected to be the new normal for China already analysts are predicting the economy to cool further this year and even government measures such as increasing spending and cutting interest rates aren't expected to help much Chinese government leaders are encouraging everyone to spend more hoping to shift the economy from export dependent to a more sustainable consumer driven model some encouraging data emerged on Tuesday retail spending even though lower than expected still grew by double digits and the automotive industry is forecast to grow on a shore Lamba i country auto sales growth is lower than gdp growth but the industry as a whole is doing alright because consumers are willing to upgrade their cars car prices are higher with better cars coming on to the market so the whole market is developing pretty fast the government is already undertaking structural reforms slowly changing from a centrally planned economy to a market driven one that will take time for now in China and the countries that depend on Chinese demand for exports will have to put up with slower Chinese growth Florence lui al Jazeera Beijing let's bring our guests into the show now and in Hong Kong we have Pauline Leung managing director of Asia analytical and analyst on China's political economy in London Chris Watling chief market strategist at Longview economics and joining us via Skype from Ningbo China miquellee jirachi professor at finance at GG an University and an economic adviser to governments corporations and investors in China a warm welcome to you all if I could start with me Kelly then how are you reading this is the glass half empty or half full do you see this as a sign of trouble for China's economy another cloud on the horizon it would the number was laterally expected as we heard before this is part of this new normal which the Chinese leadership has been telling us for the last couple of years already they have already a band of the famous 8 percent to GDP target and the narrative in the Chinese media in the economic circles has now shifted the to lower growth rate even a few days ago we heard the government official saying that even six point five it could be quite – perhaps a challenger for the 2016 and even for the average an even more challenging for the next five years until 2020 so the numbering itself today did not surprise me in fact it was pretty much as as we had expected still behind this number there are lots of interesting stories that one should analyze to understand the nature of the 6.9 where where it comes from and what it hides behind it okay and that's exactly what we want to do but too clearly the alarm bells are not ringing therefore Micheli by the sound of it Chris do you agree with that that perhaps this isn't such a big deal as many people fear it is well I'm slightly more skeptical than that I think we we have an economy here that's had one of the biggest credit booms pretty much of any economy relative to GDP in the last 40 years and what we know from the history of credit booms is they're generally followed by credit busts now clearly there's a there's a belief in the markets and amongst economists and policymakers that the government is omnipotent and can manage this now and slowly and take and take the economy to its new sort of glidepath level without any big bumps along the way but if I look in various sectors of the Chinese economy I see an awful lot of pain across an ALICE ously did a 1400 company's profits are contracting by 40 percent year-on-year revenues are down 10 percent year-on-year and that's consistent with what producer price inflation is telling us there's an awful lot of pain in a very significant part of this economy and I find it hard to believe that the economy is just going to nicely transition through that to this wonderful consumption utopia that people keep talking about no I mean chime to me has has got a lot of excess in it and a major slowdowns recessions tend to follow economies that have big excess as they unwind those excesses so now I'm not so confident that all all is as well as it seems Pauline Chris makes some good points there I mean when you look at the bigger picture I mean you can on the one hand say of course you know the figures came in line with expectations but when you look at other figures for the Chinese economy exports weakening domestic demand sluggish debt is high investment slowing there is a bigger problem here isn't there basically there are no growth engines for exports global demand is down the cheap labor that had made China so successful the labor pool is shrinking investment is on its last legs it's been pulling the economy along for a while it can't do it anymore and then there's that much talked about switch to consumption that takes time people seem to forget that on a per capita basis China is number one seventy number eighty in terms of global ranking about eight thousand dollars per capita GDP compared to say the United States 55,000 60,000 so consumption is going to time to be able to drive bros so the outlook is really much much slower growth for a couple of more years to come ok we'll get into what that means for the world but before we do that let me go back to me Kelly with let me take a quote from Pauline there there's no more growth engines left what makes you it sounded shall we say cautiously optimistic confident that the government can manage this one what advice do you give to government officials when they ask you for it when there is two things to look at it you know we tend to focus on GDP as if it was the only measure of economic growth the reason why I am on one hand the worried and in a way I agree with believe that the growth of GDP seems to be in that travel on the other hand let's not forget that there is a possibility that personal income grows faster than GDP and at the end of the day this is what matters to people and we have seen no state this is happening there but is it happening fast enough Micheli I think so GDP has grown by six point nine percent real let's so let's not forget that they've used a negative inflator so the nominal growth of GDP has been six point three for 2015 why personal income has been in the range of 8.2 to eight point nine percent nominal so let's say two percentage points so personal income grows two percentage point faster than nominal GDP and this is a little bit encouraging because at the end of the day people don't care about the GDP they care about what goes into their own pockets okay okay let me let me bring let me bring Pauline back into the hallway forgetting when people talk about the gloom and doom are forgetting to look at factors like the growth of personal income which miquellee was talking about well I want to take a step back and go totally low-tech on this if you