China is presently passing into a period of long overdue consolidation and slower growth. In a way, much is built and it is time to manage it all properly. As this article points out, China is still a long ways to establishing anything close to individual earning parity with the developed world and that is the true point to look for wen unrepairable excesses will bite.
If
everyone who can work pretty well has a job then growth must now come
from increasing efficiency and the related wages. That wages are in
fact rising sharply tells us that this is happening.
Pessimism
is seriously misplaced and the longer this period of consolidation
plays out, the better for the succeeding expansion. A sustained four
percent growth would work extremely well for even a couple of
decades. The economy would naturally transition into a consumer
society during this.
Most
importantly, the country has the time to implement both political and
economic reforms although it is pretty obvious that it is high time
to allow decision making to devolve to the local level under locally
elected officials. That allows all the local stakeholders to sort
local issues out and we eliminate the present spectacle of thousands
of demonstrations.
How strong is China’s economy?
Despite a recent slowdown, the world’s second-biggest economy is more resilient than its critics think
May 26th 2012 | from the print
edition
CHINA’S weight in the global
economy means that it commands the world’s attention. When its
industrial production, house building and electricity output slow
sharply, as they did in the year to April, the news weighs on global
stockmarkets and commodity prices. When its central bank eases
monetary policy, as it did this month, it creates almost as big a
stir as a decision by America’s Federal Reserve. And when China’s
prime minister, Wen Jiabao, stresses the need to maintain growth, as
he did last weekend, his words carry more weight with the markets
than similar homages to growth from Europe’s leaders. No previous
industrial revolution has been so widely watched.
But rapid development can look messy
close up, as our special
report this week explains; and there is much that is going wrong
with China’s economy. It is surprisingly inefficient, and it is not
as fair as it should be. But outsiders’ principal concern—that
its growth will collapse if it suffers a serious blow, such as the
collapse of the euro—is not justified. For the moment, it is likely
to prove more resilient than its detractors fear. Its difficulties,
and they are considerable, will emerge later on.
Unfair, but not unstable
Outsiders tend to regard China as a
paragon of export-led efficiency. But that is not the whole story.
Investment spending on machinery, buildings and infrastructure
accounted for over half of China’s growth last year; net exports
contributed none of it. Too much of this investment is undertaken by
state-owned enterprises (SOEs), which benefit from implicit
subsidies, sheltered markets and politically encouraged loans.
Examples of waste abound, from a ghost city on China’s northern
steppe to decadent resorts on its southern shores.
China’s economic model is also
unfair on its people. Regulated interest rates enable banks to rip
off savers, by underpaying them for their deposits. Barriers to
competition allow the SOEs to overcharge consumers for their
products. China’s household-registration system denies equal access
to public services for rural migrants, who work in the cities but are
registered in the villages. Arbitrary land laws allow local
governments to cheat farmers, by underpaying them for the
agricultural plots they buy off them for development. And many of the
proceeds end up in the pockets of officials.
This cronyism and profligacy leads
critics to liken China to other fast-growing economies that
subsequently suffered a spectacular downfall. One recent comparison
is with the Asian tigers before their financial comeuppance in
1997-98. The tigers’ high investment rates powered growth for a
while, but they also fostered a financial fragility that was cruelly
exposed when exports slowed, investment faltered and foreign capital
fled. Critics point out that not only is China investing at a faster
rate than the tigers ever did, but its banks and other lenders have
also been on an astonishing lending binge, with credit jumping from
122% of GDP in 2008 to 171% in 2010, as the government engineered a
bout of “stimulus lending”.
Yet the very unfairness of China’s
system gives it an unusual resilience. Unlike the tigers, China
relies very little on foreign borrowing. Its growth is financed from
resources extracted from its own population, not from fickle
foreigners free to flee, as happened in South-East Asia (and is
happening again in parts of the euro zone). China’s saving rate, at
51% of GDP, is even higher than its investment rate. And the
repressive state-dominated financial system those savings are kept in
is actually well placed to deal with repayment delays and defaults.
Most obviously, China’s banks are
highly liquid. Their deposit-taking more than matches their
loan-making, and they keep a fifth of their deposits in reserve at
the central bank. That gives the banks some scope to roll over
troublesome loans that may be repaid at a later date, or written off
at a more convenient time. But there is also the backstop of the
central government, which has formal debts amounting to only about
25% of GDP. Local-government debts might double that proportion, but
China plainly has enough fiscal space to recapitalise any bank
threatened with insolvency.
That space also gives the government
room to stimulate growth again, should exports to Europe fall off a
cliff. China’s government spent a lot on infrastructure when the
credit crunch struck its customers in the West. But there is no
shortage of other things it could finance. It could redouble its
efforts to expand rural health care, for example. China still has
only one family doctor for every 22,000 people. If ordinary Chinese
knew that their health would be looked after in their old age, they
would save less and spend more. Household consumption accounts for
little more than a third of the economy.
Time is on my side
That underlines the longer-term
problem China faces. The same quirks and unfairnesses that would help
it withstand a shock in the next few years will, over time, work
against the country. China’s phenomenal saving rate will start
falling, as the population ages and workers become more expensive.
Capital is also already becoming less captive. Fed up with the
miserable returns on their deposits, savers are demanding
alternatives. Some are also finding ways to take their money out of
the country, contributing to unusual downward pressure on the
currency. China’s bank deposits grew at their slowest rate on
record in the year to April.
So China will have to learn how
to use its capital more wisely. That will require it to lift barriers
to private investment in lucrative markets still dominated by
wasteful SOEs. It will also require a less cosseted banking system
and a better social-security net, never mind the political and social
reforms that will be needed in the coming decade.
China’s reformers have a big job
ahead, but they also have some time. Pessimists compare it to Japan,
which like China was a creditor nation when its bubble burst in 1991.
But Japan did not blow up until its income per head was 120% of
America’s (at market exchange rates). If China’s income per head
were to reach that level, its economy would be five times as big as
America’s. That is a long way off.
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