China's economy

Coming down to earth

Chinese growth is losing altitude. Will it be a

soft or hard landing?
Apr 18th 2015 | ZHENGZHOU | From the print edition

The citys GDP growth fell to 9.3% last year from an average of more than 13% over the
preceding decade. The downward trend will continue. As the capital of Henan, one of the
countrys poorest provinces, Zhengzhou had anchored the countrys last, large, fastgrowth frontier. Its maturation signals that the slowing of Chinas economy is not a
cyclical blip but a structural downshift.
So the question for China is not whether growth will rebound to anything like the doubledigit pace of the past. Instead, it is whether its slowdown will be a gradual descenta
little bumpy at times but free from crisisor a sudden, dangerous lurch lower.
Growth will keep on declining, says Xiang Songzuo, chief economist with Agricultural
Bank of China, a state-owned lender. Our main wish is that the decline go smoothly.
The darkest cloud over China is its property market. Factoring in its impact from steel to
furniture, it has powered nearly a fifth of the economy. Now, it is set to subtract from
growth.
Sales of residential housing last year were 20% higher than they were in 2009, but
projects under way have more than doubled since then, according to official data. If true,
it would take five years to consume the pipeline of homes being built, up from three
before the global financial crisis.
Those who were over-optimistic about the longevity of the boom are paying a price.
Chinese steelmakers had created capacity for 1.2 billion tonnes a year. The 820m tonnes
produced last year may well be the top.
Property is thus turning from a driver into a drag for the Chinese economy. Wang Tao of
UBS, a bank, estimates that every ten percentage-point drop in construction growth cuts
as much as three percentage points off GDP.
One way China could rekindle its property market is by using its banks to pump cash into
the economy, as it did in 2008 when the global financial crisis struck. Yet that would be a
dreadful mistake.
Chinese lending has grown less potent. In the six years before the financial crisis, each
yuan of new credit resulted in about five yuan of economic output. In the six years since
the crisis, each yuan of credit has yielded three of output.

Much depends on how liabilities are managed. China has several advantages. The vast
majority of its debts are held at home. In many cases both debtors and creditors answer to
the same master, the government. A state-owned bank is not about to call in a loan from a
state-owned shipbuilder. This buys it time to sort out the mess.
Credit growth has fallen below 15% year-on-year, down by more than a quarter from the
average of the past decade.
A much-needed shift towards consumption-led growth is just getting under way.
Investment accounts for 50% of economic output, well beyond what even Japan and
South Korea registered in their most intensive growth phases. Without rebalancing,
overcapacity in industry would only get more severe, further undermining the return on
capital.
At last, there are glimmers of hope. Investment growth has halved in recent years but
consumption growth has held steady; in future, as Chinas growth slows, consumption
should contribute a bigger share of it
Health insurance, old-age benefits and free schooling, though works in progress, appear
to have helped check the remarkable propensity of Chinese to save. At 40% of income,
the household savings rate has stopped rising in recent years.
China created 13.2m new urban jobs, an all-time high. The strong jobs market has
allowed wages to keep on rising at a steady clip, a prerequisite for getting people to
consume more.
Regulations constrain investment options, making property one of the few viable assets;
this drives up house prices.
The alternativetrapping money in China at artificially low interest rates and
encouraging wasteful investmentwas bound to be more destructive.

South Koreas economy

A tiger in winter

A once fearsome economy struggles to fend

off a deflationary funk

Mar 28th 2015 | SEOUL | From the print edition

THE previous president of South Korea, Lee Myung-bak, set a target for economic
growth of 7%a level the country once achieved regularly, but missed on his watch. Last
year his successor, Park Geun-hye, adopted a more modest goal of 4%. Yet in January the
Bank of Korea revised its growth forecast for this year down from 3.9% to 3.4%. HSBC,
a bank, thinks growth will barely top 3%.
Industrial output is also sagging. Slowing growth in China, South Koreas biggest export
market, has taken its toll. So has the strong won. It has surged by 40% against the yen
since late 2012, which has pinched exporters profits, since they compete against
Japanese firms in electronics and carmaking, among other businesses.
In response, the central bank cut its main interest rate twice last year. This month it
clipped it by a further quarter of a percentage point, to 1.75%an all-time low. It may
well cut again soon.
In February inflation dropped to its slowest pace since 1999, 0.5% year on year. That is
well below the central banks target of 2.5-3.5%.
The government expects the rate cut to pep up consumer sentiment and ease the squeeze
on exporters.
Several other Asian countries have had to keep rates higher, to stem an outflow of funds
in anticipation of higher interest rates in America. But South Korea is better protected
than most, with a big current-account surplus and little external debt.
Raising government spending, some say, would provide more of a boost to the economy
than lower interest rates.

