Longish read but worth it


Here are four hard-earned and important lessons about China’s economy: The pessimists have always been wrong. Effectiveness — at allocating resources to produce sustained growth — trumps efficiency. The financial system is stronger than it looks. And a dynamic economy can survive even authoritarian politics.

These are the main conclusions drawn by Arthur Kroeber, the editor of China Economic Quarterly, which has been the most influential regular publication on China’s business world and economy in the English language for most of its 20 years.

Gavekal Dragonomics, the consultancy that has run the magazine, will replace it with one-off publications of in-depth research. Its final issue includes some telling assessments by top experts on China’s economy.

Kroeber concedes that many critiques who anticipated disaster have been well-reasoned. But “any honest assessment of the country’s economic prospects must acknowledge that China has a long record of defying the ­sceptics”.

China has excelled at mobilising a high domestic saving rate, with financial repression — lack of investment opportunities — playing a role. It has also introduced policies that consistently favour business investment, technological upgrading, and infrastructure.

Just as when the magazine was launched 20 years ago, the financial system is widely considered the nation’s Achilles’ heel, with too much money lent to projects that deliver too low a return.

But the system funds itself from domestic savings rather than borrowing from abroad. And while the government pursues sustainable growth-oriented policies, banks will generate enough of a return on their good loans to pay for the losses on the bad ones.

In recent years, though, the government has opened the doors to greater financial flexibility, which naturally involves greater risk, although regulators are working to contain it.

And because, Kroeber says, stability depends on a large pool of captive domestic savings, and strict limits on borrowing from abroad, “it is basically impossible for China ever to fully liberalise its capital account”. Thus it will be hard for China to achieve the same importance in the global financial system as it has in trade and infrastructure investment.

And on the authoritarian point, the notion that economic growth inevitably leads to the rise of a middle class that will demand democratic rights is debatable — especially when the ruling communist party has worked so hard to ensure that this class is the main beneficiary of its rule through monopoly power.

Kroeber believes that “authoritarian regimes fall because their legitimacy is too narrow, they have no mechanism for leadership successions, or they are too rigid and fail to keep pace with changes in society and public demands”.

The party has mostly succeeded on these counts, but has in recent times appeared to risk drifting into rigidity under Xi Jinping, who has also yet to develop a clear succession program.

The party will need to help China adapt to a rather different future, with the country’s demography set to shape up by 2040 similar to Japan’s today, with at best a couple of people of working age for every person over 60.

Kroeber is also troubled that “Xi and his colleagues seem determined to retain direct state ownership over large swathes of the economy, and to subject the workings of the market to perpetual discipline by the Communist Party” — at a significant productivity cost.

China has a strong economy and an elite ambitious to regain the great power status the country lost a couple of centuries ago. But the constraints on China’s ability to mould the rest of the world — even if it does overtake the US to become the biggest single ­economy — are enormous. Its share of global inbound direct investment has declined, while outbound direct investment surged in 2012-16 but has since been reined in by a government worried about capital flight.

We are not headed for a “Chinese century”, Kroeber says, for China lacks a globally trusted currency, military allies, a culture that anyone else is interested in, a political system that anyone else might want to adopt, companies that can reliably compete outside the protected cocoon of their home market, and a convincing claim on technological leadership.

Barry Naughton, who holds a chair in Chinese International Affairs at the University of California, says in the final CEQ that social and political change has lagged economic growth in China, while policy has become less reformist and more statist.

As Beijing pours ever more resources into low-productivity prestige projects, the economic ­future is unlikely to be as bright as the past, he says: “Government-dictated techno-industrial policy has become Beijing’s main tool to offset declining growth and drive China to the front ranks of the world economy”, with strategic ambition married to a disregard for cost.

James Kynge, emerging markets editor of the Financial Times, expects China will become over the next few years “all the following things simultaneously: the world’s biggest economy, but one that is nevertheless still ‘emerging’; the world’s biggest consumer market, but one in which people’s average income lags far behind ‘developed’ standards; and the world’s biggest trader, but one which sternly protects against foreign investment in key domestic industries”.

It will also be a non-market economy crackling with entrepreneurial energy, a leader in technology and innovation in thrall to an authoritarian government, and the world’s biggest emitter of carbon, hailed as a trailblazer in the fight against climate change.

Kynge quotes a European diplomat as saying China “keeps its own market to a large extent closed to acquisitions by our big companies while making the most of our open markets to buy up our technological leaders. This imbalance cannot continue indefinitely”.

BTW, China is busy constructing refugee camps along the NK border. Sensible. We think the only Fat Boy in NK is such a nut that he may well believe he can start and win a war.

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