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Dr Sheo Nandan Pandey
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The People’s Republic of China (PRC) has been caught on its wrong foot in its mimic of the free market economy of the west and export led growth model of the East Asian tiger economies of yesteryears.
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Annual rate of growth of China’s gross domestic product (GDP), for example, touched the nadir 6.1 per cent year-on-year during the first quarter of 2009.
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Aggregate demand for goods and services, in particular its external component remains substantially weak. Output glut, massive lay offs, shutdowns, drop in energy consumption, decline in output, fall in government revenue and increase in budget deficits, cutback in private investments and the like tend to rule the roost.
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In the short run, China’s absolute as much as relative capability to ward off recession and/ or early reset remains dependent on creating effective demand for the entire range of goods and services in the home and new foreign markets, plummeting under the weight of the global down turn.
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The ground situation in China was just the opposite. Drop in the demand for exportable goods and services relate to totally elastic demand. The demand for capital and wage goods in respect of low income as much as laid off workers fall in a little different category.
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While external shock is largely responsible for rocking the Chinese boat, the correctives have but to take care of side effects of an array of other shocks, in particular those which carry bearings on competitiveness of Chinese goods and services.
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China followed a differential loaning policy to jack up demand for the worst affected industrial products, in particular automobiles, electronics and the like. Lower upfront payments and subsidies of different kinds including coupons constituted major devices.
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As the global economy is slated to contract by 2.9 per cent 2009 and could hardly grow more than 2 per cent in 2010, the Chinese exports may not experience reckonable turn around.
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In its stride, the Chinese State Council announced a spate of measures to jack up domestic consumption, which, inter alia, included raising pension and minimum allowance for low income people. The local governments, at their levels, went ahead with issuing concession vouchers during festive occasions. Property buying has been made a lot easier.
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Simultaneously, China halved the purchase tax on passenger cars to 5 per cent for models with engine displacements of less than 1.6 liters.
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Zhuang Jian, a senior economist with the Asian Development Bank, put a caveat for future sustainability of momentum in sales growth, in particular property and cars until the Chinese government undertook new measures to kindle consumer confidence.
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Eventually even state owned industries can not keep on producing unsold products. In the case of SMEs, a large proportion of target consumers are in the process of de-leveraging, and actually saving. They would not be in buying spree of SME products.
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The size of China’s bad loan has been a source of constant controversy. Gordon Chang, a China expert and author of "The Coming Collapse of China," told the hearing of the US-China Economic and Security Review Commission that China's banks and instrumentalities were probably sitting on a trillion dollars of doubtful loans. He warned that "a bank failure in the next few years is possible, if not likely"