The economy
Uncurl the body

India needs to learn to trust markets more

May 23rd 2015 | From the print edition
Its economy did enjoy a boom in the early years of this century, with high investment and
rapid growth, in spite of decades of over-regulation, state domination of many sectors,
including banks, and a lingering scepticism about markets. But now it needs to uncurl the
economic body properly with much bolder reforms.
Austerity policies introduced under the previous government were kept going, which
helped reduce the big fiscal deficit.
Short-term prospects look promising, certainly brighter than in most emerging markets,
or in India itself a couple of years ago.
Yet other indicators do not support that rosy assessment. Industrial production is anaemic,
credit and investment are barely growing, construction is slow, few jobs are being created
and consumer demand is limp.
Now and then Mr Modi suggests that the economy should involve minimum
government, but does not spell out what he means. He could have announced plans for
the outright sale of state-owned steel or oil firms or banks by now, but basically he
doesnt want to sell, says a businessman in Ahmedabad. Asked in a private conversation
last year why he was not setting an example by selling Air India, the low-flying national
carrier, Mr Modi said he had no wish to battle unions as he began ten years in office.
The power ministry has auctioned off most coal-mining licences issued in the past two
decades after the Supreme Court cancelled them because of corruption. That raised over
two trillion rupees ($32 billion). The winning bidders, including private firms, can now
dig more coal.
The government could have considered breaking up Coal India, a state firm that mines
the lions share of the countrys coal. If you ask Piyush Goyal, the power minister,
whether Coal India could go down that route, or even be privatised, he rolls his eyes and
says there is no need to be ideological.
It is a similar tale for Indias troubled banks. Many are state-run and have endured
decades of political meddling. Ideally some of them should be recapitalised and made
independent, and the worst of them should be closed. They are lumbered with big old
loans from previous splurges by infrastructure investors, many of them with political
connections, on projects that are going nowhere.

Everyone agrees that India needs a bigger manufacturing sector to create lots of new jobs.
Currently manufacturing accounts for only 16% of the economy, much less than in other
Asian countries. The government has set a target to lift the share to 25% by 2022
Indian governments have long had a bad habit of levying taxes retrospectively, and the
current one has failed to demonstrate that this has been abandoned, so planning
investments remains difficult.
Fixing the power supply is a third urgent need.
The fourth, contentious, area for reform is land. Some manufacturers fret about a lack of
space for factories. Others worry that the government will not be able to get hold of land
quickly enough to build lots of new roads, railways and other infrastructure.
One of Indias worst problems is getting contracts enforced: it takes an average of 1,420
days to settle a court case.

State of the Economy

and Prospects

The strong post-financial-crisis stimulus led to stronger growth in 2009-10 and 2010-11.
However, the boost to consumption, coupled with supply side constraints, led to higher
inflation.
Monetary policy was tightened, even as external headwinds to growth increased.
The consequent slowdown, especially in 2012-13, has been across the board, with no
sector of the economy unaffected.
Falling savings without a commensurate fall in aggregate investment have led to a
widening current account deficit (CAD).
1.5 Why has the economy slowed down so rapidly despite recovering strongly from the
global financial crisis? A number of factors are responsible. First, the boost to demand
given by monetary and fiscal stimulus following the crisis was large. Final consumption
grew at an average of over 8 per cent annually between 2009-10 and 2011-12. The result
was strong inflation and a powerful monetary response that also slowed consumption
demand. Second, starting in 2011-12, corporate and infrastructure investment started
slowing both as a result of investment bottlenecks as well as the tighter monetary policy.
Thirdly, even as the economy slowed, it was hit by two additional shocks: a slowing
global economy, weighed down by the crisis in the Euro area and uncertainties about
fiscal policy in the United States, and a weak monsoon, at least in its initial phase.
1.6 As growth slowed and government revenues did not keep pace with spending, the
fiscal deficit threatened to breach the target. With government savings falling, and private
savings also shrinking, the CAD--which is the investment that cannot be financed by
domestic savings and has to be financed from abroad--also widened. In the rest of this
chapter, the statistical underpinnings of the macroeconomy are analysed followed by the
rationale behind the government's policy for macroeconomic stabilization and restoring
growth, in addition to the macroeconomic outlook and possible risks to the outlook.
1.8 In the last decade, growth has increasingly come from the services sector, whose
contribution to overall growth of the economy has been 65 per cent, while that of the
industry and agriculture sectors has been 27 per cent and 8 per cent respectively.