China’s slow­ing econ­omy

When China spits, Asia swims, and the world gets wet feet

The Washington Times Weekly - - Editorials -

The growth of the Chi­nese econ­omy has slowed to the low­est in three decades, sug­gest­ing peril to world se­cu­rity by the sec­ond­largest econ­omy and prin­ci­pal trader. When China spits, as the proverb goes, Asia swims. The rest of the world gets wet feet, too.

Weaker growth of Chi­nese ex­ports has re­duced de­mand for im­ports of in­ter­me­di­ates and raw ma­te­ri­als, re­flect­ing losses on iron ore and cop­per trad­ing and like prod­ucts mostly in emerg­ing mar­kets of key global com­modi­ties.

But the big­ger worry of pol­i­cy­mak­ers is that the lat­est data shows a loss of mo­men­tum in the three en­gines of the world’s sec­ond-largest econ­omy — ex­ports, in­vest­ment and con­sump­tion.

Bei­jing’s “So­cial­ism with Chi­nese Char­ac­ter­is­tics” has chilled lib­er­al­iza­tion, height­ened mer­can­til­ism, raised bu­reau­cratic hur­dles to trade and in­vest­ment, weak­ened the rule of law, and strength­ened re­sis­tance from vested in­ter­ests that im­pede more dy­namic eco­nomic devel­op­ment.

The eco­nomic slow­down may be more se­vere than of­fi­cial sta­tis­tics in­di­cate, and poses se­ri­ous chal­lenges to a gov­ern­ment whose le­git­i­macy de­pends on its abil­ity to raise liv­ing stan­dards. Much will de­pend on how suc­cess­ful Pres­i­dent Xi Jin­ping ma­neu­vers to con­sol­i­date power for a third term. He makes it dif­fi­cult to an­a­lyze mea­sures that could be taken in the tightly con­trolled econ­omy. His strat­egy to achieve Chi­nese dom­i­nance of high-tech sec­tors has en­gen­dered push­back from global ri­vals.

All land in China is state-owned and pro­tec­tion of for­eign in­tel­lec­tual prop­erty is, to use Chi­nese del­i­cacy, “in­ad­e­quate.” The ju­di­cial sys­tem is dom­i­nated by gov­ern­ment agen­cies and the Chi­nese Com­mu­nist Party. Cor­rup­tion is en­demic, and the lead­er­ship has re­jected fun­da­men­tal re­forms, such as re­quir­ing pub­lic dis­clo­sure of as­sets by gov­ern­ment of­fi­cials, or­ga­niz­ing gen­uinely in­de­pen­dent over­sight bod­ies, and elim­i­nat­ing re­straints on the news­pa­pers and net­works.

Elim­i­nat­ing min­i­mum cap­i­tal re­quire­ment has made it eas­ier to open new busi­ness com­pa­nies, but the over­all reg­u­la­tory frame­work re­mains an ob­sta­cle to devel­op­ment. The re­quire­ments of get­ting started are com­plex and un­even. The la­bor mar­ket re­mains tightly con­trolled with guide­lines that of­ten dif­fer from agency to agency, and la­bor laws are ap­plied dif­fer­ently in dif­fer­ent lo­cal­i­ties. The gov­ern­ment sub­si­dizes numer­ous state-owned en­ter­prises and is still com­mit­ted to price con­trols for es­sen­tial goods and ser­vices.

Eco­nomic mod­els that sug­gest a 2 per­cent de­cline in Chi­nese growth would cut world growth by 0.5 per­cent, leav­ing it at 2.3 per­cent, the slow­est since 2009, not far from global re­ces­sion. The slow­down co­in­cides with the trade dis­pute with the United States, weak­en­ing do­mes­tic sen­ti­ment and global de­mand, and alarm­ing lo­cal gov­ern­ments us­ing large-scale off-the­bal­ance sheet bor­row­ing.

The Shang­hai Stock Ex­change Com­pos­ite In­dex was the world’s big­gest loser in 2018, post­ing a fall of 24.6 per­cent. Bei­jing au­thor­i­ties were try­ing to chip away at one of the high­est debt moun­tains in the world, a stun­ning 253 per­cent of GDP. But their strat­egy co­in­cided with the slow­ing of the big Euro­pean ex­port mar­ket and Pres­i­dent Trump’s tar­iff ini­tia­tive.

China’s eco­nomic growth has been steadily de­cel­er­at­ing over the past decade, from a 14.2 per­cent in 2007 to 6.5 per­cent in the third quar­ter of last year. The 6.4 per­cent growth in the fourth quar­ter was the low­est since China be­gan pub­lish­ing quar­terly GDP data.

There’s no re­li­able in­di­ca­tion of when a re­cov­ery will come. Bei­jing has suc­cess­fully played a dom­i­nant role in the econ­omy, and it will be ex­ceed­ingly dif­fi­cult to wean pol­i­cy­mak­ers from that.

But that model in­evitably leads to con­fronta­tion be­tween China and the West. Cur­rent trade talks dra­ma­tize their dif­fer­ences. The Amer­i­can small-gov­ern­ment, free-mar­ket ethos is very dif­fer­ent from the Chi­nese com­mand-and-con­trol model. China awards sig­nif­i­cant fi­nan­cial and non­fi­nan­cial sup­port to ma­jor com­pa­nies, those it owns or con­trols. In the United States, com­pa­nies in trou­ble must trade, merge or die.

The Chi­nese econ­omy has one pos­i­tive el­e­ment, the world­wide plunge in en­ergy prices which will off­set some of China’s dif­fi­cul­ties.

But an off-set is not a cure.

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