There are two ways that China’s economic future is viewed today.
First, there’s the China which is going to move coherently towards a more consumption-heavy economic mix — the oft-mentioned “rebalancing” that is needed to address its unusually capital-intensive economy. An oped by GK Dragonomics’ Andrew Batson says this means the China naysayers, focusing on the woes of Sany or growing coal stockpiles, are misguided:
While construction equipment, coal and chemicals have been important to China’s economic growth up to now, the economy is hardly so narrow today. Consumer spending is growing steadily. Car sales have picked up. Wages are rising. Even exports to some markets, outside struggling Europe, are not doing so badly. Companies are adapting to the end of China’s investment boom and its transition to slower overall growth.
This structural change will be stressful for many companies. Both the World Bank and Chinese government scholars estimate that China’s potential economic growth rate will be closer to 7% over the next several years than the 10% of recent years.
Well, 7 per cent is not so bad. And the rebalancing, says Batson, is already proceeding:
Moreover, China will not grow in the same way over the next decade as it has over the past decade. Growth in fixed capital formation, the broadest measure of investment, averaged 16% a year over the past decade, after accounting for inflation. In 2011, real growth in fixed capital formation dropped to 10% and will likely slow further this year.
The other view is that this won’t be so simple.
This is not intended to pick on Batson; our own A-List recently featured a more bullish piece by Yao Yang arguing that China’s annual GDP growth may well remain at 8 per cent or higher and that consumption’s share of GDP is already growing.
But assuming that consumption hasn’t yet started taking a bigger share of output (and we haven’t seen much compelling evidence of this) we have two problems with the argument that this will happen smoothly and calmly, taking China’s economy to the inevitable next phase. Both problems are highlighted in two reports today. One, coincidentally, is in the same edition of the Journal (with our emphasis):
Premier Wen Jiabao said Tuesday the government’s primary task is to promote investment. Although policies to stabilize growth “include stimulating consumption and diversifying exports,” he said in a statement posted on the government website, “currently the main task is to promote reasonable investment growth.”
To do that, Beijing is turning to giant state-owned companies that hold monopolies in energy, construction, steel and banking.
See what he did there?
That possibly-already rising consumption ratio does not seem to have the full support of the central government. The focus is again on capital investment and supporting the state-owned companies — which by definition will hinder rebalancing and real economic progress. As Minxin Pei of Claremont McKenna college wrote in March, the political reality in China mitigates against attempts to rein in the state-owned enterprises which dominate upstream industries:
China’s giant SOEs may have some economic usefulness, but their existential value is political. The CCP uses the SOEs to provide good jobs and perks for its members. Of the CCP’s roughly 80 million members, more than five million hold executive positions in state-owned or affiliated firms. Factoring in the regulators and local administrators whose jobs similarly depend on maintaining the current level of state intervention in the economy, World Bank-style reforms would jeopardize probably close to ten million official sinecures.
Which brings us to the second problem with the smooth transition argument: that China’s power is overly concentrated among the princelings. This is not just its political power, but economic power too. This is deep and specialised Sinophilia territory, but John Garnaut’s epic Foreign Policy report gives a taste of the vast influence these key families have in business dealings:
As the lure of the market grows ever greater and the Communist Party refuses to fetter its enormous administrative powers or subject itself to law, ambitious officials and entrepreneurs are increasingly forced to seek the favor of the politically well-connected in order to accumulate and protect their wealth. When contained, the greed this engenders can bind officials together and foster loyalty to the central party apparatus, the ultimate source of wealth and power. But many now believe that the restraint is gone: Corruption increasingly distorts policymaking, sabotages policy implementation, diminishes the leadership talent pool, and taints the party’s legitimacy.
And, again coincidentally, the FT has an analysis piece today looking at the influence of the princelings throughout the whole economy:
However, the chief executives of three multinationals with decades of experience operating in China told the Financial Times that engaging relatives of senior officials as consultants or as joint venture partners was standard practice – and, in fact, vital in many industries. They said these princelings usually preferred to hold stakes in joint ventures through a holding company in Hong Kong or the Caribbean, where Chinese anti-corruption investigators cannot find them.
That’s not to say that the well-connected and powerful can’t come undone, at least individually. There is of course the notorious example of Bo Xilai, whose extended family is believed to control companies worth at least $100m. The FT’s princelings report begins by looking at Mao Xinyu, a direct descendent of Mao Zedong who falls short of owning a fortune, despite being given a high rank in the People’s Liberation Army. But how likely is it that the incumbent powers will willingly relinquish their hold on the economy for the greater good?