look at the four big banks their profit growth last year was around 1% nobody's going to get any pay rises dough bonuses nothing and that uh that's the big state-owned banks people and companies are not making money the outlook is is quite grim in terms of debt instead of looking at all the fancy growth numbers if you look at the fact that companies are not making money banks are not making money it's really hard to see where growth could be coming from in the coming years talking about taking a step back Chris how do we know these numbers are accurate there's been a lot of comment and doubt on them do you fear that maybe the slowdown could actually be greater than what we're being told officially yeah absolutely I mean I'd like to I'd like to pick up on that and what Pauline said as well I mean the corporate sector sits at the heart of of wealth of creation in any economy and and if it's not functioning if not profitable it's not going to be driving investment in creating wealth and that's why I go back to the analysis we did of 1,400 companies across China where aggregate revenues are contracting at ten percent year-on-year so that that makes me question and wonder about the GDP numbers because clearly that said that that's a wide section of society wide section of companies and they're not delivering any revenue growth and their profit growth is contracting even faster so hang on Chris what about the numbers which Micheli mentioned their personal income growth well I don't see how you can deliver strong income growth if your profits are contracting ten fifteen twenty percent year-on-year and I think that's the case at the moment certainly in little companies we looked at so you know I have a lot of question mark so it's very difficult to get good income growth data very good to get wage inflation data very difficult sorry to get good wage inflation data so I don't have much confidence in that but I do have confidence in their in the profit numbers that we that we see reported I have confidence in the freight volumes we see in the railroads the electricity consumption all of these things which are deeply negative and where's a lot of question marks in my mind about about the strength of the wheel growth that's going on in this economy at the moment I could see me Kelly shaking your I think in disagreement there so I'm going to give you a chance to come back in on that how do we know those numbers are right that you're talking about Micheli well you know I reflected you increase it you know we have to address two separate things either numbers right and if they are right to do do they look good or do they look bad in a way the fact that the company's profit shrinks and is not entirely contradiction with the fact that the wages go up because that's what people's make when people make money from wages so if wages go up there is a pressure on profit I agree what crystal said that is also there is a downward pressure on the revenue which may be the moral worrying thing but so just looking at company profit it's completely in line with the having decreased profit and increased wages and that's what the rebalancing is about it's about taking money out of the corporate sector and putting into the hands of the people so that's eventually and I know it's going to be very difficult consumption could be the main engine of economic growth so my view is that even if GDP numbers are wrong even if GDP growth is zero personal income can grow above zero and that's what makes people happy corporate profit would go down it's a rebalancing plus minus equals to zero by the transfer of wealth back into the hands of the individuals just remember over the last 20 years personal income has grown slower than GDP that's why there has been a great accumulation of wealth in the hands of the corporate sector due to what we already called financial reparations low interest rates low raining B and low wages now if this is to be reversed China has the possibility and I'm not saying that they will do that I know it's very difficult and challenging but he has the tools to make people we're better off even in the face of a almost nil GDP growth all right this is fascinating stuff and we could go on but that's we should talk about what this means for the rest of the world despite the slowdown in China the lazy's outlook from the International Monetary Fund says global economic growth is still expected to rise this year it's forecast to be three point four percent that's a rise of a 1% from last year advanced economies will drive global growth as they see what the IMF calls a continued modest and uneven recovery the IMF meanwhile forecasts are generalized slowdown for China and other emerging market economies with that in mind Chris do you think that the troubles I know you're very skeptical slightly skeptical at least on this one do you think it's going to drag down the world economy should the world be worried about some of the numbers that you've been mentioning well what we've seen in the last few years is all the pressure on global growth be pushed on to the United States so we've been in this thing that people like to call currency wars but which is really just competitive devaluations that I think perhaps are even somewhat agreed upon amongst policymakers but we've had Japan devalue its currency meaningfully in recent years we've had Europe devalue its currency in meaningfully in recent years and now we're seeing a lot of emerging markets and devalue their currency and even China to a certain extent and what's happened is all the pressure of driving global growth is pushed on to the United States the the last sort of bastion of of strength and we're now seeing that economy start to slow its corporate sectors come under a lot of pressure its industrial sectors in recession and you know and let's not forget the kind of global recovery we've had for the last five years based on really cheap money emanating out of the Federal Reserve washing across the globe artificially boosting emerging market economies and commodity prices and driving global capex in a 60% of the world's capex in the last decade is from energy and materials that's all to do with cheap money and artificial growth and yes so I I think actually the IMF will find they're too optimistic this year I think the u.s. is is in danger of a small recession and I'm sure the rest of the world will feel that if that so comes to pass so yeah I think the effects from China are are rippling out as well as the effects from a Federal Reserve that is now tightening money in a world that needs ultra loose money and a lot more QE than it's getting at the moment interesting Pauline Chris mentioned currency policy there the you know the possibility of currency war or we may even be seeing some