With the Chinese stock market
crashing, many have focused, with no small measure of fear, on that economy’s
slowdown. Beijing’s statistical office reported recently that the real economy
grew 6.9 percent in 2015, down from 7.3 the year before, below the government’s
7.0 percent target—and, as many have noted, also in fear, at the slowest pace
in quarter of a century. Other indicators are no more encouraging. Industrial
production in the twelve months ended last December grew 5.9 percent, down from
earlier reports, while retail sales registered a gain of 11.1 percent, also
down from the past. The International
Monetary Fund (IMF) expects only 6.3 percent overall growth in
the coming year and 6.0 percent in 2017.
While Americans, Europeans and Japanese
would delight at such statistics in their own economies, the news has
nonetheless created considerable pessimism about China’s prospects. Some
contend that growth in China is really closer to 4.0 percent, while Chinese
business people were rumored to have spoken of only a 2.2 percent growth rate.
These many pessimists also note that electricity usage in China has hardly
risen at all during the past year and that weak corporate earnings confirm a
softer economy than the government figures imply. And because recent government
efforts to stabilize financial markets have failed and past government stimulus
programs have encouraged a tremendous build up in private debt outstanding,
forecasts of a Chinese collapse have multiplied.
Surveying this almost universal pessimism, anyone with a memory cannot help but
wonder how quickly perceptions change. Not too long ago, while China’s economy
averaged real growth of 10-12 percent a year, consensus opinion saw it on the
verge of overtaking the U.S. economy as the world’s largest—that China would
soon eat America’s proverbial lunch. Now consensus thinking characterizes that
once seemingly unstoppable power as a risk to itself and to the global economy.
Before, reality failed to match up with
the older popular perceptions of China’s unstoppable strength. Now, though it
contains much that is troubling about China, reality hardly points to the
collapse that so many fear and, indeed, expect. On the contrary, much in
China’s economic slowdown looks entirely reasonable, even
China’s straightforward passage into a
more mature phase of development surely underlies much of it. The county’s
impressive initial gains in large part reflected the leverage many countries
enjoy when they first begin to redeploy their economic effort from agriculture
to industry. China was particularly ripe for gains of this sort. When it first
began to industrialize in the early 1980s, almost three-quarters of the nation’s
output came from agriculture, and some 70 percent of the workforce toiled on
the farm, overworked but not especially well employed or productive. These
workers became much more effective as they redeployed to export industries.
Those remaining on the farm also became more productive as industrialization
mechanized their efforts. China can perhaps extend some of this effect. It
still has about a quarter of its workforce on the farm. But it cannot recapture
the effects of the initial structural adjustments. The resulting growth
slowdown may have disappointed some, but it was inevitable and is hardly the
sign of ill economic health, as consensus thinking seems to claim.
Part of the slowdown also doubtless
reflects a judicious top-down design. Back during the first decade of this
century, when China’s boom growth was at its height, Beijing could see that it
was unsustainable. The country’s leadership noted at the time how China’s
exports during the prior twenty years had climbed from nothing to 12 percent of
the global total and that such a gain was not likely to repeat. Beijing decided
then that the economy had to broaden its base, focus relatively less on exports
and investments in exporting industries and more on domestic engines of growth,
consumption, the development of service industries, and associated investments.
It was well aware that the process would slow the pace of overall economic
growth.
China has a long way to go in this planned
broadening. It would be difficult in any economy but perhaps especially in one
where so much commercial activity remains state owned—about 15 percent. An
intense desire for centralized control makes it difficult for the authorities
to facilitate the process by opening financial markets. Still, the fact that
retail sales are expanding faster than the overall economy suggests that the
effort is gaining traction. The fact that electricity use has slowed may well
speak less to economic problems, as some have suggested, than to the tendency
for consumption and services to use less power than industry, especially the
industries behind China’s exports.
Not all the slowdown is so benign. China
also suffers from the after effects of a real estate bubble that inflated
during the early years of this decade. Easy credit conditions fostered by
government policy inspired overbuilding, primarily of residential structures,
and created a surge in private and provincial government debt that has taken
the outstanding amount up to the troubling level of 350 percent of China’s
gross domestic product (GDP). This overbuilding and the associated questionable
debt will have their ill effects. Companies will suffer bankruptcies. The need
to work off the overhang of unused structures will retard the pace of economic
growth.
It would be a mistake,
however, to exaggerate these problems. Westerners understandably become uneasy
about such particulars, drawing easy parallels to their own real estate
troubles of 2007-09. Media reports have played on such uneasiness. One of
particular influence aired some months ago on the television show “60 Minutes.” Showing massive empty
buildings in Chinese regional centers, it implied that if anything China’s
troubles are worse than America’s were. But that is far from the case. For one,
this country’s most intense problems arose in large part because a diffusion of
subprime debt in the financial system created great uncertainties. China has no
subprime debt. On the contrary, its debt, rather than suffused throughout
the system, is concentrated largely with provincial governments and a few
development companies. This is hardly good for the economy, but it avoids the
uncertainties that beset American markets. What is more, the central government
in Beijing has much less debt than Washington did during this country’s
troubles and so is better able to backstop the financial system should the need
arise.
These differences are most evident in the
fact that China’s real estate adjustment has proceeded now for at least
eighteen months without much bankruptcy or panic outside the recent equity
market retreat, which in any case is not especially related to it. Building
activity has fallen off and residential real estate prices have declined, so
much, in fact, that home sales of late have actually begun to improve. The
empty buildings that featured on “60 Minutes” are now all largely tenanted.
If real estate problems were going to prompt a general collapse, it would
have occurred at the beginning of the process not eighteen months into it. Asia
Times
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