It’s time to give China some time
Is China headed for a boom or bust? Depending on whom you read, the world’s most populous nation is on the cusp of either a debt meltdown or a middle-class expansion.
I’ve written before about the possibility of China suffering its own “Minsky moment” - the point when a debt-driven speculative bubble comes to a sudden and nasty end. Yet there’s also evidence the country may be approaching something of a Henry Ford moment, when a manufacturing-based economy matures to point where workers can afford to buy the products they’re making. The reality, as unsatisfying as it may be to those looking for a dramatic headline, is probably somewhere in between.
The recent Conference Board report I referenced last week paints the direr picture. Authors David Hoffman and Andrew Polk predict Chinese gross domestic product growth will drop below 4 percent in the next decade. At the same time, more optimistic takes from the Asia Society Policy Institute and the Rhodium Group argue that financial upgrades are underway in China that could produce a more sustainable growth path. Those who fear a slowing economy might spark riots and instability also have to be heartened by new data that suggest incomes across China - which is what matters most to ordinary Chinese - are rising more than is commonly acknowledged.
For now, the best strategy for outsiders may be to look the other way, as best they can. Instead of obsessing over every tick up or down in China’s GDP growth rate, the investment world needs to give Chinese leaders time and space to implement the reforms they’ve pledged thus far.
When Deng Xiaoping opened China’s economy in the 1980s, he followed several of the dictates of Adam Smith. Current President Xi Jinping must reinvent the world’s second-biggest economy in entirely new ways. He must sideline the state-owned enterprises that make the political class wealthy, rein in a sprawling shadow-banking system with tentacles everywhere and gradually decelerate the economy as it transitions from an investment-heavy, debt-fueled growth model to one based more on consumption and services than exports. To use a familiar metaphor, Xi is trying to change China’s engines in midflight. Having an army of analysts screech about every zig and zag in the growth rate can’t be helping him concentrate.
I’m tempted to suggest a moratorium on Chinese GDP figures for a couple of years. That sounds hypocritical, I realize, given that we in the foreign media always demand greater transparency from China. Yet even if the Chinese economy slowed to the 3.9 percent rate former U.S. Treasury Secretary Lawrence Summers thinks lies ahead, would Beijing admit it anyway?
There are many other ways to take China’s pulse. Economists’ favorite reality-check indicators include HSBC’s purchasing manager’s index, rail-freight traffic, export and import data (which can be confirmed by cross-checking the numbers with trading partners), electricity-use trends and the trajectory of prices of commodities China dominates like iron ore and coal. Even if this is a non-starter, let’s at least encourage Beijing to forgo a growth target next year.
Xi’s challenge was clear last week when the global media convulsed over news China had grown the slowest in five years in the third quarter. Editors and bankers tripped over themselves to urge Beijing to do more to spur growth. This is what’s truly hypocritical: Even though everyone acknowledges that China must stop artificially pumping up its economy, markets panic at the slightest hint GDP is losing altitude - as if China were some giant company that must constantly impress us.
The last thing China should do is embark on a fresh stimulus kick to placate the nail biters: That would result merely in more debt and unproductive investment and even bigger asset bubbles. The world needs a stable China more than it needs a fast-growing one. And on that front, the economy is doing surprisingly well.
Buried in recent data, Bloomberg News reports, are signs that average Chinese are benefiting more despite slower growth: The disposable incomes of urban residents jumped 9.3 percent in the first three quarters from the same period a year ago; rural residents’ cash income leapt 11.8 percent. The 176 million migrant workers at factories and construction sites also are enjoying wage increases.
None of this means China will avoid a date with financial destiny - just about every developing nation crashes. But we’re years away from knowing whether China ends this decade in the boom or bust category. Xi’s job is difficult enough without our impatience pushing him into ill-considered decisions. Give the man a chance.
*The author is a Bloomberg View columnist based in Tokyo.
by William Pesek