Slower Growth for 'Inclusive' China
The Chinese authorities find the short-termism of the US and Europe rather amusing. It is said that while the Americans use a watch to tell the time, the Chinese use a calendar. That probably does not do the Chinese long-term mind set justice, given the authorities' focus on five-year plans.
Having recently returned from Asia, Steen Jakobsen, the chief strategist at Saxo Bank, has been reminded of a famous American who spent a lot of time thinking about China.
“An excellent example being Kissinger asking a former Chinese premier his views on the French Revolution," Jakobsen said in an interview with CNBC on Thursday. "The answer came straight back: 'it's too early to tell'. The time scale in Asia is not the same as in Europe and the US.”
Following his trip, Jakobsen has been questioning the Chinese and Asian growth story and concluded the battle against inflation and the need to find inclusive growth will hold back growth in Asia and the developed world.
China is serious about inflation as witnessed by Prime Minister Wen’s comments recently. “Inflation is like a tiger — when it's first out the cage is very hard to put back in.”
“This is significant for two reasons: it's a change of tone and focus as China is moving from a growth priority to an inflation fighting agenda,” said Jakobsen.
“It's also relevant for the next five years potential growth cycle. Asia was very fast in re-starting stimulus during the 2008 crisis and the result has been close to 10 percent growth annually.”
“They contributed 50 percent of all new world growth — with a likely slow-down to a more sustainable 5-6 percent in the five year plan the extra juice to world growth will lose momentum and could create a increased potential for slow-down to continue not only beyond Q2 but also into 2012.”
The Two Dimensions of Inflation
One reaction to higher inflation has been tightening of policy from the Chinese authorities, the second reaction; according to Jakobsen is the social dynamic of inflation.
Inflation has two dimensions, he explained.
“Inflation hollows out disposable income through higher energy, rental and food prices. This makes for an increased social tension — the very last thing Asia wants to see.”
“The middle class and low income Asians are losing out as the rich gets richer while the poor get poorer.”
This is a major issue for Asia, as a society creating an ever larger income gap becomes unstable while a country of common purpose and wealth is one moving forward, he said.
"So when you hear Asian talk about inflation make sure to measure their ability to be inclusive. China next five years program is designed do this the opportunity cost is an increased odds of lower world growth,” Jakobsen said.