would say aspects of that what do you think this says about currency policy going forward for China and the decisions China will have to make there's a difference between the government's policy and what market forces are going to do to it because for the first time the Chinese economy the Chinese currency is not as firewalled from the rest of the world as it used to be now China has to open its current accounts its exchange controls much more so while the Chinese government I believe want to keep the run and be stable they don't mind a little bit of devaluation but they certainly don't want to see any dramatic you know plummeting of the currency but there is so much in the way of money wanting to leave China for various reasons from money seeking better opportunities returns elsewhere to money seeking political safety so um it's going to be a big struggle between the central bank trying to keep the currency stable and market forces inside China as well as outside pushing the currency down so this is going to be a very interesting year a very big struggle newkeli there is the way that Pauline sees it is there an easy way out some say China should have freed its exchange rate before this point when money was still flowing in fast and furious now the economy's slowing debts piling up the dollar is strong is there an easy way out that's a difficult thing because I agree with Pauline the financial and the flow of capital is a big problem in China what I do recommend is instead of accelerating reforms of the financial system they need to be a much more cause much more cautious more careful so do not to open the capital account because then money would probably leave our market horse is going to push against that in this polling point true but they are not technically allowed to take money out of the country in excess of let's say fifty thousand dollars although some regulation have been relaxed there is a rule that you know you cannot take money out of the country to make it simpler it's not quite like that but it is in a way and it mean no money leaves under you know various forms but the government could try to close the distal all horses are out but that's a big challenge and that goes down to you know we have seen money coming out of other countries in other places around the world and yes there may be some capital outflow of China but that will not necessarily imply that the country will go bankrupt the capital outflow has happening in other countries some countries of managing well some less so let's say Argentina and other South American countries but I come from Italy there was a capital outflow of Italy a few decades ago the country has to survive you know the thing is we worry about all these issues and then maybe problem there may be crisis but the system I think could live on the system could live on Chrissy didn't look very happy and convinced with that why well I wouldn't say the system won't live on but I think there's a there's a real challenge here and a bit of a paradox that you can't control everything and China is trying to control its exchange rate control its interest rates and control the capital flow and and in economics terms you you have to choose two of the three and at the moment money is leaving Chinese economy very fast and as I was explaining before an awful lot of money flooded into that economy from 2009 sort of 2012-13 and it's now flooding out at a very fast what's at stake for the world Chris if we don't broaden this out like if your fears flow whirring here looking at for the rest of the world well check the port thing is if China has to take some economic pain it either devalues its currency in the rest of the world takes some of it and that eases China's pressure to a degree or it maintains its currency in exchange rate at a very high level an artificially high level and it takes even more pain itself in which case you know commodity price is moving even lower and certain parts of the world take that pain so you know I in a way there's no winner here but what happens on the currency dictates how the pain is shared out if you like so you know and it's like you know in some senses is in the Chinese authorities hand but it's not a system that's a good system it encouraged way too much money to go into the country from oh nine to twenty thirteen the central bank balance sheet in China is is the biggest in the world by far well that's the telling stat I think that says it all or I want to give Micheli a chance to come back on that it's not a good system you advise the system sometimes what do you make of that when we advise and I said you know some things are done wrong that there are some reforms there were a mistake and I think the example of the stock market reforms that was introduced at the beginning of the year that in a way I'm provide the market crash in the first a few days you know juice them crazy so we'd say take it off you know scrap this measure and not because I said it but they did watch observe the effect of their policies that was not very good and they did take it back they stopped it so they have some kind of flexibility which is I have to say a little bit unprecedented in China to admit to policy errors so they've always been all along thinking they've been right now they try error and when they error they come back and they did it so quickly in it in three days so they took back that result so that's just funny any sample of the kind of leverage that the government does have you know it is not only out and we know that right but slightly they make decision weekly all right talking about quickly we've got a minute left I want to give that to Pauline to have the final word there a lot of what we're hinging towards now Pauline seems to be confident in the system how key is that or essentially the problem is whether the authorities realize what they're facing I have this impression that they don't need to choose between interest rate exchange controls you know exchange rates that they can have it all what happens in the summer with the stock market if you ask oh is this belief that they can control market forces by dictate and until we have a feeling that the Chinese government the Chinese leadership realize that you can't fight market forces the way they've been trying to do then I don't think that there's much confidence in the way they're going about it we're going to have to leave it there for now let's thank our guests thanks to Pauline loom Michaela jirachi and Chris Watling and thank you for watching as always you can leave your comments on the program page of our website aljazeera.com you can post your views on facebook.com forward slash AJ inside story or tweet us at AJ inside story from me Sammy's a van and the whole team for now it's goodbye




