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Steinbock: China's On the Way to Recovery

Dan Steinbock | Research Dir., International Business, India China and America Institute
Thursday, 18 Oct 2012 | 10:22 AM ET
Beijing's Central Business District
Frederic J Brown | AFP | Getty Images
Beijing's Central Business District

We have been there before. In early 2009, Premier Wen Jiabao said in Davos that China could achieve 8.5% growth by the year-end. While the audience applauded, few had any faith in the forecast.

Like most foreign analysts, the participants presumed that China's growth would plunge along with that of the West.

Since early 2012, China has been amidst soft landing. But again, due to the accelerating turmoil in the Eurozone and the stagnation in the United States, the behind-the-façade consensus abroad has been that China is in or on way to hard landing.

And yet, since early summer, the economic fundamentals have told a very different story.

Exceeding growth target

According to new data, the third quarter indicates continued growth acceleration. In September, this was also reflected by fixed asset investment, industrial output and retail sales.

In the third quarter, GDP growth slowed in year-to-terms to 7.4%, which is in line with consensus expectations. In quarter-to-quarter terms, however, the growth intensified, representing 9.1% in annualized terms – exceeding the 7.5% growth target.

China's economy has been in soft landing since the 1st quarter. Despite strong, even disruptive headwinds in the advanced economies, the overall economic development has been relatively stable.

(Read More: China Economy Hits Bottom, Is It Time to Buy Stocks ?)

Of course, the skeptics argue that, even if China meets its 7.5% growth target for 2012, this would mark its weakest growth in 13 years.

However, taking into consideration the fact that this growth occurs amidst the most severe global crisis since the Great Depression, a renewed Eurozone recession, U.S. stagnation and a potential for a 'perfect storm' in the West, Cinese growth should be seen as an achievement.

Fall recovery

Over time, we are likely to find out that the turnaround began in early spring. Since, however, the economic data was softer than anticipated in April, the easing policies have been accelerated.

Instead of a large fiscal stimulus package, China engaged in what I have called stimulus lite – that is, a broad array of different fiscal, monetary, substantial infrastructure projects, and other policies.

The common denominator of these measures is the effort to stabilize foundations for growth.

The upcoming 18th Party Congress, which will begin only two days after the U.S. presidential elections in November, does contribute to expectations. Until the 1990s, these events were habitually followed by periods of strong investment, growth and inflation. But today China is driven more by bottom-up market forces than top-down government policies as business cycles have gradually substituted for political cycles.

(Read more: China Third Quarter GDP Growth 7.4% on Year, Below Official Target .)

Nonetheless, in a positive scenario, the upcoming Congress will strengthen confidence in the Chinese economy and thus global growth, in which China is today a critical driver. Domestically, it could also support efforts to ensure structural transition, which is an important task in the medium-term.

Growth, transition, and regional differentiation

The past slowdown has been challenging at times, but also a blessing in disguise. Over time, it will support more stable growth, structural transition, as well as economic development in China's inland and west.

(Read more: Chinese Give Luxury Goods a Pass, Go on Holiday Instead .)

An overheating economy, amidst multiple global crises, would be far more challenging than a stable slowdown, which responds flexibly to global signals, and yet continues to manifest solid growth prospects. In the medium-term, challenges will increase, however. Stabilizing growth is predicated on the containment of the local government debt burden, which is still ahead in 2013.

Second, ensuring structural transition is China's most demanding task. In the postwar era, dozens of nations have hoped to migrate from the Third World to the First World, but only a few East Asian nations have surpassed the feared "middle-income trap." To manage this transition, China is likely to begin the transition toward consumption-driven and post-industrial growth.

Third, in Europe, it took two centuries for the industrial revolution to spread from Manchester to the regional periphery. In China, structural transition is a far more complex task, due to the huge population and regional differences in economic development. While the transition has already begun in the more prosperous coastal provinces, investment-driven growth will continue to be vital in China's inland and west, which are now industrializing.

Wrong time for nationalism and protectionism

In terms of economic growth, China has done better than other large emerging economies.

India is currently struggling with a pessimistic sentiment and lowered growth prospects. Russia, in the absence of industrial diversification, remains dependent on natural resources. Due to its lagging industrial sector and the extraordinarily low U.S. interest rate, Brazil is dealing with a slower recovery.

Due to its long-term growth potential, China has been better positioned to cope with the challenges originating from the advanced economies of North America, Western Europe and Japan.

(Read More: Global Economy: When China Sneezes )

Moreover, the regional neighborhood matters. In relative terms, the greatest long-term growth prospects are in China and in the emerging Asia. If global economic integration shall linger in the coming years, Asian nations are more likely to embrace regionalism and regional growth prospects.

Due to economic challenges, the old forces of nationalism and protectionism have intensified in Western Europe, the United States, and Japan. However, flirting with aggressive currency policy or signaling assertive trade policies is precisely the wrong policy posture in the wrong time. You don't run faster by shooting yourself in the foot.

Dan Steinbock is research director of International Business at India China and America Institute (USA), visiting fellow at Shanghai Institutes for International Studies (China) and in the EU-Center (Singapore).

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