Lingering optimism about the Chinese economy after a decade on the ground

PICTURATE moment of confusion in a taxi in Guiyang, a city in southwest China. Your columnist had asked the driver to go to the new neighborhood. “The new new neighborhood or the old new neighborhood? He asked. It was, it turned out, the old new quarter – a place that seven years ago, on a previous visit to Guiyang, had looked like some kind of ghost town so dominating the horror stories about it. Chinese economy, full of giant empty buildings. This time, however, the problem was exactly the opposite. What was supposed to be a quick getaway turned into a congested traffic headache, the taxi crawling through a sea of ​​red taillights. The old new quarter had filled up, and then some.

One of the reasons it’s good for journalists to stay in a country for a long time is that it promotes humility. Assumptions that once seemed shielded rust over the years. This is true for most places. But that’s especially the case when it comes to covering something as complex as the Chinese economy, something your columnist has been privileged to do over the past decade.

This, to be clear, is not a mea culpa to be too dark. There have also been periods of over-optimism about China’s capacity for change. Take the rebalancing. As early as 2007, then Chinese Premier Wen Jiabao described his economy as “unstable, unbalanced” – proof, it seemed, that leaders understood the problem and were ready to act. Yet the economy has only become more unstable, culminating in an almost epic collapse in 2015. And it is more unbalanced than ever, with investment far exceeding consumption. Still, it’s hard to escape the conclusion that in the economic realm, China has been more right than wrong over the past decade. Otherwise, how to assess its performance when, despite many predictions of misfortune, it has doubled in size during this period?

A common retort is that this success is illusory – that the government has simply delayed descent from its debt-fueled peak. Postponing pain is certainly part of the mix. Perhaps the safest bet in economics is that when growth slows sharply, China will unveil even more infrastructure projects and call on banks to grant even more loans. And if those projects or loans fail, officials have little qualms about orchestrating bailouts and renewals.

What is less appreciated is that China’s ability to engage in such engineering is in itself a measure of success. The government can rely on its banks because they are extremely profitable to start with. The telltale signs of an economy in short supply – high inflation, rampant unemployment and business malaise – exist in pockets in China, but they are the exception, not the rule.

This point arose when your columnist moved from Beijing to Shanghai in 2014. Every city has its charms, but Shanghai undoubtedly offers a more flattering picture of the economy. Beijing, a showcase of political power, is tarnished by the imposing headquarters of public enterprises. Day trips take reporters through China’s biggest economic calamities, from oversized Tianjin to the carnage of coal mines in Inner Mongolia. In Shanghai, which performs remarkably well for a city of 25 million people, reporters instead flock to see high-tech innovators in Hangzhou, nimble exporters in Wuxi, and ambitious entrepreneurs in Wenzhou. They show that even as the tenth year of Xi Jinping’s reign approaches, two of the fundamental foundations of China’s economic dynamism remain intact: bloody competition in the private sector and the relentless pursuit of millions and millions of ordinary people. to improve their lives.

Saying good things about the Chinese economy these days comes with a baggage, not least because of the Communist Party’s insistence that its record of growth is proof of its superior political system. It is true that the government has played a crucial role in the development of the country, starting with the fact that it has been “Infrastructure Week” almost every week in China since 1990.

The correct answer to the party’s boasting is not to deny China its success, but to insist on proper attribution. Japan, South Korea and Taiwan were its forerunners in using suppressed financial systems to allow investment and relying on exports to become more competitive. China has repeated all of this, albeit on a much larger and arguably more impressive scale. At the same time, its rapid and sustained growth over the past four decades has less to do with the wisdom of the Politburo than with the work of a brilliant Saint Lucian economist, Sir Arthur Lewis, who in the 1950s, explained that moving labor from low-value agriculture to higher-value-added industry can, if properly managed, trigger such a catch-up process.

And now for something completely different

The coming decade will certainly prove to be more difficult. With 65% of Chinese already in cities and the population near the peak, Lewis points out that there is little scope to earn more by turning farmers into factory workers. The parallels between China and the Asian dynamos of yesteryear are collapsing. China is older and more in debt than it was at the same stage. As most countries seek to strengthen the rule of law as they mature, Xi cultivates stronger party control.

Add to that a treacherous outdoor environment. Faced with the threat of economic decoupling from the West, it is only rational for China to pursue greater autonomy. Thanks to its size and sophistication, it may well triumph in key industries, from semiconductors to robotics. But the sad history of import substitution on a global scale should make it clear that this is a sub-optimal strategy involving a lot of waste and ultimately leading to lower growth.

All of this is almost enough to make you a Chinese bear: predicting not an almighty crash but rather an inevitable slide into stagnation. In conversations with analysts and investors, versions of this narrative crop up over and over again. The fact that it has become something like the consensus is the main reason your columnist, after a long time in China, suspects that its economy will fare considerably better.

This article appeared in the Finance & Economics section of the print edition under the title “A Decade of Chinese Lessons”


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