Comments
  1. What is leaving China is working some place else. China has over extended itself. The interest rates are increasing, which is hurting China. China's shadow banking caused by the policies of the CCP is hurting China. Tariffs have increased by the US to help balance trade, but China refuses to work with others to balance trade. More nations will increase tariffs as the economics develop. Other nations will develop supplies for the world market, in effect setting China out of the loop. Most of this is being caused by China's aggressive attitude in the South China Sea, actions against India along their mutual border, and the domination of Tibet. The CCP has stated it is now assuming its rightful place in the world. Too bad they didn't stay where they were. Communism kills ambitions and progress. Most of the world knows better. If not, they will learn. The fall of the Soviet Union was caused by the military race. China is more fragile, in that they have a smaller GDP per capita than either the US or Russia. They are overextended and do not have the reserves to prevent economic collapse. They do not have the means to produce enough food, nor the economy to import it from other countries, especially since others will place an export tariff on food products. Per capita income in China is $11,000 per year. The US has a per capita income of $55,000, and has more than enough food even discounting California and their water problems. The USA also has Donald Trump and a recovering democracy. :<)

  2. Good riddance to China! the enemy of the free world! Their military build up must be slowing down too! That's what they are upset about aimed at dominating the world!

  3. You experts should looking at the peoples on the streets, are they happier than the people who walking on the US streets or UK streets. I am living in western countries, I know westerners are broken and misery.

  4. THE REAL ESTATE MARKET IS DIEING!!! BIG CITIES ARE IN CONFUSION OF WHAT IS HAPPENING!!! CRIME HAS INCREASED IN THEFT!!!

  5. china is not going to replace the US. It's already the second largest economy. People in the manufacturing sector are going back to the farms. There is only so much demand right now. And china's cheaper goods do provide an alternative to the west. What a market economy offers.

