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Monday, July 23, 2012

China failing economic vision test


Special to The Japan Times

HONG KONG — China comes in at the top of the class when it comes to the Olympics of economic statistics. Beijing left all rivals trailing when it produced its figures for gross domestic product for the second quarter of 2012, a mere 13 days after the end of the quarter.

Only tiny sophisticated Singapore came close. Older, richer countries, such as the United States, Germany and Japan, have yet to calculate their economic performance.

So, is it cheers all around then, especially when China showed 7.6 percent growth, a slowdown and the worst performance for years but with prospects that the trough has been reached? Most mainstream economists are forecasting growth of 8 to 8.3 percent for 2012 for China.

But better make that toast in beer, not vintage champagne. Nagging doubts remain about whether China's number crunching is too perfect for its own good. WikiLeaks drew attention to them with publication of a message that, in 2007, Vice Premier Li Keqiang told U.S. officials that China's GDP figures are "man-made" and "for reference only". Li, remember, is all set to take over from Wen Jiabao as China's premier in the imminent political changing of the guard. Equally important, Beijing's tools for boosting the economy may set back medium-term essential reforms.

In spite of staunch claims by China's top statisticians that their numbers have been checked to see that they do add up, there are several points of inconsistency. Electricity consumption, which Vice Premier Li has cited as a more reliable figure than GDP, is flat; new housing starts continue to collapse; retail sales figures do not point in a clear direction; and the GDP deflator implied from the difference between nominal and real rates of GDP growth suggests that China is on track toward deflation.

All of these factors lead some skeptical economists to suggest that China's growth may be more like 7 to 7.3 percent.

In the much more important context of China's economy in the 21st century, whether growth was really 7.6 or only 7 percent amounts to something more than a quibble — though government efforts to achieve the mystical magical 8 percent growth by pumping in more investment risk makes the underlying problems worse.

In these months leading up to the changing of the political guard, it is probably too much to expect a burst of honesty from China's rulers, still less that they will tackle the massive issues that prevent the country from advancing to the next stage of its economic development. These include the structure of the economy and the imbalances among investment, trade and consumption; China's quality of life; and potentially huge social and environmental issues that will have an impact on China as well as the world.

Closely interwrapped are burning political questions, including political and economic freedoms within China, the roles of the state and private enterprise, and what role China will play in the world — as a once and future imperial power or as a global partner. The question of China's vision of itself and role as a global player is vitally important, not least because it will determine how many billions and what amount of government spending and attention goes to "defense."

Sprach Analyst, a Hong Kong based entrepreneur and blogger with a good eye for economic reality, as well as a keen sense of BS, recently praised China's very real achievements: "It used to be that Hongkongers would go to China to purchase really cheap stuff.

"Now, it is the Mainland Chinese who come to Hong Kong to buy really expensive stuff. ... Today, it is almost as if this city (Hong Kong) would have died if the Chinese economy did not grow as it did.

"No one would ever dispute the achievement of the Chinese economy. What we see in China now, on the surface at least, is progress. For 30 years or more, the Chinese economy has defied 'gravity', has never been in recession, and has lifted enormous numbers of people out of poverty. Predictably, perception of the Chinese economy has changed very dramatically from a market you wanted to stay away from to a market that no one wants to miss.

"Before the story of 'China as the forthcoming greatest economic power', many held the impression that Chinese companies either were not well run, or were run by crooks who cooked the books and produced inferior products to rip people off. Meanwhile, corruption was rampant ...

"These are the problems of China's past. But if they sound familiar to you, that's because they are what increasing numbers of people are talking about now. China is still full of businessmen who make crap products that are dangerous for human consumption. Corruption is as serious as it was, if not more so. You still have to bribe officials to achieve your goals, and government officials cannot have a successful career without being corrupt ... The only difference between recent years and 10 years ago is that people ignore it now, because the extraordinary bull market and the seemingly unstoppable economic growth has created a China cult."

The China cult is still strong. Andy Rothman, a former U.S. diplomat, who is a China strategist for CLSA, the self-proclaimed "independent voice" of Asia, in May produced a glowing report, "Misunderstanding China", which tried to "debunk 16 commonly held misconceptions about China."

According to Rothman, almost everything in China's economic garden is coming up sweet-smelling blooming roses. For example, China is not export-driven; is the "world's best consumption story with an entrepreneur-driven economy"; a banking crisis is unlikely in the near term; growth will be 8.5 percent; local government debt is not a time bomb; and land sales are not key to local government revenue. China is the "world's best privatization story'; there is no property bubble; there are no 'shadow' banks; the yuan is not grossly undervalued; manufacturing is still competitive; and the only real worry is the rule of law.

Rothman's optimism has itself been roundly debunked by other economists who are waiting to see signs of rising Chinese consumption — which is only 35 percent of GDP, against 50 to 55 percent in developing countries at similar stages of development.

China has relied on investment spending and the government still seems to be going along this route.

The World Bank, which accepts China's 8 to 10 percent growth story, earlier this year produced a report with the State Council's Development Research Center, in which Li Keqiang is closely involved, suggesting that China needs to undertake major restructuring reforms if it is to fulfill its economic potential as well as the hopes and dreams of its 1.3 billion people.

As professor Michael Pettis of Peking University has pointed out, rebalancing the economy will probably involve a fall in the GDP growth rate. He believes that ordinary Chinese will not care if growth falls to 5 percent or even to 3 percent, as long as wages go up, household income rises and they get a bigger share of the pie.

The difficult side of the rebalancing coin is that powerful vested interests, especially connected to state enterprises, will have to be cut down.

The problem for the country is that it is entering the phony political period where little gets done. It could drag on for months to allow the old leaders to depart and the new ones to settle into the job without the need to look over their shoulders.

Kevin Rafferty is editor in chief of PlainWords Media.


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