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How real is China's growth?

China Economy

How real is China's growth?


I'M NOW back from China, and I'm going to resist the temptation to draw grand, sweeping conclusions based on two weeks jaunting around the country. I will tell you some of my impressions, however. And I'll start with the primary question on my mind as I left to visit China: how real is its economic growth?


I came away from China a bit less worried about property issues than I'd been going in. Don't get me wrong, China is building an enormous amount of new housing, and quite a lot of that new housing is standing empty, even as prices rise. But this isn't necessarily the problem many people suspect, for a few reasons. For one thing, the flow of new demand for housing seems sure. Millions of Chinese remain underhoused while real incomes are soaring. In some cases, the Chinese government is coordinating the construction of several years' worth of demand for new homes all at once, justifiably confident that new units will ultimately be occupied. In other cases, Chinese workers are buying up new units as investment vehicles—but are using savings, rather than debt, to fund the purchases. It's not impossible, or even that unlikely, that prices in the main cities may fall, but it would be wrong to assume that China's property markets operate in the way American markets do and share the same vulnerabilities.

Tightening restrictions on household purchases, and tightening credit, designed to rein in booming private construction, may produce a squeeze in some segments of the real estate market, leading to pain for some on the development and transactional side of the market.
But a slowdown in private construction is unlikely to gut the broader economy, thanks to a massive government push for affordable housing construction that will keep workers and suppliers busy. And the government has the will and the ability to make sure any broader loan troubles are contained. I won't begin to argue that there aren't huge inefficiencies and costs to this system, but it doesn't look like the kind of structure that's likely to collapse, bringing the economy down with it. It's clear where the risk ultimately lies—with the government—and it's clear that the government can handle it.


What little I saw of China's manufacturing sector reinforced my sense that it's an impressive and productive part of the economy. China's manufacturing also spans the value-added chain. In the large coastal cities, deindustrialisation is already a reality; labour-intensive factories have already left for cheaper markets, leaving high-tech manufacturing and a growing service sector behind. In the poorer west, by contrast, the scope for movement up the value chain remains significant. Much of what rapid growth China has left will be powered, in no small, part, by the convergence of western provinces toward coastal development levels, and this process is well underway.



What's China's manufacturing isn't is labour-intensive, even at the fairly low-tech enterprises. As large and strong as China's manufacturing firms are, they're not able to absorb all that much of China's enormous labour force. China seems to compensate for this by absorbing huge numbers of workers in a growing service sector. Productivity levels in many service industries must be ming-bogglingly low. Hotels seemed to have as many employees as guests, teams of workers with hand tools maintained roadside greenery, and buildings of all sorts are staffed with large groups of greeters and security personnel. Cheap labour may make some of this sort of employment worthwhile, but officials also indicated that, in the past at least, the government used public service employment to help absorb workers displaced when hundreds of thousands of textile and electronic manufacturing jobs were lost to cheaper locales. This may be costly and inefficient, but one wonders if it isn't less costly and inefficient than America's habit of letting displaced workers linger in long-term unemployment, on disability roles, or out of the labour force entirely.


Chinese officials were quick to play down the country's dependence on foreign demand, pointing to progress in the country's trade surplus. There may be less to this than they indicate; Michael Pettis writes here, for instance, about financial chicanery in the country's copper trade that may have artificially boosted import totals early in 2011. China is also cultivating export markets in fast growing countries across central and southeast Asia. But candid Chinese professionals admitted that trouble in the US and European economies represented a big potential threat to the economy. That threat will slowly ebb as Chinese consumers become more active. Government officials repeatedly reported eye-popping real income growth figures. But more than one of the people I spoke with likened the Chinese economy to a large ship that can't turn on a dime. No amount of movement in exchange rates or wages or policies will move the Chinese economy to a more normal rate of domestic consumption overnight.

What seemed clear, however, was that the fundamentals in the Chinese economy are stronger than many Americans suspect. For this reason, a collapse looks unlikely, and the government has the will and the means to fight off a short-term crisis. The government cites stability as its source of legitimacy, and it draws a tight connection between stability and economic growth. Stability, and therefore growth, will be especially important given the looming handover of party and national leadership from Hu Jintao to (it seems certain) Xi Jinping. The present policy strategy is muddied somewhat by the rise in inflation, which is a big source of concern among the masses. China will trade off a little growth for control of its prices. Officials will try extremely hard to ensure that the landing is a soft one, however. (For more on the progress here, read this week's economics Lead note. Markets seem to be overreacting to signs of a Chinese slowdown.)

The longer-term picture is far murkier, however. Nothing that I saw on my trip convinced me that the country's economy is becoming more nimble. There are large structural problems in the economy that will begin to bite as China exhausts its potential for rapid catch-up growth. And what then? The private economy is growing in importance (many of the larger companies in the economy remain state-owned or controlled, including a substantial number that "look" private). Chinese citizens are no strangers to entrepreneurship. But entrepreneurial activity isn't always consistent with party goals. Successful start-ups may threaten established firms with state connections, leading officials to either rein in the start-up or take for themselves a direct financial interest in it. Will China be able to embrace the hurly burly of the entrepreneurial marketplace? If it can't, the middle-income trapmay loom.

There was one question to which I could never get a satisfactory answer on my trip. Chinese officials, I was repeatedly told, take a very long view. They're focused on the next few decades, not the next quarter. And they're very cautious, always anticipating things that might go wrong. Responding to this, I'd point out that China hadn't experienced a full year of economic contraction in three decades, and that this streak was unlikely to continue; eventually, every economy has a recession. What were China's far-sighted leaders planning to do when the economy slowed, and how would the slowdown affect the country's stability? The answer was always a bit of a non sequitur.


China has a model that works for China, I was told. Confidence in China understandably soared in the wake of the global crisis and recession. But I wonder if the government has learned too much from its ability to negotiate the crisis without suffering a recession. Eventually, China's economy will hit a true bad spot. The more China's leaders believe that it won't, the less prepared they may be to handle it when it does occur.


Of course, westerners may overstate the impact of a slowdown on political stability. Many of us assume that when the first downturn hits, support for the party will collapse. That needn't be true; China's government seems to have built up a remarkable reserve of goodwill in recent decades. From the perspective of the average Chinese worker, it must seem blindingly obvious that the current Chinese system is the ideal, a sure route to prosperity. Still, stories like thisand thisgives one pause. From my (admittedly limited) view of China, arguments that China's economy is little more than a Ponzi scheme, in which any slowdown will lead to implosion, are mistaken. I left with more questions than answers about the political system, however. I simply can't say how legitimate and stable the current government appears in the eyes of the Chinese citizenry. But I feel fairly confident that it won't be that long, perhaps 5 or 10 years, before we find out.


Resource:
Jun 1st 2011, 14:39 by R.A. | WASHINGTON

The Economist and The Economist online are trading names of:

The Economist Newspaper Limited Registered in England and Wales. No.236383 VAT no: GB 340 436 876 Registered office: 25 St James's Street, London, SW1A 1HG


Dr. Chao  rearranged from The Economist

Jun 2nd, 2011

凡事唯有投入,結果才能深入; 凡事唯有付出,結果才能傑出;
凡事唯有磨鍊,結果才能熟練; 凡事唯有不煩,結果才能不凡。
能與智者同行,你會不同凡響; 能與高人為伍,你能登上巔峰。
你雖不能改變環境,但卻可以轉換心境;你雖不能樣樣勝利,但卻可以事事盡力。
Dr. Chao Yuang Shiang (PH.D in management), Assistant professor,Dep.of Finance,Nanhua University,Taiwan.
website:amazon.com/author/drchao
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