  6. Nitrogen dioxide gas in the stratosphere will DOOM life on earth's surface by triggering a horrible worldwide famine. Shall I explain the sequence of "black swan" events to come?
    (A major extinction event known to the dummies as "the Day of the Lord" will arrive without any warning — except this, if you have ears an brains to hear and understand it):
    1) A ultra-powerful gamma ray burst from somewhere within the galaxy will strike earth's outer
    layer of stratosphere and ionize it, making it react with itself chemically and producing a heavy SMOG of deep maroon colored nitrogen dioxide gas (see Bible ref's: Amos 5:18-20 & Amos 8:9, Isaiah 51:6 "people die like flies" & 24:18 "floodgates of heaven" opened;a also Jeremiah 25:30-33 and related prophecies, e.g., Jeremiah 4:28*-31).
    2) NO2 gas happens to be 1.6 times heavier than normal air, so this brownish smog will slowly descend to the 4-5 mile altitude, where it will encounter the OZONE LAYER. (Note: it also made the sun and moon both appear "darkened", Mt. 24:21-30 explains that right after that "lightning-like" flash in the skies, both sun and moon will "withdraw their shining" as it were; it was only that the dark smog of NO2 that made it appear so, when seen from earth's surface).
    3) Sadly, it turns out is a chemical catalyst that rapidly destroys OZONE (O3), the only thing protecting life on earth's surface from the DEADLY ultraviolet rays of our nearby star (the sun).
    "B" & "C" rays are very short wave length, and so are powerful enough to penetrate forty feet down into the oceanic water column and start killing off tiny green plankton there (the base of the entire oceanic food chain–sorry, Charlie!). Worse, these same rays break strands DNA inside cell nuclei, causing photosynthesis to "grind to a halt". This means that ALL LEAFY TREES and (OMG) also ALL LEAFY FOOD PLANTS will slowly turn yellow, wither and die. A
    HORRIBLE WORLDWIDE FAMINE will be the end result and I guarantee you that will not be very peaceful a all those people with the "red caps" will be at each other's throats (Jeremiah 4:30, Psalm 9:15 & Psalm 35:7-10,20 + Psalm 73:6-12*). The famine is described in Habakkuk 3:17, "no food in the fields",Jeremiah 8:13-17*, 22* & Isaiah 17:4*-13 "All will be desolation".
    4) I forgot to mention that all cell phones will die, for they depend on orbiting earth satellites, which will be "fried" when the gamma ray burst arrives without warning. All civilian and military
    communications will also end (Obadiah 1:4-5). You can imagine the great pandemonium that will rage among many nations; Isaiah 17:10-13 compares it to the "raging of mighty waters"!
    5) I like the Chinese people very much (they really were the "first" civilization on earth) and so I wish to warn them, just as the outcast Joseph warned the Egyptians to start a "strategic food supply", i.e., enough basic freeze dried and irradiated [ to kill all fungi and bacteria ] food staples [ with vitamins ] to last t least 10-15 years [ it may take that long for the ozone layer to repair itself ]. Hey! We have to have many good survivors to replant the "new heavens" and the
    "new earth" — and to rebuild the devastated cities of this planet. (People even live in Chernobyl, Hiroshima and Nagasaki today, as rainfall and time will eventually wash away most radioisotopes). Remember to pray to the God of Heaven, who hears the prayers of the poor and the needy and guides them in the right way,Jeremiah 22:16 & Isaiah 8:16-17, Zephaniah 3:8-9 "Wait, I say, for the Lord God of Heaven"! Malachi 3:16*-18. Be merciful to those who deserve mercy; God reward the evil ones y doing to them what they have done, Isaiah 59:18*).
    6) Zai Jian!

  7. Chinese miracle is dead, middle income trap killed china ,China will see soon its economic growth is 0, zero. Or equal to japans growth or less for a long time ,even if japan has lot many more high tech industries still they are struggling and china has not much of it , china will not easily bounce back because problems china face is too much ,other countries will never accept Chinese car or high tech exports there is enormous resistance because china over done with exports and every one hated Chinese cheap exports killing their local industries

  8. We all know that China for years have cheated. And with governments finally viewing China as a threat and a bunch of thieves And a bunch of spy’s.

  9. The few smart people commenting cant understand that for this people, change of focus and controlling the entry points of the market is something alien to their understanding.
    That is why they have 5 "experts" to understand non market economies in "some" governments, and even so, they dont.

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