A far cry from eco­nomic cri­sis de­spite set­backs

The Pak Banker - - OPINION - Stephen s. Roach

THE prospect of an eco­nomic melt­down in China has been send­ing tremors through global fi­nan­cial mar­kets. Yet such fears are overblown. While tur­moil in Chi­nese equity and cur­rency mar­kets should not be taken lightly, the coun­try con­tin­ues to make en­cour­ag­ing head­way on struc­tural ad­just­ments in its real econ­omy. This mis­match be­tween progress in eco­nomic re­bal­anc­ing and set­backs in fi­nan­cial re­forms must ul­ti­mately be re­solved as China now en­ters a crit­i­cal phase in its tran­si­tion to a new growth model. But it does not spell im­mi­nent cri­sis.

Con­sis­tent with China's long ex­pe­ri­ence in cen­tral plan­ning, it con­tin­ues to ex­cel at in­dus­trial re-en­gi­neer­ing. Trends in 2015 were a case in point: The 8.3 per­cent ex­pan­sion in the ser­vices sec­tor out­stripped that of the once-dom­i­nant man­u­fac­tur­ing and con­struc­tion sec­tors, which to­gether grew by just 6 per­cent last year. The ter­tiary sec­tor rose to 50.5 per­cent of the coun­try's GDP in 2015, well in ex­cess of the 47 per­cent share tar­geted in 2011, when the 12th Five-Year Plan (201115), was adopted, and a full 10 per­cent­age points more than the 40.5 per­cent share of the sec­ondary sec­tor's ac­tiv­i­ties (man­u­fac­tur­ing and con­struc­tion).

This sig­nif­i­cant shift in China's eco­nomic struc­ture is vi­tally im­por­tant to its con­sumerled re­bal­anc­ing strat­egy. Ser­vices de­vel­op­ment un­der­pins ur­ban em­ploy­ment op­por­tu­ni­ties, a key build­ing block of per­sonal in­come gen­er­a­tion. With the ser­vices sec­tor re­quir­ing about 30 per­cent more jobs per unit of out­put than man­u­fac­tur­ing and con­struc­tion, com­bined, the ter­tiary sec­tor's rel­a­tive strength has played an im­por­tant role in lim­it­ing un­em­ploy­ment and pre­vent­ing so­cial in­sta­bil­ity?long China's great­est fear. On the con­trary, even in the face of de­cel­er­at­ing GDP growth, ur­ban job cre­ation hit 11 mil­lion in 2015, against the govern­ment's tar­get of 10 mil­lion and slightly more than the 10.7 mil­lion in 2014.

The bad news is that China's im­pres­sive head­way on re­struc­tur­ing its real econ­omy has been ac­com­pa­nied by sig­nif­i­cant set­backs for its fi­nan­cial agenda?namely, the burst­ing of an equity bub­ble, a poorly han­dled shift in cur­rency pol­icy and a flight of fi­nan­cial cap­i­tal. Th­ese are hardly in­con­se­quen­tial de­vel­op­ments?es­pe­cially for a coun­try that must even­tu­ally align its fi­nan­cial in­fra­struc­ture with a mar­ket-based con­sumer so­ci­ety. China will never suc­ceed if it does not sync its fi­nan­cial re­forms with its re­bal­anc­ing strat­egy for the real econ­omy. Cap­i­tal-mar­ket re­forms?es­pe­cially the de­vel­op­ment of more ro­bust equity and bond mar­kets to aug­ment a long dom­i­nant bank-cen­tric sys­tem of credit in­ter­me­di­a­tion?are crit­i­cal to this ob­jec­tive. Yet in the af­ter­math of the stock-mar­ket bub­ble, the equity-fund­ing al­ter­na­tive is all but dead for the fore­see­able fu­ture. For that rea­son alone, China's re­cent fi­nan­cial sec­tor set­backs are es­pe­cially dis­ap­point­ing.

But set­backs and crises are not the same thing. The good news is that China's mas­sive reser­voir of for­eign ex­change re­serves pro­vides it with an im­por­tant buf­fer against a clas­sic cur­rency and liq­uid­ity cri­sis. To be sure, China's for­eign ex­change re­serves have fallen enor­mously?by $700 bil­lion?in the last 19 months. Given China's re­cent buildup of dol­lar-de­nom­i­nated li­a­bil­i­ties, which the Bank for In­ter­na­tional Set­tle­ments cur­rently places around $1 tril­lion (for short- and long-term debt, com­bined), ex­ter­nal vul­ner­a­bil­ity can hardly be ig­nored. But, at $3.3 tril­lion in De­cem­ber 2015, China's for­eign ex­change re­serves are still enough to cover more than four times its short-term ex­ter­nal debt?well in ex­cess of the widely ac­cepted rule of thumb that a coun­try should still be able to fund all of its short-term for­eign li­a­bil­i­ties in the event that it is un­able to bor­row in in­ter­na­tional mar­kets.

Of course, this cush­ion would ef­fec­tively van­ish in six years if for­eign ex­change re­serves con­tinue to fall at the $500 bil­lion an­nual rate recorded in 2015. This was pre­cisely the great­est fear dur­ing the Asian fi­nan­cial cri­sis of the late 1990s, when China was widely ex­pected to fol­low other so-called East Asian mir­a­cle economies that had run out of re­serves in the midst of a con­ta­gious at­tack on their cur­ren­cies. But if it didn't hap­pen then, it cer­tainly won't hap­pen now: China's for­eign ex­change re­serves to­day are 23 times higher than the $140 bil­lion held in 1997-98. More­over, China con­tin­ues to run a large cur­rent ac­count sur­plus, in con­trast to the out­size ex­ter­nal deficits that proved so prob­lem­atic for other Asian economies in the late 1990s.

Still, fear per­sists that if the cap­i­tal flight in­ten­si­fies, China would ul­ti­mately be pow­er­less to stop it. Noth­ing could be fur­ther from the truth. China's in­sti­tu­tional mem­ory runs deep when it comes to crises and their con­se­quences. That is es­pe­cially the case con­cern­ing the ex­pe­ri­ence of the late 1990s, when Chi­nese lead­ers saw first­hand how a run on re­serves and a re­lated cur­rency col­lapse can wreak havoc on seem­ingly in­vin­ci­ble economies. In fact, it was that re­al­iza­tion, cou­pled with a stead­fast fix­a­tion on sta­bil­ity, which prompted China to fo­cus ur­gently on amass­ing the largest reser­voir of for­eign ex­change re­serves in mod­ern his­tory.

Newspapers in English

Newspapers from Pakistan

© PressReader. All rights reserved.