Nowadays it is impossible to ignore the news coming beyond the Great Wall: China is in the spotlight. The Red Dragon, along with US, is one of the most important players in the global economy.
The predominant political standing of the US is still strong, but we cannot say the same of the economic power that the Chinese have quietly stolen. Today’s China, in the past a primarily peasant country, has modernised herself in a time-span of 30 years, making this process the fastest in human history.
Chinese policy-makers have acted thoroughly to make this happen. Now, China is one of the biggest investors in many countries around the world and the main trade partner for raw materials, making it the only nation that has started “shopping” for natural resources on a large-scale. Chinese companies are thriving, like Huawei and Lenovo in IT, small businesses too and graduated students from national universities are one of the highest in the world.
At a first glance, China’s fortune seems lasting but one should tread warily his steps in making such forecasts. The leaders at the head of the Communist Party are fully aware of the critical points that lay both within the nation and outside.
Let us start with the latter. The so-called Western countries are trying to tackle their fiscal problems that have arisen after 40 years of folly spending and bad management. We invented consumption and we ended up consumed by our own creation.
The short-term mentality of our politicians favoured the Chinese export-oriented economy. China has become a haven of rest for investors, and this has served as a catalyst for the economic growth but also brought on problems to the Chinese Politburo. Investments are restricted in China, heavily controlled by the government and selected and disposed in a catalogue, but this has not made the country immune to corruption and meanwhile problems concerning the increasing size of the population have risen in the country.
All the problems in China are rooted in the size of its population. Currently, the welfare system is not able to satisfy all the requests coming from the Chinese people. The consumption of oil and even water has become a serious issue. The Chinese policy-makers brought out of poverty 500 million people but there are still many more living in absolute poverty. They all know that the only way to bring balance and pursue “harmony and prosperity” is investing in their own market, the second largest in the world.
So, what if the economic growth slows down?
First of all, China has not stopped growing, the country is growing less but still at a considerable percentage, at growth at which European countries only dream of having themselves. Growth is necessary to keep the system balanced and not in excess, and Chinese law-makers are trying to adjust this uncontrolled rush. The booming development risked ruining China in a long-term period, leading to the need of creating a more sustainable growth.
The government decided to undertake the following three actions to reach sustainable growth: no state stimulus and depleting the debt load of financial institutions by reducing loans and structural reforms. The media describes the decade of Hu Jintao and the Wen Jiabao rule as “a golden age for the economic growth” that has reached its peak at an economic growth of 14%, but it has to be said that some of the challenges that Xi Jinping and Li Keqiang are currently facing were caused by the previous period.
The ingredients listed above are the solutions, the so-called Likonomics, from the name of the Prime Minster Li Keqiang. The aim is to control the crisis in order to restart on a more stable and high quality base. To this aim, last week the People’s Bank of China liberalised interest rates on lending and now Chinese banks are free to set the floor of their lending rates as they want. The Financial Times and The Economist consider this step not as bold but rather as expected. Lifting lids on deposit rates, not just on lending, would have been considered a true liberalisation of the banking sector, pushing big State banks to compete amongst each other and seeking medium and small firms that experienced a loan squeeze after the credit crunch of last month.
Sounds like a wake-up call for reforms, but China is moving forward. It is too early to make any honest judgement and the global economy as a whole is too fragile to make any forecast. China, in this current scenario, has done a lot.
What I see is carefulness in the legislation and, at the end of the day, should we really be concerned if it slows down? Frankly, I don’t think we should.