While the US debt debacle has dominated the headlines, the real worry is in China. Can China’s emphasis on domestic demand buoy the global economic outlook?By George Lauriat, AJOTBack in July the IMF (International Monetary Fund) issued a so-called “spillover” report that warned of the impact of “hard landing” should China’s domestic zeal lead to excess industrial capacity and an overheating of the economy. The report was buried beneath an avalanche of press dedicated to the US debt debate and S&P downgrade. The “spillover” reports are part of a Group-20 agreement assembled following the 2008 financial crisis to encourage global economic cooperation in order to help avert future meltdowns. Under the agreement the IMF reviews major economies such as China, the Euro area, Japan, Britain and the US. Basically, the report was assembled by asking China’s key trade partners what their main concerns were with China’s economic policies – particularly since the announcement of the 11th Five-Year Plan. The main concern of the PRC’s (People’s Republic of China) trading partners is what change comes with emphasis on domestic growth rather than the current export model, which has been in place for the past thirty years. According to the IMF’s report, “The concern is that overheating in China could put added pressure on commodity prices and draw short-term capital to the region.” Middle Kingdom Looks In-house The emphasis on domestic demand has (for China) an unusual inward looking approach, as evidenced by the official version outlining the main goals of the plan: “During the eleventh five-year planning, the actual increase rate of total retail sales of consumer goods will be about 11% per year, of total sales revenue of production material about 11% per year, of added value in retailing and catering industry was 9% per year, accounting for 10% of the GDP. And 71 million people will be of employed persons in domestic trade in 2010, accounting for 5.2% of the population number. The average annual increase rate of sales revenue of chain enterprises above designated size was around 21%, accounting for 25% of total retail sales of consumer goods. Fifteen to twenty big enterprises, engaging in domestic trade with national influence and strong international competitiveness and a batch of regional leading enterprises, will be established.” There are many aspects of the goals set out in the 5-year plan that are unclear. The emphasis on building a retail consumer industry is clear (11% growth), but what’s less certain is the role foreign imports will play (and the protection from brand infringement). Additionally, it would appear that China wishes to embark on developing its own state-sponsored version of Wal-Mart or Carrefour’s. In China, Western brands are popular, and there is an ongoing battle between knock offs and popular Western brands, in some cases involving local stores mimicking their Western counterparts. Yuan Impact The yuan’s value is a complex issue both inside and outside of China. There are many in the US and Europe that feel that the yuan (see Peter Buxbaum’s related story on page 12) is maintained at an artificially low rate to make China’s exports more competitive and conversely imports from the US and Europe, more expensive. Beijing would like to invest more in domestic infra-structure, and for that reason increasing the value of the yuan, vis-à-vis world currencies like the US dollar, would effectively increase their purchasing power for capital intensive goods, such as planes, high end electrical equipment and other big ticket items. Somewhat lost in the yuan debate between the US and the PRC is the difference in economic opinions within China itself. Those in the coastal provinces do not always mirror Beijing’s interests. The man-in-the-street in Shanghai or Guangzhou, while agreeing with the party leadership that the yuan’s value is a domestic question, is less likely to view a focus on domestic investment at the expense of exp