Will China be a head wind for Thai economy this year?

After the global financial crisis in 2008, China was definitely a tail wind – its demand for our exports helped Thailand make a quick recovery. Now, however, all economic indicators are pointing to a sharp slowdown in the Chinese economy and its GDP growth has fallen to an annual rate of 7.5 per cent.

This is well below recent double-digit rates of growth and many people are wondering if the Chinese will attempt to kick-start their economy again – and if so, how?

One reason China’s economy remained strong after the 2008 crisis was that the government embarked on a massive spending programme. This was mainly focused on building infrastructure and encouraging investment in industry. However, China now has industrial overcapacity and investment is already considered to take up too big a share of the economy, so this is not an option this time around.

It is also unlikely that China will attempt to follow the path of Western nations and Japan and adopt a loose monetary policy. Premier Li Keqiang has bluntly said he doesn’t support doing this. Instead, China is targeting a loose fiscal and tight monetary policy, the opposite of the West. 

Fortunately, the Chinese are in a position to do this thanks to the government’s healthy coffers – for example, despite the government announcing in March it would double the budget deficit by 50 per cent, it will still only be about 2 per cent of GDP, well below the level of most other nations, including Thailand.

From a recent trip to Beijing, I have an impression that instead of introducing a quantitative easing-style stimulus, the Chinese government will pursue more targeted efforts on upgrading the country’s manufacturing sectors, new energy industry, and other expansionary measures, including lowering taxes, increasing spending on the social safety net and more subsidies for education. There will also be increased spending on agriculture, medical and health care, employment, government-subsidised housing and public culture.

One of the goals of China’s looser fiscal policy is to stimulate household spending. China has the highest savings rate in the world at over 50 per cent of GDP – if unleashed, this would be a formidable force. However, in the wake of gloomy economic forecasts, Chinese consumers have been tightening their belts, not loosening them. In June, the People’s Bank of China announced that yuan deposits in the financial system had hit a record level of 100 trillion yuan, with household savings accounting for 44 per cent of these deposits.

Still, the government is determined to pry out some of those savings from people’s pockets to try to stimulate the economy. A few weeks ago, Premier Li indicated that growth wouldn’t be allowed to fall below 7 per cent this year. Within days of his comments, the State Council had announced a mini stimulus – a package of measures that would “arouse the energy of the market” by scrapping value-added taxes on very small businesses, cutting administrative costs for exporting companies and providing more financial options for building railways. The government hopes that these measures plus the fiscal stimulus will help to restore the growth momentum. Clearly it’s a tough challenge, given the weakening global demand for Chinese goods. 

However, China has significant advantages, with its high levels of domestic savings, huge domestic market and healthy government coffers.

Let’s hope for success and that China will be a tail wind and not a head wind for the Thai economy this year.

 

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