Saturday, November 22, 2014

China’s Last Soft Landing?

NEW HAVEN – Once again, China has defied the naysayers. Economic growth picked up in the final quarter of 2012 to 7.9% – half a percentage point faster than the 7.4% increase in GDP in the third quarter. This was a meaningful increase after ten consecutive quarters of deceleration, and it marks the Chinese economy’s second soft landing in slightly less than four years.

Despite all the talk about the coming shift to internal demand, China remains heavily dependent on exports and external demand as major drivers of economic growth. It is not a coincidence that its last two slowdowns followed closely on the heels of growth slumps in its two largest foreign markets, Europe and the United States. Just as the soft landing in early 2009 occurred in the aftermath of a horrific American-made crisis, this latest one followed the European sovereign-debt crisis.

China has several sources of strength that have enabled it to withstand the tough external shocks of the last four years. Large buffers of saving (53% of GDP) and foreign-exchange reserves ($3.3 trillion) are at the top of the list. Moreover, unlike the West, which has used up most of its traditional countercyclical policy ammunition, China has maintained ample scope for fiscal and monetary-policy adjustments as circumstances dictate. Likewise, a powerful urbanization dynamic continues to deliver solid support for China’s high-investment economy, while enabling relatively poor rural workers to raise their incomes by finding higher-paying jobs in the cities.

Nonetheless, this may be the last time that China can escape an external shock with its growth intact. Premier Wen Jiabao addressed this possibility nearly six years ago, arguing in March 2007 that the seemingly spectacular Chinese economy had become “unstable, unbalanced, uncoordinated, and ultimately unsustainable.”

Since then, many of China’s inherent strengths have been sapped by all-too-frequent external shocks. The banking sector is still digging out from the bad loans extended in the aftermath of the global meltdown in 2008. Finding affordable housing has become an increasingly serious problem for those relocating to cities for the first time. And corruption scandals and the related risks of political turmoil were unsettling, to say the least, in the months prior to last year’s Communist Party leadership transition.

In other words, the vulnerability implied by Wen’s “Four Uns” has increased significantly. China’s economy has certainly become more unstable, with major slowdowns in real GDP growth in 2009 and again in 2012. Its imbalances have gotten worse as well, with the investment share of GDP approaching 50% and private consumption falling below 35% of GDP.

Similarly, China has become more uncoordinated, or fragmented, as its income disparities have continued to widen. And sustainability is being jeopardized by environmental degradation and pollution, which pose a growing threat to the country’s atmosphere and water supply.

In short, China’s growth model has been stretched as never before. And, like a piece of fabric, the longer it remains stretched, the longer it will take to return to its former resilient state – and the greater the possibility that it will not spring back the next time something goes wrong.

The message to China’s new leadership is unmistakable: There has never been a more urgent time to get on with the heavy lifting of rebalancing and reform. Now is the time to implement the measures that will accelerate the transition to a more consumer-led economy.

The agenda is long, but it is hardly a secret. It includes developing the services sector, funding the social safety net, liberalizing an antiquated residential-permit system (hukou), reforming state-owned enterprises, and ending financial repression on households by lifting artificially low interest rates on savings.

Failure to act quickly on this program would leave China far too vulnerable to the inevitable next shock in a crisis-battered world. In the absence of rebalancing, any one of several potential tipping points could seriously compromise the economy’s ability to pull off another soft landing: deteriorating credit quality in the banking system; weakening export competitiveness as wages rise; key environmental, governance, and social problems (namely, pollution, corruption, and inequality); and, of course, foreign-policy missteps, as suggested by escalating problems with Japan.

The Chinese economy has come through two major global crises in the past four years. On the surface, its resilience has been impressive – the first to recover, as Chinese leaders always want to remind the rest of the world. But, beneath the surface, an unbalanced, unstable, uncoordinated, and unsustainable economy risks losing its capacity for resilience. Without rebalancing and reforms, the days of the automatic Chinese soft landing may be over.

I have been an optimist about China for 15 years. I still am. But the clock is ticking. Wen Jiabao’s critique six years ago was a powerful diagnosis of the Old China’s flaws that pointed to the Next China’s hopes and dreams. It remains a blueprint that China’s new leadership cannot ignore. Time is no longer on China’s side. It must act now.

