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Sieren's China

Frank Sieren, Beijing / actApril 21, 2016

The world is relieved about the latest economic data from China. Many international figures are praising Beijing, but the current re-established stability still has to pass the test of time, says DW's Frank Sieren.

Chinese industry - workers in hard hats on a car assembly line
Image: Imago

The head of the International Monetary Fund, Christine Lagarde, painted a good picture of the situation last weekend: She said that it was "normal" if China's economy was growing less fast and that it was going through a big transformation, one towards "sustainable growth." She called it a difficult, but manageable situation, illustrating her support for China's approach, but warned just the same against too much euphoria. International markets are currently so thirsty for positive news that there is also a danger that good news can be overestimated, just as bad news was in the second half of last year. The markets are nervous in both directions because they have been pumped up with cheap money.

No doubt there is cause for joy over the world's second largest economy. Last week, China's statistics bureau announced that exports had jumped 18.7 percent in March on year. Foreign investments also rose 3.4 percent in the first three months of the year to the equivalent of 30 billion euros - not a sign that foreign investors have fled then. The situation also seems to have calmed down on the currency front as last month Beijing was not forced to use its reserves in to stabilize the yuan. On the contrary: In March, for the first time in over half a year, foreign exchange reserves rose - by 10.3 billion to 3.23 trillion dollars.

Will the reconstruction of the economic model work?

This does not automatically mean that China is now back to treading its old path of growth. Even a Chinese government expert committee has said that growth of 6.7 percent could just be a short term positive breath of relief. In the long term, in years to come, it will not be possible to sustain this figure. The IMF forecasts growth of 6.5 percent for 2016 and 6.2 percent for 2017. However, this says little about the power of the Chinese economy. The US economy last rose by over 7 percent in 1984 and teemed with power for another 25 years before the 2008 crisis temporarily took the wind out of its sails.

DW columnist Frank Sieren
DW columnist Frank SierenImage: Frank Sieren

The key question now is how fast Beijing will manage to reform the economy, i.e. boosting the service sector, the middle class and domestic consumption. On its way to this, as the figures show, the government has switched on the traditional economic machine again, and brought the weakening economy to its feet just in time. Without even having to go all out. Nonetheless, the Chinese economy is going through a difficult phase. There is overcapacity in the heavy industries, many companies with large debts and state-owned companies in need of reform - these various obstacles are all connected.

Collapse in strong sectors avoided for now

However, there is a silver lining: One single problem cannot pull down the whole economy. The strong sectors are tough and can prop up the weaker ones. There have always been strong sectors in times of bleak figures - for example consumption growth. If this were not the case, there would have been a real crash a long time ago and China would be a second Brazil. So now the government still has time to adjust the economic system a bit.

Frank Sieren has lived in Beijing for over 20 years.