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UK shows up fragile China
A funny thing happened this month; the International Fund (IMF) delivered a relatively upbeat report about the UK economy, and at the same time voiced some concern about China, the world’s second largest economy.
Until recently the UK was considered the sick man of the West, it took longer to emerge from recession than other G10 countries back in 2009, and earlier this year it flirted with a triple-dip recession. In contrast, China was considered the saviour of global growth. So, why the turnaround?
[Europe sleeps even as Japan, Britain stir]
The recent pick up in UK growth, including an impressive reading of June service sector activity, is in stark contrast to China, where the manufacturing and service sectors have recently fallen into contraction territory. While Chinese growth is still much larger than the UK’s in absolute terms, the Asian powerhouse has seen the rate of growth slow at the same time as the UK’s economy starts to put its foot on the accelerator.
So while it is not completely true that the UK is overtaking China in the growth stakes, the near term economic outlook for the UK is perhaps not as challenging.
Some of the reasons for the UK and China’s opposing fortunes come down to relative central bank policy. The Bank of England has embarked on an ultra-accommodative policy, interest rates are at a record low and the Bank’s QE programme now stands at £375 Billion.
Added to this, new Governor Mark Carney is looking at fresh ways to try and keep interest rates low for the long-term. In contrast, the Chinese central bank has been reluctant to react to a slowdown in growth, and refused to inject capital into the banking system after a small-sale liquidity crunch last month.
So while the authorities in the UK are trying to prop up the UK economy, in China they are doing the opposite.
The second reason is that China is very exposed to the global export market. Exports have fallen sharply this year, the June reading found exports contracted more than 3% on an annualised basis, down from a high of more than 20% growth back in February. In contrast the UK has less exposure to exports and its economy is more biased towards the service sector, thus it has been protected from some of the slowdown in global trade this year.
The government policies in China and the UK are also one reason for the opposing fortunes of the two economies. The IMF (finally) supports the UK Treasury’s fiscal consolidation programme now that growth is picking up. It also argued in its recent review that the Government could loosen the purse strings if the recovery becomes self-sustaining, which could help boost growth further down the line.
In contrast, the IMF has bemoaned the lack of policy stimulus in the Chinese economy saying that the Asian powerhouse needed to be supported as it makes much-needed economic reforms to try and become a consumer-based economy.
Not that long ago people wrote off the dinosaur-like UK economy, arguing that China’s model of growth was something that we should emulate. However, China’s impressive growth rates of the last few decades could be coming to an end. The IMF basically told China that the economic road ahead will be tougher to climb than it has been in recent history and the low-hanging fruit is no longer available.
Economic problems made in China
The UK found this out to its horror in 2008 when the years of easy money and growth came to an abrupt halt with the financial crisis. While China was able to dodge that bullet, it now has to face a mess that it created by itself.
Credit growth has been rampant, at more than 20% so far this year, and now it is coming to a crunching halt. Credit is only useful to an economy when it is put to productive economic means. Instead, China has factories that produce nothing and ghost towns that have never been lived in. Both are classic consequences of thoughtless lending and extravagant investment that lead to rising rates of failed loans, which in turn threaten the integrity of the financial sector.
The interesting thing about the IMF report on China is that it did not comment on whether the government/central bank should step in and rescue failed lenders and prop up the financial system like the UK did back in 2008.
There are a few possibly reasons for this: Firstly, true extent of China’s banking problems is unknown, so it may not want to expose Chinese public finances to limitless liabilities; secondly, China is an important creditor to the rest of the world, if it stopped playing the role of global banker to sort out its own problems then it could cause massive disruption to the global financial system.
While the UK is slowly trying to work its way out of the economic doldrums, China is trying to overcome problems of its own. The UK is unlikely to ever completely upstage China in the economic stakes, but right now the global economic focus is on Asia, and thankfully, not on the UK.
So while the UK tries to dig its way out of economic gloom, China finds its problems are stacking up.
Kathleen Brooks is author of Kathleen Brooks on Forex, published by Harriman House.
