One of the greatest failings of China watchers and commentators is a tendency to see and assess China through Western eyes, treating it as if it is a Western nation, in particular when regarding its economic data and developments.
A most conspicuous example is data on economic growth. China is one of the few countries that target economic growth, and growth numbers are manufactured to be consistent with the objectives of various Chinese development plans.
Notice, unlike most developed countries, the quarterly rates are amazingly stable, quarter to quarter. Yet, financial markets accept and trade on the announced growth numbers as if they are a real measure of the actual state of the Chinese economy.
Some years ago, while I was on a business trip to China, the authorities announced the growth rate for the September quarter in the middle of the month of September, before the quarter had ended. In Australia, our statistician would not be able to announce the September quarter result until about the first or second week of December.
Recently a Chinese professor was censored after suggesting that growth was below 2 per cent in 2018, not 6.5 per cent as announced by the authorities.
One of the reasons offered for why the Chinese government consistently exaggerates growth numbers is its concern about social unrest if the Chinese people were told the truth about growth and the state of the Chinese economy – that economic performance was falling well short of the objectives or promises of its economic plans. There is real concern as to how to continue to control a population of 1.4 billion.
Although China has embraced many elements of a market economy, it is still very much a communist, centrally planned and controlled, economy and society. Recall the non-market initiatives adopted by Chinese authorities a few years ago when they experienced a collapse in their stock market – banning new IPOs, funding trading in some stocks, preventing others, and so on.
China is undergoing a very significant transformation in the context of a host of significant structural challenges. The overarching transition is from an economy that was dominated by investment, as high as 50 to 60 per cent of GDP, to a services-based economy. It is happening, but not as fast as had been hoped and promised.
The faster growth in the past was sustained by excessive debt, now variously estimated at over 300 per cent of GDP. Even though the central policy authorities may have sought, at times, to restrain credit, mayors and regional governments actively competed to attract business, in part by having local banks and financial institutions ignore Beijing by offering concessional finance. A particular concern is shadow banking loan exposures.
Beyond debt, the major structural challenges are: a rapidly ageing population, within a shrinking overall population, with a comparable reduction in the number of working-age people to support them; corruption; extreme pollution and the need to decarbonise the economy; extreme trade imbalances, especially with the US, with a constrained exchange rate; a far more activist and aggressive foreign and defence posture; and various cyber/pirating/espionage and intelligence issues. All this while China pours billions into infrastructure projects, especially across the Asia Pacific and Africa.
It has been said that China actually has significant capacity to handle these structural challenges because the economy and society are heavily centralised and controlled, and the government has considerable financial capacity with more than $3 trillion in foreign reserves. These reserves have been drawn on, for example, to deal with the stockmarket collapse, and when the non-performing loans of the Industrial and Commercial Bank of China needed to be picked up so it could list with an essentially clean balance sheet.
Although now closely monitored by the US, the yuan has been kept somewhat artificially low since China devalued in 1994, ahead of the Asian crisis. Indeed, it has been the essence of China’s export-led growth strategy that reserves generated from, say, its significant trade surplus with the US, were held in US Treasury bonds and other US dollar assets, thereby sustaining its competitive edge by keeping downward pressure on the yuan against the dollar. China is the largest foreign holder of US treasuries, obviously giving it an ultimate bargaining chip in Trump’s trade war.
While China doesn’t take criticism well, it resists responding by changing its strategy. I has a particularly well-defined sense of its national interest, and pushes on at every opportunity. You’ve seen it in response to Trump’s tariffs on Chinese imports. Despite all the hoopla, China’s trade surplus with the US hasn’t really reduced.
You see a similar response in its contested claims over islands in the South China Sea. While the West criticises and expresses concern, China pushes on building a military base and missile-launching capacity. Similarly, while Trump has had just one meeting with Kim Jong-un, and claimed it as evidence of his “genius”, the Chinese have met the North Korean dictator four times, and they are obviously instrumental in Pyongyang’s strategy.
Given the significance of China to us – especially in trade and investment, tourism, students, power, and so on – our governments would be most unwise to take a benign attitude to China. It saved us once, especially during the GFC, but circumstances could just as easily run the other way, against our national interests.
By John Hewson