CHINA BUBBLE BURSTS THE JAPANESE WAY

The governor of China’s central bank kept on saying in the G-20 meeting at Ankara that the growth bubble in his country had “burst”. Chinese stocks have plunged 40 per cent since its June peak. The slowdown in the Chinese economy and the erase of $5 trillion equity were the focal points of discussion at the summit. No one could believe that Chinese economy would grow by 10 per cent forever at the summit. The downturn from the double-digit growth was faster than expected and underlined the global repercussion, said Robert Samuelson, columnist of the Washington Post. In between 2007 to 2011, China’s GDP grew by annual average of 10.6 per cent. The average growth during the following three years was 7.6 per cent. In 2015, China’s GDP grew by 6.9 per cent. IMF forecasted further dip in 2016 to 6.3 per cent.

China was the locomotive for global growth. It was the biggest contributor to global economic expansion. China’s share in global GDP was 16.6 per cent in 2014. Given China being the pivot, the Chinese bubble burst will result in wider ramifications on the world economy. Fears loom large on emerging countries dependent on China that the slump will push global economy on the tenterhooks of recession, causing idle capacity, surge in unemployment, fall in the metal and oil prices and flight of capital from China – the biggest recipient of FDI.

China’s bubble burst replicates Japanese burst in 1993. Like in Japan, asset prices soared in China. Land prices increased due to construction boom, commensurate with high growth in the economy. High land prices triggered the bubble. Major Chinese cities are crowded with growing numbers of buildings that remain dark in the night, because they are vacant. Over-spending in infrastructure by the Chinese government for the purpose of creation of employment rather than stoking consumer demand swelled the bubble.

Japanese bubble triggered yen appreciation in 1985. Yen appreciation led to cheaper dollar availability. Japanese goods became costlier in export market and impacted the Japan’s export – a nation whose economic growth was based on it. This led to a drag on the Japanese manufacturing prowess. Apprehending further dip in export, Japanese manufacturers shifted manufacturing base to Asian NIEs (newly industrial economies), USA and China in the effort to manufacture cheap products and enabled them to sustain its footprint in world export market.

Similar to Japan, China is facing two problems – high debt and ageing population. Both will deter inward investment in China. High debt, induced by government stimuli, will squeeze borrowers’ capacities to spend and propel the growth. Ageing population, the byproduct of One Child policy, will shrink the availability of working population. Between 2015 and 2040, China’s working population of 15 to 64 age-group will fall by 14 per cent, amounting to 140 million, projected by US Census Bureau.

Given the doomsday ahead for inward investment and the rise in the value of Chinese yuan, Chinese bubble burst will prove to be a boon to India, despite the fact that the world economy will be shaken. The upshot of Japanese bubble burst and its favorable impact on Asian NIES, can be the example for forecasting how the Chinese bubble burst will impact India.  Japanese investment soared in Asian NIEs after the bubble burst in 1993 and became the engine for growth in South East Asian economies. Japanese investment leapfrogged more than double in Asian NIES till it was hit by Asian currency turmoil in 1997. China was already on the binge of overseas investment. Following an overturn in the FDI policy a recipient country, Chinese President Xi Jinping asserted for investment abroad, launching a ‘Go Out’ policy in 2012. In 2013, China emerged the third biggest outward investor in the world. From a paltry overseas investment of $3 billion in 2005, Chinese overseas investment increased to $90 billion in 2013. USA was the biggest receiver of Chinese investment, despite security threat. Chinese investment also made a surging growth in South East countries including Myanmar, Indonesia, Malaysia and Thailand. 

Chinese investment in India is in the priority list after Narendra Modi became the prime minster. China is not a foe – a catchword hyped in media. PM Modi’s zeal for Chinese investment is not new. His inclination towards Chinese investment sparked when he was Chief Minister of Gujarat. China pledged $20 billion investment in Indian infrastructure in the next five years. Close on the heels of Japan, China will offer its technical cooperation for high speed trains, bullet trains and development of Indian railway. China proved its competence in high-speed trains after bagging the award in Indonesia against stiff competition from Japan. China pledged to set up industrial parks in India to promote Chinese investment.

There are three outcomes of Chinese investment, which will benefit to India. First, Chinese investment in India can be instrumental to normalise the political relation between the two countries, besides economic gains. After the change of guards in Chinese leadership in 2012, China was in haste to make a thaw in its bitter relation with India. China upgraded its diplomatic presence in Delhi after PM Modi took charge at the Centre. In September 2014,Chinese President Xi Jinping appointed Le Yucheng the new Chinese Ambassador to India, who was at the rank of Vice Minister. 

China deputes ambassadors at Vice Minister rank only to those countries with which it has strategic importance. The countries like USA, Japan, Russia, North Korea and Great Britain have Chinese ambassadors at the rank of Vice-Minister. 

Second, Chinese investment will curb the rising trade deficit. The gushing flow of Chinese export led to a wide trade deficit. More than one-fourth of India’s total trade deficit is caused by Chinese cheap export to India. 

Third, the Chinese are flushed with enough cash for investment abroad. Modi government opened up the economy further by putting more doses of liberalisations in FDI policy, such as in defence, insurance and geared up ease of doing business in the country. If USA can be the frontrunner to coax Chinese investment, why should not India bury the hatchet of security threat and welcome Chinese investment? After all, FDI inflow is pivotal to “Make in India”.