China again unlikely to have a hard landing
China’s economy, which paused earlier this year, is picking up again: good news for China and the US and Europe, which need all the external stimulus they can get. China pessimists are not convinced, though. They still see a hard landing coming.
“Pause” and “hard landing” have special meanings in China, of course.
Growth slowed to an annualised rate of about 7 percent in the first half, which is lame by China’s standards, athletic by anybody else’s. Even the most pessimistic analysts talk of growth falling at some point to 3 percent or 4 percent a year, which would hardly count as a landing, let alone a hard one, in most of the world.
For now, the economy seems to be rebounding. Factory output in November was 10.1 percent higher than a year earlier, beating expectations.
China’s development model has produced spectacular growth. The fear is that anything less might start a vicious circle and the miracle could start to unravel.
Might that happen? The experts are divided, but there’s agreement on several points.
First, under the leadership that just stepped down, pro-market economic reform slowed. China’s third decade of fast growth was powered by the momentum from earlier efforts.
Second, the model has to change in any event. China should rely less on investment and more on consumption, a switch that requires bold financial reforms, and which threatens entrenched interests.
Third, the underlying drivers of China’s growth remain strong. If the government does what is needed, the miracle has further to run.
Pessimists emphasise the stalling, and some say reversal, of reform efforts. State-owned enterprises are no longer shrinking, they say; if anything, the state-run sector, with all its growth-retarding distortions and inefficiencies, is resurgent.
I would say this concern is exaggerated. The pace of restructuring from public to private ownership has slowed. That was bound to happen as state-owned enterprises lost ground. They accounted for more than 80 percent of industrial output in the late 1970s; and today between 25 percent and 30 percent.
State-owned companies’ share of assets rose after 2008 because of the surge of spending on infrastructure. Their share of bank lending, industrial output and exports continued to fall. Overall, the stimulus was a success. China pushed through the global recession virtually unscathed.
In the US, financial tightening in the states partly neutralised lower taxes and higher spending at the federal level. In China, higher spending at the sub-national level reinforced (and in fact exceeded) stimulus from the centre.
China’s public debt is reckoned to be less than 50 percent of gross domestic product. Unlike the US (to say nothing of Europe), China has scope for another big stimulus if one should be needed.
The real danger for China is not that the consolidated public sector is flirting with insolvency or that the dead hand of government planning is reaching out to strangle the country’s private sector. It is that the financing model for sub-national public investment has been overstretched.
So yes, expect setbacks. Yet, China’s underlying advantages: a vast population, a daunting work ethic, the untapped catch-up opportunities and an unsurpassed appetite for capitalism, are formidable. I would not bet on its failing. – Bloomberg
Clive Crook is a Bloomberg columnist.