Commentary: Why reports of China’s economic decline are greatly exaggerated

Commentary: Why reports of China’s economic decline are greatly exaggerated

Its annual growth of 6 per cent over the last decade will double China’s GDP in 12 years, says Stephen Greenville.

China has struggled to steer its giant economy through a slowdown
A Chinese flag flutters in the wind. (Photo: AFP/Greg Baker)

SYDNEY: “CHINA’S GDP GROWS AT SLOWEST RATE IN 29 YEARS” bellowed the Financial Times headline last week.

Never mind that this rate was still three times faster than OECD growth. The past decade has seen a relentlessly alarmist narrative about China’s slowing growth, yet China is still recording over 6 per cent, despite US President Donald Trump’s best efforts to make life hard for them.

Let’s recall some of the forecasting failures.

THE FAILURE OF NAYSAYERS

Given that we have just completed the decade, it’s time to call out Beijing-based economic academic Michael Pettis, asking him to pay up on his 2012 wager with The Economist, having confidently predicted China’s growth would “barely break 3 per cent” this past decade.

READ: Commentary: Why economists are terrible at predicting the state of the economy

You might say he was nearly half-right. The decade average was more than twice that, at 7.2 per cent. Sure, the official figures might over-state, but the message is clear enough: his pessimism was unfounded.

In 2014, Larry Summers and World Bank economist Lant Pritchett read the tea leaves from the global growth experience.

They observed the economic equivalent of “trees don’t grow to the sky”, that eventually fast-growing economies such as pre-1990 Japan, Taiwan, Hong Kong, Singapore, and South Korea use up the opportunities for rapid technological catch-up, and growth slows to the modest pace seen in advanced economies.

READ: Commentary: As China's growth slows, what prospects lie ahead for the world economy

On this flimsy basis, they predicted “reversion to the global mean” for China, with 3.9 per cent annual growth for the subsequent two decades.

FAR FROM TROUBLE

Longer-term predictions like this can’t be quickly refuted, but China is still far from the technological frontier, and its capital stock per head is a small fraction of that in economies such as Singapore or Japan.

On the basis of potential catch-up, current growth seems feasible for the next decade or two. Not inevitable, of course, but a prospect not to be dismissed on the basis of a melange of diverse global experience.

China's vast worker pool has powered the explosive growth of its export-driven economy - Nov 2014
China is still far from the technological frontier, and its capital stock per head is a small fraction of that in economies such as Singapore or Japan.

Given that China’s financial sector expanded spectacularly after 2009, initiated by its stimulatory response to the global financial crisis, predictions of financial collapse have been ten-a-penny.

More definite than most, in 2015, prolific economist and author Tyler Cowen predicted imminent financial collapse, putting the economy in sustained recession. I tried to entice him into betting on this outcome, but he didn’t want to play. I never doubted his street-smarts.

READ: Commentary: China and fast-growing economies should spur a global economic race to the top but aren't

More recently, economist Stephen Joske made a similar prediction of financial doom, although less imminent. “China’s road to a crisis became irreversible in 2015 … They will not have two years to sort out their policies … it is likely to occur “early next decade”. Again, this prediction made in October 2018 still has time to run.

MIDDLE-INCOME TRAP

But more recent commentary sees the possibility that the financial sector can be made safer over time.

No one disputes that the transition from poverty to riches is littered with traps and dead ends. The huge literature on the “middle-income trap” attests to this.

It’s also true that just about every economy that deregulated its financial sector had some form of crisis not long afterwards. But there are enough examples of countries which have successfully made the transition to refute the idea that failure is inevitable.

You have to look at the specifics of each country. China has some factors that give it a better chance of avoiding a financial crisis.

READ: Commentary: The end of the decade – the world is in more debt and it isn’t going away

It has some of the characteristics which helped Singapore’s success: A strong interventionist government with technocratic expertise, prepared to combine the allocative power of free-markets with regulation in order to steer and discipline market excesses and inefficiencies.

POLICY MATTERS

Politics is crucial and this could go drastically awry. But if the focus here is just on economics, then sensible policy-making, boring though this sounds, is the key.

China's announcement to further open up its financial sector comes after President Donald
More recent commentary sees the possibility that the financial sector in China can be made safer over time. AFP/Johannes EISELE

There is no technical reason why economic cycles get old and die, as Australia has demonstrated over the past three decades.

There is similarly no in-built reason why the path from “developing” to “advanced” must be thwarted by a middle-income trap. Mechanical reversion-to-mean is not relevant in this diverse world.

Indonesia’s three decades of 7 per cent growth didn’t end in 1997 because it was unsustainable. It ended because of a series of disastrous policy mistakes.

Can China scale-up the sort of flexibility, consistency of policy focus and adjustment capacity demonstrated by Singapore? Will policy mistakes in the balance between market-forces and intrusive regulation prove to be China’s undoing?

READ: Commentary: Time to bring back government intervention in the economy

China expert Nicholas Lardy, previously an optimist, has become more pessimistic because policy choices have favoured state-owned enterprises, thus depriving China of the dynamism it enjoyed in the three decades before 2009.

There is too much focus on China’s deceleration from double-digit growth before 2009 to the present 6 per cent.

Rather than focus on the slowing, the more important issue is whether the current rate is enough to cope with the huge challenges ahead.

Annual growth of 6 per cent doubles GDP in 12 years, and today’s 6 per cent growth represents much more in terms of actual output than the higher growth rates of earlier decades, when the GDP base was much smaller.

Sustained sensible policies would make this pace of expansion feasible, although certainly not inevitable. Gloom merchants take note.

Stephen Grenville is a Non-resident Fellow at the Lowy Institute. He works as a consultant on financial sector issues in East Asia and was previously a Deputy Governor and Board member of the Reserve Bank of Australia, having also worked for the Organisation for Economic Co-operation and Development (OECD) and the International Monetary Fund (IMF). This commentary first appeared on Lowy Institute's blog The Interpreter. Read it here.

Source: CNA/ml

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