Who decides China's fate?

Over the years, China has emerged not only as a major trade partner for countries across the world but also a major market for organizations, given the amount of money people have at their disposal and the demographic factors that come into play for the most populous nation in the world. The confusion over the path that the Chinese Government will be taking in managing its growth in the future, or even the kind of growth numbers it wants to achieve and the way it will go about doing that has led to speculation on China’s fate. The fall in the Purchasing Manager’s Index (PMI) value to 50.5, an indicator of slowing exports and lack of orders that can keep the engines of China’s growth well-oiled, has only added to the woes of emerging economies that are yet again seeing an outflow of money given the investor fears over their fate, as the ghost of QE tapering  is out to haunt them yet again. (I have written about Quantitative Easing in one of my earlier posts.)

The apparent confusion can be gauged from the fact that policy announcements have not been clear on whether China is going to curb its credit system to reduce the growth of credit which has become a major cause of concern. If efforts are indeed made in this direction, then the growth is going to stand at sub-7 percent levels for at least a few years in the future. While this has been indicated in one of the policy announcements, the information coming out from other quarters in the Chinese establishment has been that of insistence on keeping the growth engines running even at the cost of a spiraling credit demand. Banks have been on a lending spree as availability of cheap credit has been a non-issue with investors making a beeline for making a fortune out of China’s growth. Are the times changing? Well, investors are a worried lot these days. The shocks that China’s inter-bank lending rates experience from time to time, seen in June and even at the end of last year, have given credence to the theory that China’s credit bubble may burst soon and a sub-prime crisis like situation may emerge. The fact remains that sentiment drives investment more than anything else. For now, the sentiment is not in favour of China.

China is implementing long overdue social reforms. Its one-child policy has been tweaked a bit to allow more couples to have a second child. The Hukou system, which is akin to a regional passport or a registration of residence or birth and denies education and medical facilities to those not registered in a region, is being debated upon to bring about a change in the form of some relaxations. Social change is thus on the way. We all know that this was the more difficult of a change to bring about in China than something that concerns trade, banking or investments. If China can look ahead in terms of its society, rebalancing for better growth-management is certainly on the cards. If China has been able to manage its growth for decades, why should there be a question mark on its ability to give a new direction to it now? China’s fate lies in its own hands. No investor can afford to ignore an economy like China. All that is required is a clear indication on policy direction for the future.