Chinese restructuring won’t kill recovery

China’s efforts to stave off economic overheating will see its double digit GDP growth moderate. However, far from causing a drastic slowdown, this cooling of Chinese output merely aims to reverse policies that were adopted to hedge against the global economic crisis of 2008, according to a new report from CIBC World Markets.

There are growing fears that these developments, and the resultant decline in Chinese economic output, will become a drag on the global economy next year. That couldn’t be further from the truth, says Avery Shenfeld, chief economist at CIBC.

“Some of the developments in China that are viewed as harbingers of trouble ahead are, in fact, indicative of rising economic confidence both among the public and government officials,” says Shenfeld. “The move to tighten monetary policy, as well as the recent decision to allow the yuan to gradually appreciate against the greenback, are both just reversals of policies put in place when the global slowdown first hit China in 2008.”

It’s the fiscal austerity in the West and not China’s rebalancing that will put a spoke in the global economic wheel.

“It’s the West, where fiscal austerity will hit hardest, where the real growth risks lie,” says Shenfeld, adding that China’s economy isn’t immune to global forces. “It will feel the impact of a deceleration in global growth next year, but not be its cause.”

China is going through an economic rebalancing, with a tolerable degree of policy-induced moderation to 9% growth in 2011 (down from 12% in the last four quarters).

One of the boldest measures China has taken to check it exports-driven growth is to allow its currency to appreciate. Beijing has been keeping the yuan artificially low to boost exports. The near double-digit growth in China, however, isn’t driven by just exports, but construction of power plants, rail lines and other facilities necessary for a modern economy to function.

A stronger yuan and increased wages mean household consumption and service sectors can begin to assume a larger role in driving growth forward, says Shenfeld.

“Even a 5% strengthening of the yuan will provide a bit of cushion against high inflation, particularly since the Chinese currency has already seen a sharp gain against major non-U.S. currencies like the euro,” says Shenfeld.

It’s a reflection of China’s confidence in its recovery, says Dagmara Fijalkowski head of global fixed income and currencies, RBC Global Asset Management. “It will likely reduce trade tensions and is a step towards global rebalancing and normalization after the credit crisis.”

David Andrews, director of investment management at Richardson GMP Limited, says allowing the yuan to appreciate will give further impetus to global economic recovery.

“The global economy should benefit as a stronger yuan keeps inflation lower in China, boosts consumerism domestically, and boosts profits of foreign manufacturers and multinationals doing business in China,” he says.

Another macro-economic trend will see low-tech, low-pay sectors — like the production of toys and clothes — shift from China to neighbouring counties such as Vietnam and Bangladesh where labour costs remain low.

“Contrary to the labour cries in the U.S., those jobs will not flee China for the U.S. but will seek new lower cost labour pools,” says Mike Macdonald, vice-president, consulting, Weigh House Investor Services.

Although the extent of this rebalancing is anybody’s guess, industry experts are sure Beijing won’t be turning the screws so tightly as to severely choke off forward economic momentum.

The CIBC report notes that the Chinese government clearly believes the worst of the global recession and its attendant financial crisis is over, and recent measures are but an indication of the same.

(06/30/2010)