China doom-say­ings are based on sep­a­rat­ing facts

The Pak Banker - - OPINION - Danny Quah

FOR three decades now many of the world's most in­sight­ful ob­servers have pre­dicted im­mi­nent demise to China's sys­tem. But th­ese same three decades have also seen China con­found ex­pec­ta­tions. China's econ­omy turned in dou­ble-digit growth rates. China lifted 600mn peo­ple out of poverty. Thirty-five years ago China's per capita in­come was less than US$300 (just 2 per­cent that of US per capita GDP) and over 800mn Chi­nese lived in ex­treme poverty; to­day China is the world's se­cond-largest econ­omy and boasts more US dol­lar bil­lion­aires than any other coun­try.

But China doom-say­ing con­tin­ues, and the first week of 2016 sent alarm­ing sig­nals. One re­spected fi­nan­cial an­a­lyst in Lon­don voiced what many oth­ers thought, "So far China in 2016 ap­pears to be ev­ery­one's worst night­mare come true." First is the long-stand­ing view that China's sys­tem dif­fers from what has worked ev­ery­where else. China cou­ples to free-mar­ket cap­i­tal­ism a de­gree of political con­trol which many ob­servers con­sider in­com­pat­i­ble with sus­tained growth. The mix might have worked, so the rea­son­ing goes, for the last how­ever many decades but as a mat­ter of logic the sys­tem can­not con­tinue.

Ev­ery gy­ra­tion in China's econ­omy is then ev­i­dence on the con­tra­dic­tions of cap­i­tal­ist China. On as­set mar­kets in par­tic­u­lar th­ese writ­ers con­trast Chi­nese pol­i­cy­mak­ers' pro­cliv­ity for con­trol with how th­ese mar­kets need to be self-reg­u­lat­ing and free.

In­di­vid­ual free­dom, within rea­son, is one of the out­stand­ing achieve­ments of moder­nity. How­ever, not­with­stand­ing all their ob­vi­ous ben­e­fits to in­di­vid­u­als, whether en­tire na­tions per­form bet­ter when cit­i­zens have un­tram­meled free choice is a propo­si­tion with nei­ther math­e­mat­i­cal proof nor defini­tive em­pir­i­cal sup­port. No gen­er­al­iza­tion ex­ists of the Fun­da­men­tal The­o­rem of Wel­fare Eco­nom­ics that al­lows con­vinc­ing pro­nounce­ment on the op­ti­mal­ity of free political out­comes. Win­ston Churchill quipped democ­racy is the worst form of govern­ment, ex­cept for all oth­ers. But HL Mencken noted "Democ­racy is a pa­thetic be­lief in the col­lec­tive wis­dom of in­di­vid­ual ig­no­rance." As a mat­ter of an­a­lyt­i­cal logic, it is Mencken's that con­vinces.

It is an im­por­tant propo­si­tion that political free­doms mat­ter ul­ti­mately for eco­nomic suc­cess. But this is hy­poth­e­sis, not fact. China's own path­way to de­vel­op­ment dif­fers from that else­where. The se­cond ba­sis for pre­dict­ing im­mi­nent col­lapse, for many ob­servers, is China's cy­cle of eco­nomic and fi­nan­cial crises. Just the most re­cent of th­ese came the first week of 2016.

Af­ter China's fi­nan­cial mar­ket volatil­ity last sum­mer, reg­u­la­tors an­nounced cir­cuit­break­ers to be in­stalled in the new year. When the mar­ket shifts more than 5 per­cent, trad­ing halts for 15mins; more than 7 per­cent sus­pends trad­ing for the day. Awk­ward for China's reg­u­la­tors was that on the first day of op­er­a­tion their cir­cuit-break­ers had shut down the mar­ket by 1pm. Then, only three days later, on Thurs­day 07 Jan­uary the mar­ket was again forced to close, this time just 29 min­utes af­ter the morn­ing open­ing.

Two other de­vel­op­ments fu­elled un­ease. In De­cem­ber 2015 China's for­eign ex­change re­serves fell a record US$108bn, end­ing a year that saw their first ever an­nual de­cline. Re­serves were down 17 per­cent to US$3.33tn since their June 2014 peak: China was burn­ing through for­eign ex­change re­serves to de­fend its cur­rency. Even so, the RMB fell 6 per­cent against the US dol­lar over 2015, show­ing mar­kets' lack of con­fi­dence in China's eco­nomic fu­ture.

The other large con­cern on ob­servers' minds was China's slow­ing real econ­omy. A long way now from show­ing dou­ble-digit growth, China's GDP was widely ex­pected to turn in per­haps only 6.9 per­cent ex­pan­sion over 2015. (And in­deed it ended up do­ing ex­actly that.) While this growth rate would have been the envy of any other large econ­omy, it is also China's low­est for 25 years.

Many ob­servers quickly drew from th­ese sig­nals deeper con­cerns. Given China's as­sured eco­nomic pol­icy-mak­ing since 1990, why this se­quence of mis­steps? How wellde­signed are China's pol­icy mech­a­nisms for its now-mod­ern econ­omy, no longer agri­cul­tural and en­joy­ing smooth, easy ur­ban­iza­tion? Are China's pol­icy-mak­ers cred­i­ble and com­pe­tent, now the econ­omy needs to trans­form in a hurry, from low value-added man­u­fac­tur­ing to higher-tech, knowl­edge-in­ten­sive ac­tiv­ity, from in­vest­ment and ex­port-ori­ented to one driven by do­mes­tic con­sump­tion? For th­ese ob­servers all in­di­ca­tors point in one di­rec­tion. "China's down­turn will be sig­nif­i­cant. The only ques­tion is how hard the land­ing." Sure, no large ma­ture econ­omy grows faster than 3 per­cent a year for any sig­nif­i­cant du­ra­tion.

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