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    1. CommentedLeo Arouet

      China necesita reformas urgentes... Hasta el momento el crecimiento.económico ha impedido que el país se estanque; sin embargo, pronto la creciente corrupción traerá riesgos y colapsos políticos o sociales...

    2. CommentedLeo Arouet

      , China se enfrenta ahora a varias dificultades y problemas que son inherentes a todo crecimiento económico.

    3. CommentedCarol Maczinsky

      A Chinese hard landing is just a matter of time. Like a turkey earthquake in Istanbul. ACchinese collapse would also fix the US issues and lead to a breakup of China into smaller pieces. China is the new Austrohungarian empire.

    4. Commentedsrinivasan gopalan

      The author while setting out the agenda for China under the new leadership for a consumer-led economy has conspicuously side-stepped the crucial issue of freedom and liberty to its citizenry. In the absence of fundamental rights that guarantee implicit liberty, no society can become consumerist because the omission of this option or choice militates against offer of a plethora of choices the consumer culture embodies. If development and grandeur were to be secured at the suppression of basic rights, then no society can look forward to future with high hopes. China's place in the comity of nations needs to be natural and should not be born out of the fear of its economic success or military might when political rights to its millions of people remain a pipe-dream even to this day. It is high time the new leadership followed the daring path of Deng when he launched economic reform through market model for progress and prosperity by going in for democratic paradigm of governance so that the rest of the world would feel that a nation with guaranteed political rights to its millions would dare not draw swords with its neighbours or opponents. This is so because any misadventure or foolhardiness on the part of the Chinese authorities should bring immense miseries to its people who might not like to invite trouble when they enjoy the bliss of consumerist economy and the ironical and unique model of Marxist- market developmental model . G.Srinivasan, Journalist, new delhi, inde

    5. CommentedPaul Mathew Mathew

      If China were to be a consumer-driven economy anywhere remotely similar to the US... that would be the end of the world as we know it.

      In case the brain dead economists hadn't noticed, we live in a finite world with finite resources.

      We are already peaking out on CHEAP oil and that is putting a massive drag on the global economy.

      Can you imagine if China was to fire on all cylinders?

    6. Portrait of Pingfan Hong

      CommentedPingfan Hong

      Technically, in terms of sequential quarterly growth, the growth in the 4th quarter of 2012 was still lower than that of the 3rd quarter, too early to claim a victory of soft landing for China, although I agree with the author that China has an ample policy space to prevent a hard landing. The uncertainty remains, however, on whether the new government is still willing to rely on the old tricks to stimulate the economic growth if the economy continues to soften. The excess capacity in many industrial sectors remains worrisome.

    7. CommentedJan Smith

      The late 20th century global system--among the largest national economies, one liberal (USA), and three mercantilists (China, Japan, Germany)--was unsustainable. Two of the mercantilist nations became much richer, and the liberal nation poorer (way poorer than it will admit), until the system crashed. So a prominent liberal economist here advises the most successful mercantilist nation to become liberal. Will it take that advice, do you think? Not until the liberal nation retaliates with mercantilism of its own, I suspect. The Fed seems to know this but the Fed will need a lot of help--a steep VAT, deniable tariffs, etc.

    8. CommentedZsolt Hermann

      There are two simple reasons why China, and in fact all the other countries cannot avoid a total collapse unless they change the present system fundamentally:
      1. The world is fully interconnected and interdependent as the article itself also suggests. Thus there cannot be nations, regions, even individuals that can disconnect, pull away from the whole network. On the other hand even the smallest nation falling can pull the whole network with it.
      From now on only complete, and real, global and mutual cooperation from the planning to the acting level can be successful.
      2. The present overproduction, over consumption economic model, regardless of the governing structure serving it is unnatural and unsustainable. Only when we take into consideration the closed natural system we exist in, and natural desires and necessities without artificially inflated yearnings and cravings, then we would be able to build a sustainable system.
      This is true to China as well as any other country or individual.

        CommentedFrank O'Callaghan

        Zsolt Hermann is right, but the unbalanced consumption should be fixed by increasing the resources to the poor.