Bear­ish pre­dic­tions come out of vested in­ter­ests

The Pak Banker - - OPINION - Hoo Tiang Boon

SINCE Gor­dan Chang's 2001 the­ory about the ' com­ing col­lapse' of the Chi­nese econ­omy, from time to time, oth­ers have tried to fol­low in his foot­steps to make sim­i­lar pre­dic­tions. At the re­cent World Eco­nomic Fo­rum in Davos, we heard the lat­est it­er­a­tion and ver­sion of the melt­down story, with some ' doom prophets' con­tend­ing that China's econ­omy is headed to­wards some form of a cri­sis or a hard land­ing. The prob­lem with th­ese dire prophe­cies about China is that they have dire em­pir­i­cal record-they have been proven wrong, con­sis­tently.

The in­ter­est­ing ques­tion is: what in­forms th­ese cat­a­clysmic as­sess­ments? It could be that such pre­dic­tions gen­er­ate more at­ten­tion and hype, even if wrong. It has also been sug­gested that some of th­ese doom prophets have a vested in­ter­est in cre­at­ing a bear­ish per­cep­tion of the Chi­nese econ­omy so as to profit from short-sell­ing ac­tiv­i­ties. A closer look at re­cent ad­verse eco­nomic fore­casts, how­ever, sug­gests a more fun­da­men­tal prob­lem in anal­y­sis: flawed as­sump­tions. First, a large part of the cur­rent neg­a­tiv­ity to­wards China's econ­omy is re­lated to the per­ceived volatil­ity and vul­ner­a­bil­ity of its fi­nan­cial mar­kets. Yet the fi­nan­cial mar­kets have never been a re­li­able in­di­ca­tor of the true strength of the econ­omy. The No­bel Prize econ­o­mist Joseph Stiglitz notes, "there's al­ways a gap be­tween what's hap­pen­ing in the real econ­omy and fi­nan­cial mar­kets." This gap is even more im­por­tant in China's case since its fi­nan­cial mar­kets are less ma­ture as com­pared to those in more de­vel­oped economies. Hence, to sim­ply as­sume what is hap­pen­ing in the Chi­nese mar­kets re­flects the coun­try's eco­nomic state is facile.

Se­cond, slow­ing growth fig­ures in China have been cited as a wor­ry­ing trend which po­ten­tially por­tends the end of the Chi­nese suc­cess story. Again here, in­cor­rect as­sump­tions are be­ing made. China's lower GDP growth in re­cent years should be kept in per­spec­tive. Its 6.9 per­cent growth rate last year is still markedly ahead of other ma­jor economies such as the US (2.4 per­cent), Europe (0.8 per­cent) and Ja­pan (0.4 per­cent). More­over, it is of­ten over­looked that China is now a $10 tril­lion econ­omy, which means that a growth of one per­cent to­day is 'equiv­a­lent to 1.5 per­cent­age points five years ago and two per­cent­age points 10 years ago.' In ag­gre­gate terms there­fore, China's present eco­nomic growth is not sub­stan­tively weaker than be­fore. The so-called new eco­nomic nor­mal is ac­tu­ally not nor­mal for an econ­omy the size of China's; it is bet­ter than usual.

Third, some fore­casts do not take into ad­e­quate ac­count the fact that the Chi­nese econ­omy is un­der­go­ing struc­tural re­forms, from shift­ing to an ex­port-ori­ented and State-driven econ­omy to a more con­sump­tion-based and mar­ket-driven econ­omy. Given the un­prece­dented and test­ing na­ture of this ad­just­ment, inevitably, there will be some chal­lenges along the way. Th­ese hic­cups should not be made to sound more se­ri­ous than they ac­tu­ally are. A longer-term per­spec­tive is needed. Even if th­ese chal­lenges grow to be­come more prob­lem­atic, China is in a fairly strong po­si­tion to tackle them with a war-chest of more than $3 tril­lion in re­serves. A num­ber of is­sues still con­tinue to ham­per the Chi­nese econ­omy, such as a flag­ging prop­erty sec­tor, in­dus­trial over­ca­pac­ity and ris­ing lo­cal govern­ment debt while global growth re­mains weak. But there will not be an end to the Chi­nese suc­cess story. It is more ac­cu­rate to de­scribe the Chi­nese suc­cess story as go­ing through an upgrade-to­wards a more sus­tain­able, bal­anced and bet­ter ver­sion 2.0.

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