China’s economic downturn ‘vastly overstated’: report
China’s recent economic downturn is less a sign of catastrophe than of the long-awaited shift to a market economy model that is service-based and consumption-driven, a new report from international think tank European Council on Foreign Relations (ECFR) said.
“Doom-mongering predictions about the decline of the Chinese economy are vastly overstated,” Francois Godement, head of ECFR’s Asia and China program, said in his report “China’s economic downturn: The facts behind the myth”.
“After years in which China’s economic hyper-growth was taken for granted, there has been a dramatic reversal of international sentiment. The Chinese economy is now widely believed to be faltering. This is an exaggeration,” Godement said.
Godement asserted that recent economic issues in China should be seen as part of China’s transition to a service-driven economy, rather than a deep-rooted economic downturn.
The report highlights variances between different economic sectors within China, where the service sector continues to expand strongly — particularly in e-commerce, with web retail sales growing 36 percent in the first three quarters of 2015.
Meanwhile, declines in sectors such as steel and housing are desirable due to overproduction, and their environmental impact, the report said.
Godement said these patterns reflected China’s economic structural changes.
Godement also asserted that ideas of China’s impact on the global economy were exaggerated, claiming that these ideas were essentially “psychological.”
He cited limited non-Chinese exposure to the Chinese stock market and its positive current account and trade balances as factors limiting any real contagion to the global economy.
Nevertheless, he highlighted some possible effects of China’s economic changes on parts of the world economy, which do impact Europe.
Worst hit by the transition will be big exporters to China, including commodity providers like Brazil and Venezuela.
For consumer markets such as Europe, which are neither producers of primary material nor large exporters to China, the benefits from a Chinese slowdown are twofold: the downward trend in primary material prices benefits all importers; and the reduced price of Chinese exports is a boon to living standards, the report said.
However, for various European countries, the impacts of China’s economic transition would be mixed.
For Eastern Europe, it would be mostly positive, due to lower primary prices and cheaper consumer products from China.
The effects for Germany may turn out to be negative as the country relies on China as an export market.
As for southern European economies, including France, the price deflation may well increase their relative debt burden.
“There will be losses but they will, in the main, be limited in scope, although exporters to China or those with high public or private debt levels may feel the effects very sharply indeed,” Godement said.
Instead of a crisis, the expert said China’s economic transition would be an “opportunity” for European counties.
The expert said some more liberal economies — chiefly, Britain and Sweden — and Eastern European economies were right to seek China as a main funder of infrastructure projects, albeit with Chinese suppliers.
“The terms for long-term financing have never been so good; China’s supply prices, thanks to deflation and excess capacities, are becoming almost unbeatable; and the quality gap with Western supply has decreased in all but the very top technologies,” the report said.
The report also said the turn in China’s economy towards services and the changing trends in consumption would facilitate investment or free-trade negotiations between China and the European Union.
“A deal whereby Europe would participate more in China’s new economy while opening itself to the older Chinese sectors seems like a win-win proposition,” the expert advised.