HONG KONG — Economists who believe that China can come to the
rescue of an increasingly troubled global economy are now in a decided minority,
with questions increasingly being asked whether China can save itself: Will
China's economy achieve a soft landing, a hard landing or even suffer a crash
landing?
If Larry Lang Hsien Ping, professor of finance at the Chinese
University of Hong Kong and a television personality, is to be believed, China's
economy has already crashed, but the damage has not yet been recognized.
According to the Epoch Times, which broke the news of Lang's
four-hour closed-door speech in Shenyang, China, he warned that the country's
growth is already 10 percent below official statistics — still showing 9 percent
a year — and inflation is raging way above the official claims.
Lang added that once China's "economic tsunami" starts, the
regime will lose credibility and China will become the poorest country in the
world. Lang has been unavailable for comment and his office said he was on leave
until next year and they had no idea of his whereabouts.
Most China economists are not as pessimistic as Lang. However, an
argument rages between China bulls and bears: Bulls believe that any property
bubble or bad loans disruption will be merely a short-term cold that will not
interrupt China's rise to become the world's mega-power; bears fear that the
economic chill will produce fever and pneumonia that could endanger the
political and economic life of the Communist Party if not the country
itself.
Optimists often claim that "China is not Japan". On Nouriel
Roubini's EconoMonitor this month, Alessandro Magnoli Bocchi admitted that
powerhouse China today "looks as invincible as Japan did in the '80s." He
concedes that Japan then and China today have similarities: state intervention
and long-term corporate thinking; a reliance on a "dual economy" of export-led
growth by efficient overseas-oriented companies alongside highly-subsidized
protected domestic companies; and high savings rates and low consumption, which
provide cheap capital for investment.
But he believes that China enjoys key differences in having
"strong fundamentals, excellent demographics, a rising middle class, massive
urbanization and high savings. If coupled with the benefits of free trade,
market reforms and economic integration, these fundamentals will bring about
higher salaries and an increased standard of living."
China, so the bulls assert, is also trying its best to avoid
export dependence and to promote local consumption. In addition, they say,
China's property bubbles are likely to be deflated quickly by the country's
immense growth potential.
Bocchi has confidence in the Communist Party, which he says is
unlikely to repeat the mistakes of Japan's Liberal Democratic Party, in bed with
protected and inefficient economic interests.
However, China's Communist Party, whatever its good intentions,
is locked in a dance with vested interests, particularly local leaders with
property developers, so that it is hard for the central leadership to root out
corruption — which is at least as bad as Japan's was and unchecked by democratic
processes. Lang, as reported by Epoch Times, complained while wearing his TV
performer's hat that says China's media "cannot report anything at all. As long
as something is related to the government, we cannot report on it." Added to
this was the "insufferable arrogance" of party officials.
China bulls often mistakenly assume that China is different and
immune to the normal norms of economics or to the inevitable power-corrupting
processes of politics. China is certainly bigger than any other country and its
modern development started from a lower level.
But as Peking University professor Michael Pettis — a
self-proclaimed "China skeptic" and not a "China Bear" — pointed out recently in
Australia: "There's nothing in economics that we've never seen before. China is
a version of an old development model that has been taken to an extreme that we
haven't seen before."
He suggests that the French developed the model in the 1820s and
1830s to try — unsuccessfully — to catch up with the U.K. Later, Spain, Greece,
Italy, the Soviet Union, Brazil and, most recently, Japan, all developed forms
of this model.
The model's hallmark is generating great, sometimes miraculous,
investment-led growth in the early stages and then "stopping growth in the
middle of a huge amount of debt," Pettis notes.
I remember being in Brazil in the 1970s and raising such critical
questions about the "Brazilian miracle" that the deputy editor of the Financial
Times refused to publish my articles, claiming I was too critical. I was right
and he was wrong: It was the start of Brazil's lost decades.
In China's case, the demographics are still with the country, but
will soon begin to turn as the "one-child" policy causes both a decline and an
aging of the population.
Key damaging factors in China's case are the low contribution of
consumption to GDP and limited levers within government control. For years, the
mythical market of China's 1.3 billion consumers has bewitched foreign
commentators and businesses, even as the share of consumption in gross domestic
product has fallen to an unprecedentedly low 35 percent by world standards.
McKinsey and Co. often pointed out the potential for Chinese
consumption, and declared that "The Chinese have taken to consumerism with ease,
embracing thousands of new products, services and brands", while noting that
they were also notoriously fickle. But in terms of consumption as a contributor
to GDP, 35 percent is a drag on the economy, especially when exports are coming
under pressure from slow to no growth in the main markets for China's goods.
McKinsey Global Institute recently calculated that without
further government action, consumption would reach only 39 percent of GDP in 15
years time. With policy changes, they might push it to 45 percent, well below
the levels of major economies. McKinsey Global Institute urged that aggressive
and comprehensive reforms are needed to bring consumption to 50 percent, which
would also put China in better economic shape.
Sadly, however, confronted with falling economic growth, which
some economists predict to drop to 5 or even 3 percent, the government's
temptation is to reach for the easiest levers to pump-prime more loans for
investment, detracting from consumption growth and adding to the bill to be paid
later.
Kevin Rafferty is editor in chief of PlainWords Media.
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