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China’s economy

China’s economy
Optimism is not premature  The Chinese economy perennially polarises opinion, inspiring in equal measure those who think China will soon rule the world and those who think its collapse is imminent. Undoubtedly, it is due to the country’s size and potential, which ensures for better or for worse that it is never an average actor. In 2009 the sentiment was decidedly positive. By deploying a massive stimulus package the previous year, China seemingly avoided a global recession and maintained its growth even as markets around the world faltered. This led some to opine that the so-called ‘China Model’ was superior, or that it signalled a clear step forward in China’s inevitable rise to superpower status. Four years on and the dial of sentiment is in full swing the other way as this September’s statistics show that China has experienced seven straight quarters of contracting growth. Now the China doomsayers are given airtime to point out the fatal and fundamental flaws in that same ‘China Model’ and predict the end of the China miracle. But reality is rarely so simple. The much praised stimulus package, for example, had some unpleasant side-effects which came to light in subsequent years. These include unsustainable levels of bad debt in local government from unrestrained lending and from irrational investment in construction projects. Rather than a sign of some fundamental superiority in the Chinese economy, it showed only that China had the fiscal solvency (admittedly rare in the Western world) to implement a short-term fix. Could the current pessimism be equally short-sighted? Chinese leaders seem to think so. At September’s World Economic Forum in Tianjin, Premier Wen Jiabao claimed that it was part of the country’s next five-year plan to grow at 7.5 percent, the slowest rate in some 22 years, and that this is to allow for economic restructuring. Policies seem to bear out these claims. Compare the government’s reaction to this year’s contractions to that of 2008. Back then a minister of the National Development Reform Commission told the government mouthpiece China Daily that the government was “racing against time to roll out stimulus programmes for key industrial sectors.” In 2012, when manufacturing is again contracting, the same sense of urgency is conspicuously lacking. While there has been some monetary loosening, there has been no massive stimulus and tellingly, the government has stood firm on restrictions on house sales. The Chinese property sector has been described by some as ‘the most important sector on earth’ due to its importance to GDP, including knock-on effects for a wide range of industrial sectors. Clearly, priorities for the leadership have changed in the past four years. The government is now reluctant to shore up manufacturing and GDP growth at any cost, instead they are looking to broader goals. In his WEF speech, Wen painted the leadership’s approach as a more subtle calculation of trade-offs, tolerating decline in some areas for growth in others. “Heavy and chemical industries have struggled, but light industries have done well. High technology and service industries have done well, and while coastal areas have struggled, the central and western areas have done well,” Wen said. Studies show that this is creating new and interesting opportunities. A report released this August by the Economist Intelligence Unit studied the effectiveness of China’s investment in rural and inland provinces. The report observed that, unusually for developing countries, China’s poorest areas have not been hit hardest by the slowdown. The wealthy eastern seaboard is flagging while GDP growth, wages and discretionary spending is rising in western and inland China. Western provinces such as Chongqing, Shaanxi and Guizhou have maintained average growth rates of above 13 percent in the second quarter, according to the report, which is comparable to the best days of China’s double-digit growth. Another noteworthy development is investment in welfare, which is an important step towards rebalancing the economy towards consumption. As part of healthcare reforms since 2009 China has increased medical insurance coverage from less than one third of the population in 2003 to more than 95 percent at the end of 2011. These reforms are opening up opportunities in the country’s pharmaceutical and healthcare industries for foreign businesses. Seen in this light the slowdown does not necessarily signal doom, nor does it mean the decline is uncontrolled and unplanned for. But a big question mark hangs over how well China, or specifically the Chinese Communist Party (CCP), can manage this massive transformation. If the past is any indicator of the future then perhaps China’s cup is two-thirds full. The CCP’s 60-year rule over China is defined by its u-turn in 1978 on its previously disastrous economic policies, a change which launched the Chinese economic miracle. Since then, the party has stayed true to the pragmatic approach initiated by the architect of the 1978 reforms, Deng Xiaoping. Deng called on the country’s leaders to feel their way in an uncertain environment and adapt to whatever it demands. In this sense, the CCP has shown itself to be extremely flexible in economic matters. Moreover, China’s turnaround since the 1970s show the leadership has, once before, successfully managed a wide-ranging and deep-reaching economic transformation. But the picture is not entirely rosy. Even if the CCP has the capacity to take on the challenge, it is uncertain if it has the political will to do so. Unlike in the 1970s when China was poor and there was nothing to lose, today the country has amassed fortunes which are held by entrenched interest groups. Ambitious goals for change in strategic, public sectors such as welfare or finance will need to unravel long chains of established systems, many of which involve the interests of the state and state-owned enterprises which are the greatest winners in the current system. Little in the CCP’s track record suggests that it is capable of much self-denial when it comes to taking its share in the wealth of the nation. By Nancy Zhang Associate, Business Intelligence, London 
Published: 17th October 2012