China In 2012: Growth Driver Of The World Economy?

China has become an important driver of global growth

On Jan. 23, the Chinese New Year began; it is the year of the Dragon. Every year is symbolized by a new animal, following a 12-year cycle. A symbol for good fortune and change, the dragon also stands for progression and perseverance. Given the fact that China has become such an important driver of global growth, it would certainly be good to get a little help from the dragon this year. Will China be able to hold up and help to stabilize the struggling economy in the Western world?

The economic challenges in the Western world remain unsolved; therefore, economic growth will be moderate at best. For the United States, this might mean that gross domestic product growth will remain weak; countries in Europe might even see negative growth in coming quarters. In China, the situation is different. So far, economic growth has been able to keep up surprisingly well and is currently standing around 8 percent. This represents a slowdown from the previous years when growth was in the area of 9 percent to 10 percent. The slower growth rate was primarily caused by two factors. First, the general slowdown and economic crisis in the West, since almost 40 percent of China’s exports go to Europe and the United States. Secondly, the Chinese government has been trying to slow down economic growth in order to control inflation, which is one of the biggest problems.

In recent months, there has been growing optimism that China has successfully managed to control inflation; consumer price inflation fell from 6.5 percent around mid-2011 to 4.2 percent in November, a trend which is clearly encouraging. Chinese policy makers managed to control inflation by taking various measures, which included monetary, fiscal and regulatory adjustments.

Financial markets have been worried about the slowdown in China, realizing how important the country has become for the global economy. In a time when the United States and Europe are struggling like they are today, a hard landing of the Chinese economy would have the potential to turn the crisis in the West into a global recession possibly even a depression so a lot is at stake here. However, there are a number of reasons to be cautiously optimistic that China continues to be a growth driver for the world economy. Especially important is the fact that we are going to see a policy shift in China this year, which should support economic growth.

China has the financial means to give a lot of stimulus to its economy, a much different scenario from the West where deficits and debt burdens are huge and interest rates are at historical lows already. In China, inflation seems to be under control and policy makers will have more room to lower interest rates again, despite the fact that there has been a lot of talk about a real estate bubble in China. While high real estate prices in some of the major cities continue to be a problem, prices have started to come down in a majority of places, a clear indication that the housing market is cooling off a little bit. China is also under pressure to grow the economy and continue to create jobs. Policy makers are very well aware that job growth and improving living standards are the most important factors for social stability in the country.

It seems very likely that we are going to see a policy shift in China this year which should result in accelerating economic growth. This has far-reaching consequences for the Western economies in general and for global financial markets in particular. The psychological impact of this policy change is yet underestimated. China is not the only driver of the global economy, but probably the most important at the moment and much better positioned than some of the other emerging market nations, such as India. India has a lot less room to stimulate its economy, primarily due to fiscal problems and high inflation, despite 13 rate hikes since early 2010.

Market Comparisons
(Chinese Stocks are off to a good start this year)

Fixing the debt problems in Europe and the United States will not only include measures to cut spending. The austerity measures implemented in many Western countries might even make the situation worse, but Western countries also need to restructure their economies and become more competitive; only this will improve the situation long-term. It is clear that this would be easier to achieve if global growth remains robust and does not add further pressure on those countries.

With the policy change in China, there seems to be a good chance that global growth will hold up fairly well and give Western countries a little bit more breathing room. However, Europe and the United States need to make use of this opportunity and bring the house in order. I have my doubts about this, especially in a big election year like we have in 2012, it’s all about making new promises for change and a better tomorrow. Changing things to the better most often includes unpopular adjustments, sometimes even painful adjustments; it’s unlikely that we are going to see too many of these adjustments in a big election year.

With the encouraging progress in Europe (stability fund, fiscal pact, falling risk spreads), the policy change in China and upcoming elections in many major countries, the year 2012 has the potential to surprise to the upside. This is true for economic growth and financial market returns. After a very difficult and volatile 2011, things are starting to improve from rather low levels. Stock markets already anticipate a more positive development going forward. Most major equity markets have started to recover, emerging markets have even seen double digit performance so far this year and it looks as if this could continue in coming months.

In the long run, things can only improve if structural adjustments are being made in the West, and the world will watch this progress very closely. There is hope that the coming years bring positive developments but only if Europe and the United States are able to make convincing steps to address the debt problems and restructure their economies. Emerging markets can have a stabilizing effect on Western economies by providing growth opportunities in many areas. While most emerging markets have been seen as cheap places for production in the past, they are now getting more and more important as new and growing markets where Western companies can sell their goods and services. This growing importance becomes very obvious when one studies the financial reports of major Western corporations, companies that are able to pursue growth opportunities in emerging markets.

It’s good to get a little help from the dragon, but long-term success can be achieved only by structural adjustments in many areas. China continues to be a major driver for the world economy, but the Western world needs to get their act together in order to keep and improve living standards for its people.

Personal Liberty

Daniel Zurbrügg

is the Managing Partner of Alpine Atlantic Global Asset Management, a Swiss-based independent investment management firm. The firm provides clients with independent investment management, asset protection and family office services and is the issuer of the global investment newsletter Echo From The Alps. With a global network of partners, Alpine Atlantic's aim is to provide clients with true "turnkey" solutions for global investing. Prior to setting up Alpine Atlantic, Daniel held various positions with other banks and financial companies. Daniel is a Chartered Financial Analyst and regular guest speaker at international investment conferences.

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