For China’s struggling economy, 2016 may be worse than 2015
Nothing reflects better China’s economic difficulties than the collapsing commodity market. After a 15 per cent decline in 2014, the CRB index dropped another 27 per cent in 2015. China-dependent iron ore has seen its price halved again in 2015 after halving in 2014, and the price of Brent crude is down by two-thirds in 15 months.
China’s economy is mired in a structural and cyclical quagmire. To extricate itself, China must develop a comprehensive plan to stabilise the economy, absorb cyclical losses and rebalance the economy. Piecemeal measures only increase confusion and dig a deeper hole for the future.
Playing with monetary policy just doesn’t work. It is intended to boost investment demand. But, with so much overcapacity everywhere, why would anyone want to add more? Instead, it destabilises confidence in the exchange rate. The resulting capital outflows are making economic management that much harder and may even precipitate a financial crisis similar to the 1997-98 Asian financial crisis. One lesson from history is that, when the financial system is precarious, don’t play with the currency value.
China may have overinvested up to 40 trillion yuan (HK$48 trillion) since 2009. Its physical manifestation is in empty buildings and industrial overcapacity. Several prominent steel industry executives believe the industry should produce 20 per cent, or 160 million tonnes, less per annum. On top of that, the industry is rumoured to have 200 million to 400 million tonnes of overcapacity. The dire situation is common among all commodity industries. New industries like smartphone manufacturing already have a large overcapacity. Even power plants are hugely underutilised.
Declining efficiency and rising forced savings are two sides of the same coin. To get out of the vicious spiral, the government must loosen its control on the economy, especially financial resources. Government spending and that of state-owned enterprises account for about half of GDP. The level must come down by half for the economy to be stable.
China has enormous potential. Its labour productivity is comparable to that associated with per capita income of US$20,000, 2½ times the current level. The huge gap is to pay for the system’s inefficiencies. China’s current economic difficulties are entirely due to the inefficient governing system. If the right reforms are instituted, the economy will boom for the next decade. If no reforms are carried out, stagnation, instability and crises await us.