China: Tariff war, Debt bubble, Over investment & Growth.

Q1: The IMF has downgraded China's economic growth by 0.2 percentage points to 6.2% for the (calendar) year 2019. Meanwhile, you have predicted China's growth could slip to below 5%. When do you expect this to happen?

A1: All official forecasts, including IMF, World Bank, ADB, relate to official country data. My forecast of a decline in China's GDP growth rate to 4.5% to 5.5% , relates to the real (underlying)GDP growth rates. The gap between official & real rates in China is likely to rise sharply next year and then close slowly. This official data may only reflect the full extent of real growth slowdown in about 3 years i.e. 2021!

Q2: How will China's growth slowdown impact the rest of the world? What will be the impact on the Indian economy?

A2: We must distinguish the immediate short term (ST) impact from the medium & long term one (MLT). The ST effect will be to slow China’s export growth and Imports linked to it i.e. natural resources from developing countries, capital goods from developed countries & intermediate inputs from Asian supply chains. Therefore, GDP growth in these countries may be adversely affected in short term. In MLT a slowing of Chinese growth and investment in manufacturing & other tradable goods will reduce excess global capacity in tradable goods. This will increase profitability in manufacturing, investment & GDP growth in India and other competing countries.

Q3: You have pointed out that China's growth will be impacted by the tariff war and domestic credit bubble. Can you quantify the impact of these two factors?

A3: The USA is the largest market for China’s exports. A rise in US tariffs on imports from China has both a direct effect on its exports and an indirect effect on FDI investment in supply chains located in China. Together these could reduce China’s growth by 0.75% to 1.25%, if higher US tariffs are maintained. Exit from the debt-credit bubble would reduce growth by 0.5% to 1%. These supply chains will relocate out of China over next year or two, increasing FDI & investment in competing countries in Asia, and increase exports from & GDP of these countries.

Q4: Tariff war is largely being pushed by President Trump. If the restrictions do not escalate into a war, is the Chinese economy still at risk?

A4: The effect of an additional (above rates for others) 25% US import tariff on all imports from China, if sustained for 3 to 5 years will result in a deceleration of China's GDP growth. The measures directed at preventing forced transfer of technology and theft of technology from US companies will continue in parallel and ensure that, reverse engineered US R&D cannot be passed off as innovation.

Q5: How bad is the domestic credit bubble in China? Can the country manage a soft landing?

A5: The Chinese economy has seen among the largest increase in debt among the systemically important economies (US, Euro Area, Japan, UK, India), since the Global Financial crises(40% of total global debt increase). An earlier debt-credit bubble burst in 2015 & a new one was initiated in 2016, but channeled a little more through the fisc and combined with a tightening of capital controls on residents/citizens. Increased external & internal controls make it easier to ensure a financial soft landing. They do not ensure a soft landing in terms of real Economic growth.

Q6: How can China maintain its growth momentum in a de-globalized world

A6: The massive increase in World Trade ended with the Global Financial Crisis. China which benefited hugely from this globalization, has avoided the severe consequences of this reversal of globalization by increasing its share of global import and by pumping credit into its economy. These measures have kept its growth from falling below 6.5%. The US tariffs on China mean that countries which have lost because of the mercantilist growth model followed by the communist party of China are no longer willing to accept these costs. Similarly credit fueled growth cannot be sustained indefinitely. Thus, a decline in China's GDP growth rate is inevitable. The only question is when and how smoothly? China can smoothen the adjustment to a lower growth rate by allowing wages to rise to level consistent with its Per Capita GDP & eliminating directed lending to unprofitable SOEs, Exporters, Party capitalists and high risk, low return investments.

Q7: You have talked about the opportunities for India from the US-China tariff war. What are they?

A7: From the start of the US-China tariff war, late last year-early this year I have emphasized the huge opportunity for India to attract supply chains located in China to India. The new US approach to China's communist party run non-market, non-transparent economy creates great uncertainty for export-oriented supply chains located in China. Given India's free market, open democratic system the Indian economy provides a stable long-term location for such investment. This is particularly so for labour intensive products & processes and where cyber security is a concern as in electronics, telecom & electrical control systems. However, we need to get our own policies and institutions in order. The EoDB external indicator is still very poor. Complaints of tax terrorism are still heard from foreign companies. We need to drastically simplify bureaucratic procedures for FDI & other Export production.

Q8: There is talk of decoupling or disentangling of the US and Chinese economy, what are your views?

A8: There is very high likelihood of a decoupling of the US and Chinese economies over the next 10 years. This will affect significant effects on Geo-economics and Geopolitics. We must be prepared to grab the opportunities this will throw up while remaining alert to the dangers.

To read more,

 "Effect of China Slowdown on India", Policy Paper No. WsPP 1/2017, April 2017, ChinaIndia17feb20Apr.docx .

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A version of this Q&A appeared in digital Financial Express at, https://www.financialexpress.com/economy/avind-virmani-exclusive-china-gdp-growth-could-crash-to-just-5-and-it-is-profitable-for-india/1345357/ and at https://www.financialexpress.com/economy/china-gdp-growth-could-fall-below-5-former-cea-arvind-virmani-tells-when-and-why-it-will-happen/1343910/