Economics: China - Happy New Year

(Drivebycuriosity) - Today the Chinese celebrate their lunar New Year and the start of the "year of the pig". The "year of the dog", which ends today, brought a lot of stress for the financial markets in China & the rest of the world. China`s economic growth slowed down to 6.4%, but the country avoided again the hard landing many have been predicting for years (china). Western media, banks, hedge funds and many pundits are drawing a gloomy picture of the "people`s republic". "Hysteria over China has reached the point of collective madness", commented the British paper Telegraph (telegraph). As a result China`s stock market, the Shanghai Composite Index dropped 24% in the recent 12 months.

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I think that the gloomy China sentiment and the Chinese stock market drop are both ill founded. The country is still in the begin of a secular catching-up process which is fueled by extreme income & wealth differences to the US and other Western nation values. Today China has about $8,800 income per capita, the US number is $59,500 (worldbank). China doesn`t have much commodities but it owns a huge amount of human capital: 1.4 billion people who are intelligent, who work hard and save a lot money to achieve a better life. Wikipedia counted in 2014 already "2,236 colleges and universities, with over 20 million students enrolled in mainland China" (wikipedia). The fast expanding knowledge is driving science & innovation, raising productivty and fostering economic growth (washingtonpost). Chinese corporations, think tanks & administrations can employ a large number of highly dedicated & educated people - a strong driver of economic growth (scottsumner).

China`s growth is fueled by a rapid transformation process.  The country is transforming from an industrial & export-focused economy into a modern system like the US, where most of the GNP is fueled by consumer spending. In the US consumer spending is the engine of the economy. China, which still depends too much on exports & industrial production, is on the way to became a modern economy. Many peasants are moving to the huge metropolitan centers which are spread all over the huge country to lift their standard of living. This creates a fast rising affluent middle class, giving consumer spending a boost as the strong retail sales demonstrate  (growth rates about 8% tradingeconomics). The consumption power of 1.4 billion Chinese population becomes more and more the growth engine of Chinese economy.

China´s growth gets tailwinds from the technological progress and advances of Internet, automatization of industrial production and 3D-printing. These developments raise efficiency and  productivity of China´s economy.  I think that the recent official stimulating programs (lower interest rates, billions into infrastructure and more) supported by cheap oil & other commodities will generate enough tailwinds to stabilize the Chinese economic growth rates in the course of the year.

During the "year of the pig" China`s economy should continue the soft landing and could still grow between 6 and 7% thanks to the transformation process & rising productivity (technological progress). There are also tailwinds from fresh stimulus measure: In January Beijing announced tax cuts “on a larger scale” in order to boost business activity and The People's Bank of China injected more money into the market via a targeted cut of the reserve requirement ratio. Signs of stabilizing (retail sales, industrial production and more) could refuse the gloomy sentiment and disprove the "China-is-crashing" calls and might rekindle Shanghai`s ailing stock market.

Btw Pigs are smart, at least as smart as chimpanzees (nbcnews )

Happy Year of Pig!