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Can China rise to the challenge of stemming GDP slowdown?

Publication Date : 22-10-2012

 

With the impact of the European debt crisis still being felt and Japan-China ties remaining chilled, there is little sign of a reversal in the slowdown of China's economy. All eyes are on what policies the Chinese government will hammer out to get its economy sizzling again.

China's gross domestic product slowed for a seventh straight quarter in the July to September period, growing 7.4 per cent after inflation from a year earlier, according to preliminary government data. Growth for the July-September quarter fell below the government-set target of 7.5 per cent for the full year.

Economists say 8 per cent annual economic expansion is the "minimum requirement" for China to ensure its economic health and generate enough jobs for its workers. However, it is difficult to tell when China's falling growth will bottom out. Indications are that growth through 2012 will likely dip under 8 per cent for the first time in 13 years.

The slowdown of China's economy, which has been a locomotive of the global economy as one of the world's key growth centres, must be closely watched because it could hurt the economies of Japan and other nations.

Risk factors surging

China's downturn can be attributed mainly to falling exports to Europe, its biggest export market, where financial uncertainty has spread. Consequently, the output of China's export industries and related sectors has been sluggish.

The deterioration of ties between Tokyo and Beijing over the Senkaku Islands in Okinawa Prefecture also has contributed to China's slowdown. Boycotts of Japanese-made products, including motor vehicles, spread across China, hitting sales of Japanese goods. In addition, personal consumption--an engine of China's growth--has been losing steam.

Due to the surge in such risk factors in China, many Japanese companies have decided to cut production there. Cracks have started to emerge in the production framework based on a division of labor in which Japan exports parts to China, where they are assembled into finished products.

If these trends spread, in addition to the tepid production of Japanese firms in China, employment and income conditions of Chinese workers at Japanese factories and other places will deteriorate. This could spell even more bad news for China's economy.

After Lehman Brothers collapsed four years ago, the Chinese government implemented a massive stimulus package that generated, albeit temporarily, a V-shaped recovery. The stimulus measures created several downsides, such as leading to a real estate bubble. As a result, Chinese authorities are reportedly circumspect about launching a similar large-scale package to deal with the latest slowdown.

Boost Japan-China trade

Amid all this, China is in an unstable period as it prepares for a transition of power. Vice President Xi Jinping is set to take the helm of a new government in November. If the business slowdown cannot be halted, the very foundation of the government could be shaken.

Widening income disparities between urban and rural regions and increasing unemployment among young people have become serious social problems in China. Under these circumstances, maintaining China's stable growth could be the most urgent task for its leaders.

Specifically, front-loading and accelerating projects to improve infrastructure such as expressways, in tandem with steps to boost personal spending, will be indispensable.

Additional monetary easing measures may be another option. We hope China promptly takes steps to lift its economic growth while preventing a reemergence of the bubble economy.

China needs to expand trade with Japan and encourage more investment by Japanese companies. Chinese authorities should change their hard-line policy toward Japan and quickly bring bilateral ties back to normal.

 

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