The Chinese Century – Promises, Pitfalls and Presumptions
Op-Ed Commentary: Chris Devonshire-Ellis
Nov. 21 – The Economist Newspaper’s annual China summit took place in Beijing last Friday, with some 300 senior executives from many of China’s MNCs in attendance, together with political and academic leaders. With this year’s theme being “Promises, Pitfalls and Presumptions,” the event promised to provoke some controversy, and in true Economist style, this was very much the case with healthy debate on all sides and some excellent speakers and panelists – not least including Gary Locke, the new U.S. Ambassador to China.
I break the event down into its component parts in order for our readers to follow what went on. The conclusions given are mine alone.
China’s economy – bulls and bears
With a panel including Li Daokui, advisor to the Monetary Policy Committee of the People’s Bank of China; Huang Yiping, chief economist at Barclays Capital; Arthur Kroeber, managing director of Dragonomics; Paul Schulte, global head of Asia Banks Research at CCB International; and Patrick Chovanec, associate professor at the Tsinghua University School of Economics, this was always going to be a healthy academic debate. What was unusual this year was the arrival of far more bearish comments and perceptions concerning China than any I can recall in the past 20 years.
Li’s opening remarks, which seemed to follow CCP lines, stated that the economic pressure on China is a reaction to international economies performing badly, and is not a true reflection of China’s actual economic position. He stated that what is occurring globally is a restructuring of the world order, and that private consumption is increasing, while noting that China’s global trade surplus has dropped by 50 percent over the past three years (although he didn’t mention that the trade surplus with the United States has actually increased) due to China’s economic rebalancing. He noted that China’s wage increases were rising at a rate faster than GDP growth and that this would lead to a wealthier population able to purchase more goods from overseas.
Concerning a changing China, Li suggested that the main issue was figuring out what sort of society should China become, citing several different market economy models: the United States, United Kingdom, Germany and Singapore among them. Stating that a practical approach to leadership would be required, Li commented that the next generation of China’s leaders would be pragmatic as they had all been farmers, worked in factories, and had gone through the Cultural Revolution – thus making them socially very knowledgeable. These comments struck this listener as an unusual qualification claim to understanding global economics. Li then was highly bullish about China and seems to regard the “Western” reporting of negative issues concerning China’s economy as a reaction to economies elsewhere doing badly.
Arthur Kroeber of Dragonomics gave an opinion that China would slow down and that this was a demographic inevitability. China’s population is aging, he said, and gave the opinion that China’s policymakers had not spent enough time or attention to this issue. Stating the case of Japan in the 1970s, he said the Japanese economy had behaved in the same manner at that time.
Workers entering employment aged between 16-24 years have declined by 30 percent and there are simply not enough workers in China. The country is entering a period where fewer workers would have to support more retirees and children than ever before. He also mentioned that China’s “stock of credit” had risen from 120 percent in 2008 to 168 percent in 2011, and that this was problematic as GDP growth needs to get growth out of capital, but that this was being increasingly tied up. He said that although the fiscal incentives given by China to assist with the Chinese economy had helped, there had been no follow-through policies, and that structural reform was needed to follow on from capital injections.
China to raise the retirement age?
Li countered by saying that, concerning the workforce, there was a difference between a wealthy 60-year-old Chinese and a poor one, and that the poor one would have to find work and was likely to remain in employment. He raised the possibility for China to consider raising the retirement age to cater for the reduction in workforce, and to keep workers in employment for longer, noting that at present, most male workers within China’s SOEs retire at 50 and some women from 45.
China to liberalize its capital accounts?
Huang Yiping then commented by asking why China had been such a success over the past 30 years. He said that it had been because the economy had been unbalanced at a time when the world wanted cheap goods – that there had been easy access to cheap labor, land and money. These had acted as incentives and China had grown as a result. He also stated that China’s rebalancing to a consumption-based model would have to be kick started by an increase in wages. He also stated that interest rate liberalization has to occur to sustain this, and that China needed to liberalize its capital accounts, and that this must become official policy.
Li countered again by suggesting that China’s population policy needed to change in order to deal with population issues, that it was changing and now more than ever market forces were pushing reform.
Patrick Chovanec then stepped in to say that there were significant challenges in China’s transition. How disruptive these would be was the core issue, and stressed that “winter is coming.” Saying the fundamentals that had taken China forward the past 30 years had now changed, that demand has fallen off, and that China’s hedge against this is an investment boom fueled by credit, he warned that this was unsustainable and the results are and will continue to be a concern over inflation and a continuing rise in bad debt. Noting that China was not yet a consumer economy, Chovanec was of the opinion that cheap credit had been provided by manipulated financing and that China needed to wean itself off this model. He also stated that some people in China benefited from this model and there was likely to be strong resistance to any change. Accordingly, investors need to be prepared in the wake of an inability to stave off a crisis of rising debt, and high inflation.
Wenzhou problems “not symptomatic”
Kroeber then brought up the subject of Wenzhou, stating that he did not believe the recent problems in the city (where local businessmen had borrowed money to fund their businesses and invested part of that into real estate only for those investments to retreat) were a national problem. It was mentioned that Wenzhou businesses had turned their manufacturing companies into asset-speculators and as quasi hedge funds, but this went bad.
Stating that China needed to rein in credit and reduce debt, he also noted that an explosion in credit had fueled consumption and this model was unsustainable. He said that there were no structural reforms in China that could probably manage China’s financial stimulus. Huang interjected by stating that only 15 percent of SMEs in China were obtaining bank loans, despite them contributing to some 50 percent of the economy. Credit, he said, was being provided in the wrong areas. The process to adjust this would be politically difficult he suggested.
China to help the Euro?
Li then turned his attention to Europe and stated that China needed to join global efforts to sort out the Eurozone, but it was reasonable that pre-conditions should apply and that Europe needed to provide productive, rather than non-productive, plans. He stated it would be useful if China adopts a “buy European” policy and encourages Chinese households to purchase European goods, and that this could be part of such assistance. He said China needed to get RMB out and the Euro in.
John Griffiths, chief economist for Boeing, then asked from the floor what would be a realistic timetable for China to open and liberalize its capital account, with answers ranging from 2015, to statements suggesting it would “be difficult.” Chovanec stated that China needed to remove institutional barriers to reform, and mentioned again that vested interests exist to maintain the status quo. Social development, he suggested, had not risen in line with China’s financial development. There were now many questions over the nature of China’s society and social reform to be set against the nature of China’s managed development, questioning whether China’s government really had any taste for reforming government.
China growth to slow to 7 percent – 8 percent
Asked what China’s growth would be over the next five years, the general consensus was that it would be from 7 percent to 8 percent and that inflation would be from 5 percent to 6 percent. Chavonec also stated that, in his opinion, it could be possible for China to enter negative growth at some point within the next five years.
A summit poll was taken of all delegates asking, “Would China growth slow?” Out of the some 300 attendees, the results came back with an opinion of 66 percent “Yes” and 34 percent “No,” meaning that, for this session, the China bears won.
This is Part I of a three part report.
Chris Devonshire-Ellis in the founding partner and principal of Dezan Shira & Associates. To read his report on last year’s Economist China Summit, please click here.
The Economist Newspaper has been published since 1843 and is one of the world’s leading newspapers detailing the global economy and its political influences. The Economist runs, through its conferences division, a global series of high profile events. To view the Economist conference schedule, please click here.
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i would like to attend future events such as Annual China Summit. Would you please add me to your mailing / invitaiton list?
The Economist Annual China Summit is organized by Economist Conferences, please visit them directly at http://www.economistconferences.co.uk for details.
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Happy New Year! – Chris
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