Negative industrial data caused the already weakened Chinese stock markets to fall further this week. Chinese stocks are now quite cheap in a global comparison. That reflects on the one hand doubts about the Chinese economy. On the other hand, it is an expression of concern about the reliability of Chinese policies vis-à-vis the domestic stock market. It is a market where nobody knows what state influences are involved, and where selling is constantly under threat of market closure whenever the authorities don’t like the look of developments.
The real economic background became clear last year at the latest: It is not just about the economic climate, there are structural and therefore longer-term causes of lower global growth this year which will have a negative effect on the Chinese economy in particular. We are now seeing the end of a development phase of the global economy. A phase which began 40 years ago with a lowering of global transport and communication costs and trade barriers and a simultaneous opening of emerging markets in terms of economic development, especially in China. This process became known under the term “modern economic globalization.”
The weakness of the global economy, which will continue this year too, is a weakness of the Chinese economy and some other emerging markets.
It meant a gigantic realignment of global production structures. Countries like China used their comparative advantages, especially in the production of low-end products. This opened up for China the classical development path via its industrial sector. Since 1990 more than 400,000 people left rural areas and agriculture for the cities and industry. This phase made double-digit growth rates possible — and in turn brought about structural adaptation in the West. Global manufacturing chains were established, which we now know: from “Made in Germany” to “Made in the World.”
This phase has been drawing to an end for several years now. The world now has new production structures. One characteristic of this big change is the fact that world trade is no longer growing.
Without further development and its own domestic economic impulses China would only continue to grow at a speed dictated by global demand for low-end industrial products. The weakness of the global economy, which will continue this year too, is a weakness of the Chinese economy and some other emerging markets.
It was possible to gloss over this for a while: The crisis policies of Western central banks since 2007 permitted capital inflows as the basis for an enormous expansion of credit and investment in what are now seen as questionable new industrial capacities. That kept up growth in many emerging markets and especially in China – also during the financial crisis — but covered up the structural problems under which many emerging markets suffer: weak institutions, inadequate innovation and little diversification.
In the case of China a particular problem is its dwindling global competitiveness due to big wage increases. Last year for the first time since 1988 there was a net outflow of money from emerging markets. That led to a devaluation of their currencies, a rise in interest rates and a worsening of financing conditions for companies. Especially for companies with high levels of debt in hard currencies, this could lead to a further increase in default rates.
China and other emerging markets are more resistant to crises than they used to be: They have bigger reserves of foreign currency, bigger domestic financial markets and relatively low public debt. But in individual cases the stability track record is not so good. The Chinese state has sufficient reserves at its disposal to withstand accrued levels of indebtedness. But that would only serve to allay market fears of credit defaults, not concerns about the business model of China. Although in the long term the country will be in a position to continue along its path of economic development, it will take a while before investors are convinced again.
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