There is no doubt that Europe dominated the macroeconomic scene for all the wrong reasons during the last four years, and will most likely continue to do so in the unforeseen future given the intensity of the region’s economic woes and the lack of credible structural adjustment, but the lingering question is which region or country can influence events in 2014.
In my opinion, China’s role in the global economy and the ever increasing evidence of recovering business activities do build up a case that China can positively weigh on the world next year.
The second-biggest economy will act as a driver of global growth via three channels.
First, the buoyant Chinese manufacturing sector, which had expanded to an 18-month high in October will surely enhance the trade linkages with the rest of the world through an increased demand for imports.
Second, the recent pledges by the Chinese government to structurally rebalance the economy toward private investment and to ease the one-child policy will immensely enhance domestic consumption, which will be in favor of other countries’ external balances.
While the aforementioned two channels are trade-related, the third is pertaining to opening up the Chinese financial market for foreign direct investment and portfolio inflows. The communist party document that was issued on November 12 after a four-day meeting, Third Plenum, pledged to elevate the role of markets through interest rate liberalization, convertibility of the yuan and allowing qualified private investors to set up small-to-medium sized banks.
These reforms might be driven by a sense of urgency, as economic growth registers the weakest expansion since 1990, yet it will bode well for China and the global economy, with the former reverting to a more sustainable and balanced economy and as the latter benefits from China as a consumer and investment destination.
If the developed economies are facing a liquidity-trap, with economic growth lagging even after historically low interest rates and unprecedented pumping/printing of money, China is trying to evade a middle-income trap whereby productivity and income growth come to a grinding halt as the economy fails to reform and loses competitiveness.
The second half of 2013 might have eased the concerns over China, yet a couple of drags still exist and can make the unlikely become highly likely, a scenario of hard landing. The local government debt burdens, estimated at $3 trillion, can create a negative feedback loop with the domestic financial system, resulting in non-performing loans and eventually write-offs.
Additionally, despite the central bank’s cooling measures, rising home prices, above 20 percent Y/Y, are likely to continue well into 2014, which can impact investors, developers and banks’ non-performing loans if the bubble eventually erupts.
Evidently, China’s bilateral trade with the Kingdom makes the Chinese story pivotal whether for current or future strategies.
Which is the fastest growing economy in the world during the last decade?, Which economy is the largest consumer of most resources?, and where will the huge capacity in Saudi petrochemicals be sold?
If the answer to all these questions is China that dominates 12.9 percent of total Saudi exports, then we should look East.
— Tamer El Zayat is senior economist at National Commercial Bank
(Twitter: @ZeEconomist.)
