Story Of The Week

How long can the dragon fly high??

Manufacturing, which has been one of the major contributors to China’s Gross Domestic Product saw a declining trend for four straight quarters till April, 2014 adding questions about the world’s second largest economy losing momentum. The economy saw the growth at 18 months low at the start of 2014. This was China’s slowest growth since the third quarter of FY12 when GDP growth had slumped to 7.4 percent.[1]

Many economists and statisticians believe that the economy is in a transformation phase and a slowdown in growth from the double digit level is inevitable.

So, what is this transformation all about?

Well, China is no more interested in manufacturing shoes for you. What interests them now is making lithium batteries that power your Honda Prius. So, does that mean they will not manufacture shoes anymore? Not at all, they still do and they still will. But the economy is certainly moving inwards towards consumption led growth from investment led growth.

This act of rebalancing will be harder and riskier for China with GDP growth staggering at not more than 5 percent level. Many believe that rebalancing has now become essential with the investment led growth reaching its saturation. Manufacturing plants now have a lot of underutilized capacity leading to a fall in return on capital employed and dead investments in terms of plants not being used to their maximum capacity.[2]

China’s HSBC/Markit Purchasing Managers Index (PMI) for April came in at 48.1, lower than a preliminary reading of 48.3 but slightly up from the eight month low at 48.0 in March. The HSBC/PMI has been below the 50 mark which separates growth from contraction. Even export orders had slipped back into contraction in the month of April.

But, the manufacturing growth is now gathering pace as per the purchasing mangers’ index published in the month of July.  It rose to 51.7 in July, strongest since April 2012 and up from 51 in June. Export order flooded factories pointing to better economic growth than the 7.5 per cent seen in the second quarter of the current financial year. According to Annette Beacher, head of Asia Pacific research at TD securities in Singapore, “taken literally, these PMIs signal an exceptionally strong start for third quarter growth in China.”[3]

Well the turnaround is not particular to China and is being witnessed by other Asian countries as well. India’s factory activity expanded at its fastest pace in 17 months in July while Taiwanese manufacturers reported a robust improvement in overall business conditions. So has been the case with South Korea.

The question is how long can the Dragon continue with such a sky high growth rate. With the focus being on bringing structural changes in the macroeconomic situation, a consumption led growth which makes the economy self-sustained and less volatile to global shocks will certainly lower the Gross Domestic Output growth from the current standards.

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