China's soaring economy
China closed 2009 with a blistering growth performance, raising expectations the world's No.3 economy may become No.2 this year.
Wouldn’t it be funny if Beijing did what rational economic market commentators told it to do and the markets reacted as if the cadres had declared an end to capitalism. That’s pretty much what happened this week.
The concern about China easing off the accelerator a touch – an accelerator that had been flat to the metal – is simply absurd.
In the same week that any number of figures from BHP production reports to Beijing’s rubbery statistics showed China rocketing along, news of a little less stimulus, a tightening of monetary policy and a sharper brake on some of the more dubious lenders should have been a cause for celebration.
Instead, the lemmings headed for the nearest cliff. OK, maybe it was just a small ditch, but they still jumped.
What’s bemusing is that China’s actions this week read like they were taken directly from an editorial in the Economist magazine.
There is a steady chorus in the global media that delights in attacking China. There is, of course, plenty to criticise, but the blindness of the attacks is simply stupid, like the doctrinaire campaign against the Obama administration by the right-wing American media. Whatever the President does, it’s wrong on Fox News.
Some of the same voices that attacked Beijing’s stimulus plan for not being big enough now criticise it for being too big. Actually that sounds familiar, just like the Federal Opposition declaring that Canberra’s stimulus package wasn’t saving a single job and now that it saved too many.
The Economist leader nicely summarises the reasons for continued faith in Chinese growth and, in particular, debunks the myth that China is riding the same sort of bubble that Japan experienced in the 1980s:
“There are many alarming similarities between China today and Japan in the late 1980s - but there are also big differences. For instance, Japan’s property boom was fuelled mainly by credit. By contrast, one quarter of Chinese homebuyers pay cash, and the average mortgage covers only 50 per cent of a property’s value. And unlike Japan in the 1980s, China is a poor country in the early stages of development. Its high investment-to-GDP ratio is often flagged as evidence of overinvestment, yet its capital stock per person is only 5 per cent of America’s or Japan’s. As for overcapacity, most of last year’s investment boom went into infrastructure, not manufacturing. Unlike Japan, which built ‘bridges to nowhere’, China really does need more infrastructure. Nor is the country on the verge of financial crisis - and even if share and house prices do collapse, the result is likely to be a pause, not a prolonged period of Japanese-style stagnation.”
Anyone notice any BHP types releasing production figures this week quaking in their boots over fears that China was about to close for business? Me neither. And BHP keeps its ear much closer to the Chinese economy than the vociferous chorus of largely American naysayers.
The neat part of the Economist editorial though was its advice to the cadres:
“That does not mean China has a Goldilocks economy. Bank lending is growing too fast, which may be fine if it is flowing into useful investments, but not if it is fuelling asset prices. The risk of bubbles and excess capacity will grow unless policy is tightened soon. The People’s Bank of China has just raised banks’ reserve requirements, but it needs to act more boldly to lift interest rates and curb bank lending. That means that the yuan must be allowed to rise. China’s main excuse for holding down the yuan - to support battered exporters - is no longer tenable in light of the rebound in exports. Recent warnings about an imminent Chinese crash are premature, but unless China acts, the bears will one day be proved right.”
It almost looks like they subscribe to the Economist in Beijing, enacting two of the three recommendations. And as Mr Meatloaf has noted, two out of three ain’t bad.
Allowing the renminbi to rise is a little harder politically, but in time the advantages of it will become more obvious to Beijing than they are now. For a start, it’s an easy way to reduce the inflationary impact of those surging commodity imports.
The cadres aren’t in the business of bringing growth to a screaming halt – they’re just trying to sustain it.
Michael Pascoe is a BusinessDay contributing editor.
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