Sunday, 21 April 2013

East Asia tensions amid slowing Chinese growth

China’s economic growth slumped in the first quarter of 2013, the lowest it has been since 2004. After the news from the second half of last year that China’s growth is back on track, recent reports of the Chinese GDP falling from 7.9 percent in the last quarter of 2012 to 7.7 percent on a year-on-year basis in the first quarter of 2013 is worrying analysts that a recovery might be short-lived.

That China also received the nasty notification of a downgrading of their long-term local currency debt from AA- to A+, citing “underlying structural weaknesses”, would have compounded the impact of last week’s news. But slower growth could have the greater effect on the global economy as exporters of raw materials, who have relied on surging Chinese demand over the past decade, will be hurt as orders reactively tighten.

As the successful method of Chinese statecraft encounters obstacles and the model becomes economically, socially and politically untenable at a time of rising wages and input costs and weak external demand, Beijing is reacting interestingly.

It is possible the growth drop-off could be China’s economy trying to find equilibrium after their miracle decade of phenomenal growth. After all, 10 percent GDP growth year-on-year is extremely difficult to maintain over the long term and there is always a danger of growing too quickly. But it is equally likely that certain fiscal policies enacted by previous Chinese leaders and a rapidly developing East Asian economic environment are conspiring to whip up a storm which even the might of Beijing will struggle to weather.

One factor stems from the economic strife still gripping much of the world. In this sense, lower than expected GDP figures from China will only exacerbate pessimistic global investment feelings.

But Beijing is actually looking to stabilise growth to control it, rather than let it continue in an unsustainable rocket-like economic thrust. The latest growth figures could be proof that Beijing’s controls are starting to take effect and that nothing of consequence lies just behind the curtain.

And yet something doesn’t feel right. While Chinese growth is still moving in the right direction, from Beijing’s point of view, a slow-down in growth could tip the economic and social scales in the country enough that, without significant correction, might intensify existing problems.

Such problems include: the simmering social discontent, lower-than-ideal domestic consumption of Chinese goods, high migration numbers from the core to the eastern seaboard, diminished orders for goods coming from Europe and America, unfavourable demographic trends, and struggle for resource and trade route control, among many other things.

And yet the benchmark for further downgrading China, cited by the ratings agency Fitch, specifically warns about the splintering geopolitical dynamics in East Asia ahead of any of the other pressing economic issues listed above.

If these dynamics do not deteriorate any further, and this is hardly a foregone conclusion yet, China could claw back come points. But with tension constantly increasing between Beijing and Tokyo, Beijing and Hanoi, and between Beijing’s Pyongyang ally and Seoul, the security situation in East Asia is a long way from composed.

The almost annual rhetoric and sabre-rattling from North Korea has serendipitously taken the shine off this year’s other tumultuous, headline-grabbing region: the South and East China seas. Even though TV cameras and journalists are presently deprioritising this area, recent waterborne spats indicate little has improved to cool tensions.

Chinese patrol craft confront Vietnamese fishing
ships near the Paracel Islands
Chinese patrol boats confronted a Vietnamese fishing boat near the disputed Paracel Islands at the end of March. The fishing boat burned after Chinese “warning shots” were fired. The whole event occurred while political overtures from Beijing suggested more diplomatic cooperation in the region.

Among other confrontations with China Hanoi is responding by beefing up its naval strength to better enforce Vietnam’s territorial claims. Vietnam will take delivery of two Russian diesel-electric submarines later this year. And rather than continue down the weakening line of “fishing-fleet diplomacy”, the submarines send a clear message to Beijing.

China could deal with these countries if it came to a hot war. Many of them cannot stand up to the Chinese Navy. But each time new spats over desolate rocks kicks up new spray on the East China Sea, those countries turn further away from China as a trading partner. Anti-Japan sentiment is causing Japanese manufacturers to look to South Asia to base industrial plants, rather than in mainland China. This is just one example which could hurt China in the long-run.

Another is deftly outlined by Gordon Chang writing for Forbes. The United States is China’s biggest trading partner. Yet in its search for supremacy in the Asia-Pacific, China is making America its greatest adversary. American officials recently raised the threat of cyber-attacks above that of terrorism as their most serious national security threat. Mr Chang says, “China, of course, is America’s number one cyber adversary.  Being named your biggest customer’s biggest threat is not smart strategy.

Slower growth in China could also worsen the increasing prices of manufacturing goods in China. For years China has attracted investment from other nations with the offer of cheap low-cost goods with little profit margin to keep investors coming back.

But even as China’s central lending practises keep manufacturing costs low and businesses in operation, those companies earn little or even lose profits which could another reason for China’s slowed growth. Artificially keeping weak businesses open with government funds sucks those funds down an economic black hole.

So as China slows its growth by reaching the limits of speedy development, it looks to stretch into its near-abroad to secure trade routes and resources. In doing so it conflicts with other developing Asian states that tend to kick-back politically and economically as they move investment away from, as they see it, an aggressive China. In response, China expands a bit more, and the negative feedback loop locks in place.

New Zealand is a key exporter to China of agricultural and forestry goods such as lamb, dairy products and timber. Whether the latest figures are indicative of a new trend is yet to be seen. But a slowing China will have a direct effect on the rising tide carrying all boats, including New Zealand.

1 comment:

ketz said...

Yet China remains a developing country and its market reforms are incomplete.

bank bailouts