China’s not-so-new not-so-nor­mal

Financial Mirror (Cyprus) - - FRONT PAGE -

I just spent a week in China, where I par­tic­i­pated in the Boao Asia Fo­rum, a con­fer­ence sim­i­lar to the an­nual gath­er­ing of the World Eco­nomic Fo­rum in Davos. The topic of my panel was what Pres­i­dent Xi Jin­ping has called the Chi­nese econ­omy’s “new nor­mal”: an era of rel­a­tively slower growth, fol­low­ing three decades of dou­bledigit eco­nomic ex­pan­sion.

But what strikes me most about China’s econ­omy is how re­mark­able it is. In­deed, its per­for­mance con­tin­ues to as­tound me. Though it un­doubt­edly faces plenty of chal­lenges, the key ques­tion is how likely they are to bring down the econ­omy.

Of the four BRIC coun­tries – Brazil, Rus­sia, In­dia, and China – Xi’s is the only one that has met my ex­pec­ta­tions for growth so far this decade.

From 2011 to 2014, the Chi­nese econ­omy grew at an av­er­age an­nual rate of 8% per year. If it con­tin­ues to grow by around 7% for the rest of the decade, as the au­thor­i­ties and many ob­servers ex­pect, it will achieve an av­er­age pace of ex­pan­sion of 7.5%, in line with my pro­jec­tions.

The phrase “new nor­mal” is a clever bit of mes­sag­ing by China’s lead­ers, who must ex­plain to the coun­try’s 1.4 bln cit­i­zens why the econ­omy will no longer be grow­ing by 10% a year.

But there is noth­ing nor­mal about an econ­omy that is al­ready twice as large as the next largest, Ja­pan, and will pos­si­bly out­strip the Euro­pean Union within the next five years.

I was in China pri­mar­ily in my role as Chair of the Bri­tish gov­ern­ment’s Re­view on An­timi­cro­bial Re­sis­tance; but I also sought op­por­tu­ni­ties to speak to peo­ple about the chal­lenges fac­ing the econ­omy. Many in­ter­na­tional ob­servers have been wor­ried about the coun­try’s over­sup­ply of hous­ing and the re­lated credit boom, mak­ing me won­der whether I have been overly san­guine about th­ese risks. But my con­ver­sa­tions per­suaded me that both prob­lems are likely to be man­age­able.

To be sure, the hous­ing mar­ket is in the dol­drums. But, as many pointed out to me, this is partly the re­sult of de­lib­er­ate gov­ern­ment mea­sures to de­flate it (also com­fort­ing is the fact that con­sumers are in gen­eral not over­lever­aged). Some builders will ex­pe­ri­ence prob­lems with credit, and so might some lo­cal au­thor­i­ties. But spend­ing by the cen­tral gov­ern­ment is such a small per­cent­age of the coun­try’s to­tal GDP that pol­i­cy­mak­ers have a lot of room for ma­neu­ver if in­ter­ven­tion be­comes nec­es­sary in th­ese ar­eas.

For­eign ob­servers fre­quently spec­u­late that the Chi­nese au­thor­i­ties may be de­lib­er­ately over­stat­ing the econ­omy’s strength. But it is equally pos­si­ble that the size of some sec­tors is be­ing un­der­stated. Af­ter spend­ing a few days in Bei­jing, it was abun­dantly clear that China is un­der­go­ing a boom in In­ter­net use, in­clud­ing as a con­sumer plat­form. On­line com­merce is off­set­ting some of the other weaker ar­eas of the econ­omy, and its full im­pact might ac­tu­ally be un­der­re­ported in of­fi­cial statis­tics.

I do worry that the gov­ern­ment is not mov­ing fast enough to grant the coun­try’s mil­lions of mi­grant work­ers of­fi­cial res­i­dency in the cities where they work and live. Mi­grants’ con­tin­ued lack of ac­cess to public ser­vices might pre­vent a large rise in con­sump­tion as a share of GDP. But, as I was told dur­ing my visit, the cen­tral gov­ern­ment’s re­luc­tance to move more quickly re­flects its wari­ness of im­pos­ing im­mense fis­cal pres­sures on lo­cal au­thor­i­ties.

An­other area of se­ri­ous con­cern is health care. At some stage, the cen­tral gov­ern­ment will have to ad­dress the sec­tor’s de­fi­cien­cies. I learned about one ex­am­ple when dis­cussing an­timi­cro­bial re­sis­tance, to which the gov­ern­ment has re­sponded by at­tempt­ing to limit the quan­tity of an­tibi­otics a pa­tient may take. The trou­ble is that many hos­pi­tals and doc­tors rely on drug sales for a large por­tion of their rev­enues, which cre­ates a pow­er­ful in­cen­tive to find ways to cir­cum­vent the rules.

Pol­lu­tion re­mains a grave chal­lenge as well. But it must also be noted that China’s car­bon diox­ide emis­sions de­clined no­tably in 2014, of­fer­ing what is per­haps the first tan­gi­ble ev­i­dence that the coun­try is mak­ing some progress on this front. En­ergy ef­fi­ciency and re­new­able en­ergy use are both on the rise as well.

Most im­por­tant, de­spite the chal­lenges it faces, the Chi­nese econ­omy’s sin­gu­lar im­por­tance is now widely recog­nised. The coun­try’s re­cent in­ter­na­tional achieve­ments – par­tic­u­lar its abil­ity to se­cure the back­ing of the United King­dom, France, Ger­many, and Italy for its Asian In­fra­struc­ture In­vest­ment Bank in the face of op­po­si­tion from the United States – im­ply a high de­gree of con­fi­dence that China will ad­dress its prob­lems suc­cess­fully.

China’s role within ex­ist­ing in­ter­na­tional fi­nan­cial in­sti­tu­tions could change this year as well.

In De­cem­ber, the In­ter­na­tional Mon­e­tary Fund will con­sider adding ren­minbi to the bas­ket of cur­ren­cies that com­prise the Fund’s unit of ac­count, known as Spe­cial Drawing Rights, along­side the US dollar, the euro, the Bri­tish pound, and the Ja­panese yen.

And the world is still wait­ing for the US to im­ple­ment a 2010 re­form of the IMF that would strengthen the po­si­tion of China and other large emerg­ing economies in the in­sti­tu­tion’s gov­er­nance struc­ture. Given the sig­nif­i­cance of the Chi­nese econ­omy, con­tin­u­ing to leave this un­ad­dressed is any­thing but nor­mal.

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