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Chinese authorities should be wiser now

Comments on Peter Drysdale "The problems for Asia’s growth", 17/08/2015

China's slowing economic growth is probably greater than the Chinese leadership team expected and adds to the potential that it may fall into the so called middle income trap. There are a number of factors that combined to result in the excessively slowing of the Chinese economy. Surely the prolonged weakening in economic growth in major international economies including the US, and particularly in Europe has been one of the external factors.

The appreciation of the Chinese Renminbi, the yuan, against many currencies as it pegged to and rose together with the US dollar is another headwind as far as external factors are concerned. It has rendered the Chinese exports as a whole uncompetitive. The Chinese authorities were probably too concerned about the pressure from the US to call currency manipulator and didn't act early enough to mitigate its appreciating currency. The recent move by the Chinese authorities to allow greater movement/depreciation against the US dollar indicates how strong the downward pressure of its economic growth rate.

The third factor is the rapid rises in wages in China that contributed to both external and internal problems. Externally it further reduced its international competitiveness so added to the slowing export growth. Internally it may added to the tightening of the labour market due to population growth and demographic change and reduced the employment growth than otherwise.

More importantly from policy point of view, the Chinese authorities were probably too relaxed in its economic management and didn't use enough expansionary policies, in the hope that its consumption may pick up the economic slacks to drive the economy. That policy stance was a combination of the result of the previous huge stimulus in the wake of the GFC and the desire to deleverage. Of course that policy stance became problematic in the context of both external and other internal problems as mentioned.

That policy stance, in the hope of the market would come to rescue, even would not work well in well functioned markets such as the industrialised countries, not to mention in China where the market is not as perfect as those in advanced economies.

The Chinese authorities have probably realised the country's economic problems and have taken actions to stimulate its economy, although it may have been too late and too little. Nevertheless, it is a useful lesson and if they have learned that lesson well, it should be conducive to getting future policies right. That in turn is likely for China to avoid the middle income trap and graduate as early as possible to high income ranks. Hope that is a price paid with a dividend.

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