China's short-term pain will lead to long-term gainAngus Walker
An unexpected trade deficit, falling GDP and fears about deflation. The news from China has been getting steadily worse.
Saxo Bank Chief Economist and CIO Steen Jakobsen believes the slowdown in China will continue, but that short-term pain has to lead to long-term gain.
“You have to see the Chinese economy as a supertanker” says Steen, “a supertanker which is very, very hard to turn. Here, we’re talking about an almost 180-degree turn away from growth… that’s very difficult to micro-manage into a soft landing.”
Hang on, isn’t falling growth and a move away from an export driven economy exactly what the Chinese government wants to see?
Steen says that the Chinese government is still sticking to its target of 7.5 percent growth and yet this week, China reported an unexpected trade balance deficit. Exports in February fell 18.1 percent compared with last year. Imports rose 10.1 percent, creating a trade deficit of USD 23 billion for the month. A Reuters poll had been predicting a rise in exports of about 6 percent.
Steen believes the trade figures show China’s slowdown continues as the country is moving away from an export-driven economic model. True to some extent, the reason for the deficit could be linked to a crackdown on cross border hot money scams. However, overall Steen says more evidence of a China slowdown points towards a positive conclusion. Eventually, China’s growth could be more heavily based on consumer spending on Chinese-made high tech and high-quality products. Then China will have emerged from this process of short-term pain into the promised long-term gain.