Many expect the Chinese economy to misbehave but it is more likely that China will grow out itself out of trouble
China is growing up in front of our eyes and there is an expectation that, like any adolescent, it will get into trouble before fulfilling its promise. Naysayers predict that China’s growth spurt has left it with a number of issues that must be worked through before it can get any bigger. Yet, China has a good head on its shoulders in the form of the Communist Party which will do all it can to keep the economy buoyant. While the years of stellar growth are likely over, it need not mean that the Chinese economy will be held back.
Big trouble in (not so) little China?
The spectacular rate of growth achieved by China over the past decade could never continue forever. Quite the opposite, the rapid expansion would have been harmful if it had been maintained and a slower pace of growth is actually a preferable outcome. This is because much of the economic growth had been fuelled by investment – construction of new factories to sell cheap goods overseas along with the expansion of megacities in China to accommodate an influx of workers from the countryside. Normally, investment accounts for around 10% to 15% of GDP in most developed countries but reached 50% of GDP in China.
This building frenzy could not continue especially when it is becoming more difficult to make money and some investments would be wasted on pointless projects. It is the examples of this, empty apartment blocks and overly lavish public spending, that pessimists point to as evidence that China has gone too far. With large amounts of bad debt expected to result from these poor investments, the financial sector is expected to take a big hit and drag the whole economy down with it. The argument is basically that China has gotten too big for its boots and will need to shrink.
Growing up is never easy
Your Neighbourhood Economist would instead argue that China has a similar problem to what he had when he was growing up. His mother would buy Your Neighbourhood Economist clothes that were too big for him in the knowledge that he would grow into them. It is ungainly to be sporting oversized gear and this seems to be similar to the phase China is going through. This is partly because China had been expanding so quickly that any investment needs to be put up in a hurry. There is also the added complication of spending getting out of hand as regional politicians try to impress their bosses in the Communist Party.
Yet, China, like a much younger version of Your Neighbourhood Economist, still has a lot of growing to do. Some of the ill-fitting parts of the Chinese economy may be put to better use as its citizen will continue to migrate toward the cities in search of work. China has also learnt lessons from its investment binge with the central government shifting emphasis from economic growth to other benefits of greater wealth such as a cleaner environment and a more efficient bureaucracy. Local officials are being brought into line through a crackdown on corruption and concentration of power within the Communist Party.
Along with changes to policy, the Chinese government also has the resources to deal with any past mistakes. With both domestic savings and government reserves at high levels, there is plenty of money around if needed. And, with an eye firmly fixed on keeping the economy growing, the Communist Party would not be as timid compared to Western governments in terms of stepping in and shoring up the banking sector if needed. China is also moving away from investment as the driver of its economic growth and consumption is expected to pick up the slack (albeit with growth at a slower pace).
Growing while you watch
Your Neighbourhood Economist has seen the change in China with his own eyes. In a visit 15 years ago, the Pudong area across the river in Shanghai seemed like a ghost town but one that had been freshly built with a scattering of skyscrapers. Now, Pudong is anything but quiet and the pace at which new buildings continue to go up is testament to China’s growth. It also shows that it you build it (in China at least), they will (still) come.