Hard times for China

G Chandrashekhar | Updated on March 09, 2018

But it’s likely to shake off its debt-related woes

With a GDP value in excess of $11 trillion, China’s economy is 17 times larger now than it was in 1980. No wonder, the recent National Congress of the Communist Party of China assumed special significance for the global economy and market participants.

Until recently, the Chinese growth strategy was essentially investment-led which envisaged large outlays especially in fixed assets such as infrastructure and power. That meant ravenous appetite for consumption of commodities, especially industrial metals (steel, base metals). China consumes 40- 50 per cent of most industrial metals, even as it is a large producer. For instance, it accounts for 50 per cent of global steel production of 1,600 million tonnes. No wonder, the country is the mover and shaker of the world metals market.

Interestingly, in China, State Owned Enterprises (SOEs) play a significant role in economic activity. But many of the SOEs are inherently inefficient and nurse large excess capacity. Policy attention is now directed towards making these enterprises more market-savvy. However, having achieved rapid growth through massive investment, in the last National Congress held five years ago, the policymakers in China brought about a subtle change in focus. It was decided that the economy must gradually transition from investment-led growth to consumption-led growth. This has changed the composition of Chinese import and consumption basket.

In the process of rapid and enviable growth, two concerns have emerged. One relates to environment and the other, debt. Importantly, China’s debt levels have soared. Relative to GDP, China’s total level of debt (public plus private) has crossed 250 per cent of GDP, according to Bank of International Settlements. The biggest increase occurred in China’s already highly indebted non-financial sector.

Experts assert that it was at such humongous debt levels that Japan in 1990 and Eurozone in 2007 and the US in 2008 began their debt crisis. As debt accumulates, China’s economy has begun to slow considerably. Since 2015, we have seen capital flight, fall in forex reserves (from $3.8 trillion to about $3 trillion) and weakening of the currency Renminbi due to excessive debt concerns.

All this is seen exerting profound impact on world commodity market as evidenced by collapse in price of many commodities, especially industrial metals — iron ore, steel, copper, aluminium, etc. China has now completed 15 years since being treated as non-market economy under the WTO membership. What if China attains Market Economy Status (MES)? How will it impact global commodity markets? It will be negative for commodity-driven sectors. Iron and steel, chemicals, ceramics and tyres benefited so far by anti-dumping duties. MES is likely to benefit China as it will reduce the opportunity for Chinese competitors to initiate anti-dumping measures against China’s exports.

At the same time, it is sure to bring more transparency in Chinese pricing (production and sale) and would help push Chinese exports. Interestingly, a third of anti-dumping cases globally are against Chinese goods.

Without doubt, China is is struggling to manage its economy, but it can bounce back gradually. Discussions at the National Congress are therefore of great interest for its future , and for the world,too.

The writer is a commodities market specialist

Published on October 30, 2017

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