PICTURE THE moment of confusion in a taxi in Guiyang, a city in south-western China. Your columnist had asked the driver to go to the new district. “The new new district or the old new district?” he asked. It was, it emerged, the old new district—a place that seven years ago, on an earlier visit to Guiyang, had looked like the sort of ghost town then dominating horror stories about China’s economy, full of giant empty buildings. This time, however, the problem was the exact opposite. What was meant to be a quick jaunt turned into a traffic-clogged headache, the taxi crawling along in a sea of red tail lights. The old new district had filled in, and then some.
One reason why it is good for journalists to stay in a country for a long stint is that it helps breed humility. Assumptions that once appeared iron-clad gather rust as the years roll by. That is true for most places. But it is especially so when covering something as complex as China’s economy, which your columnist had the privilege to do over the past decade.
This, to be clear, is not a mea culpa for being overly gloomy. There were also times of excess optimism about China’s capacity for change. Take rebalancing. As far back as 2007 Wen Jiabao, then China’s prime minister, decried its economy as “unstable, unbalanced”—evidence, it seemed, that leaders grasped the problem and were ready to act. Yet the economy only became more unstable, culminating in a nearly epic meltdown in 2015. And it is as unbalanced as ever, with investment running far ahead of consumption. Nevertheless, it is hard to escape the conclusion that in the economic realm, China got more right than wrong over the past decade. How else to score its performance when, despite many predictions of doom, it doubled in size during that time?
A common riposte is that this success is illusory—that the government has simply delayed the comedown from its debt-fuelled high. The deferral of pain is certainly part of the mix. Perhaps the safest bet in economics is that when growth slows sharply, China will unveil yet more infrastructure projects and call on banks to make still more loans. And if those projects or loans fail, officials have few qualms about orchestrating bail-outs and roll-overs.
What is less appreciated is that China’s ability to engage in such engineering is itself a measure of success. The government can lean on its banks because they are enormously profitable to begin with. The telltale signs of an overdrawn economy—high inflation, rampant unemployment and corporate malaise—exist in pockets in China, but they are the exception, not the rule.
This point was driven home when your columnist moved from Beijing to Shanghai in 2014. Each city has its charms, but Shanghai unquestionably offers a more flattering picture of the economy. Beijing, a showcase for political power, is blotted by the hulking headquarters of state-owned enterprises. Day trips take reporters to China’s greatest economic calamities, from overbuilt Tianjin to coal-mine carnage in Inner Mongolia. In Shanghai, which functions remarkably well for a city of 25m, reporters instead hop over to see high-tech innovators in Hangzhou, nimble exporters in Wuxi and ambitious entrepreneurs in Wenzhou. They show that even as the tenth year of Xi Jinping’s rule approaches, two of the fundamental underpinnings of China’s economic dynamism remain intact: red-blooded competition in the private sector and the restless quest of millions upon millions of ordinary people to improve their lot in life.
These days, saying nice things about China’s economy comes with baggage, not least because of the Communist Party’s insistence that its growth record is proof of its superior political system. It is true that the government has had a crucial hand in the country’s development, starting with the fact that it has been “Infrastructure Week” just about every week in China since 1990.
The correct response to the party’s boasting is not to deny China its success, but to insist on proper attribution. Japan, South Korea and Taiwan were its forerunners in using repressed financial systems to enable investment and in relying on exports to become more competitive. China has repeated all this, albeit at a far greater, and arguably more impressive, scale. At the same time, its sustained rapid growth of the past four decades has less to do with the wisdom of the Politburo than with the work of a brilliant Saint Lucian economist, Sir Arthur Lewis, who in the 1950s explained that shifting labour from low-value farming to higher-value industry can, if managed right, engender just such a catch-up process.
And now for something completely different
The coming decade is sure to prove more challenging. With 65% of Chinese people already in cities and the population close to peaking, Mr Lewis would point out that there is little scope for further gains from turning farmers into factory workers. Parallels between China and the Asian dynamos of yesteryear are breaking down. China is older and more indebted than they were at the same stage. Whereas most countries seek to strengthen the rule of law as they mature, Mr Xi is cultivating stronger party control.
Add to that a treacherous external environment. Faced with the threat of economic decoupling from the West, it is only rational for China to pursue greater self-reliance. Thanks to its size and sophistication, it may well triumph in key sectors, from semiconductors to robotics. But the sorry history of import substitution globally should make clear that this is a sub-optimal strategy involving much waste and eventually leading to lower growth.
All this is almost enough to turn you into a China bear: to predict not an almighty crash but rather an ineluctable slide towards stagnation. In conversations with analysts and investors, versions of this narrative crop up again and again. That it has become something like the consensus view is the single biggest reason why your columnist, after a long run in China, suspects that its economy will fare considerably better. ■
This article appeared in the Finance & economics section of the print edition under the headline “A decade of Chinese lessons”
Source: Finance - economist.com
