What lies beneath China’s financial tremors?

Published on The Straits Times, Singapore, by John Wong, Aug 29, 2015.

China’s financial fluctuations have sent world markets reeling. But fears of an imminent collapse in the Chinese economy are unfounded … //

… China’s present economic slowdown is also not just about the change in the magnitude of growth, but also the nature of its growth.

Years of hyper growth have left behind a lot of “excesses” in terms of over-production and over-capacity as well as a huge domestic debt overhang. Thus, the manufacturing sector that used to grow at double-digit rates, registered only 6 per cent growth in the first seven months of this year.

China currently has huge stocks of surplus raw materials and minerals, and this explains why it currently faces low import demand from primary-producing countries. This also explains why it is pushing hard for its One Belt, One Road project as a way to digest its industrial over-capacity.

More significantly, its growth pattern has started to shift, with growth increasingly driven by domestic consumption. This means that its future 7 per cent or so growth generates more GDP in consumer goods and services, and less in output from the heavy industry sector like iron and steel.

China’s imports of certain raw materials and minerals are set to decline further. This is bad news for some primary-export Asean countries. In short, it is not just China itself, but the world at large that also has to adjust to China’s economic slowdown.

But the story of China’s growth has been well-forecast and is by no means unexpected.

The critical thing right now is not to misinterpret the fluctuations in the yuan and stock markets, which are just corrections to overvaluations in the past, certainly not a signal that the Chinese economy is about to collapse.

(full text).

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