Recent economic data have troubled markets and analysts about the direction of the Chinese economy. China Economic Review caught up with Bill Adams, senior international economist at US-based PNC Financial Services Group and co-author of the book In Line Behind a Billion People: How Scarcity Will Define China’s Ascent in the Next Decade, to get his thoughts.
Q1 GDP data show China’s economy continues to slow. Do you believe lower growth rates give the government more room to push through with rebalancing?
China’s slower growth in the first quarter is a direct consequence of steps that the government has already taken to address some of the imbalances in the economy. We’ve seen a big slowdown in investment activity, in part because of direct controls on the quantity of credit growth, but also because of more market-determined interest rates, which are higher interest rates and have dampened the rate of credit growth. So five or 10 years ago, everyone was talking about how China needed more market-determined cost of capital to make investment more efficient over the long run. And now we’re starting to see some of the financial reforms necessary for that to happen come into place.
Where do you stand on the debate over whether Beijing should roll out more stimulus measures to meet growth targets?
My read of Chinese economic policy right now comes from the premier’s effectively forward guidance out of the [Government] Work Report at the National People’s Congress. As long as growth is strong enough to maintain full employment, the government does not see a need for a substantial stimulus program. And looking at the latest wage growth data which were released with the first-quarter GDP report, it looks like China’s wage growth is reflecting a still relatively tight labor market, meaning a labor market that’s close to full employment. So I think the pace of growth that China’s experiencing right now is sufficient from the government’s perspective. The concern for China in 2014 is not so much the pace of growth, but uncertainty over the resolution of the excessive credit growth during the years immediately following the global recession.
The Chinese leadership has promised to allow a more “decisive” role for market forces in the economy. Is this commitment sincere, and if so, are there possible dangers to this approach?
I think Chinese policymakers understand the obstacles to growth posed by vested interests in the Chinese economy and system, so the analysis is there. But how exactly to go about changing the system is very complicated. The other thing to say about it is that it’s quite possible that one consequence of China’s current anti-corruption drive, which is coming down especially hard on state-owned enterprises and sectors of the economy that are heavily regulated, could be opening those sectors to more participation by privately owned participants.
Premier Li Keqiang recently called for reform of the state-owned enterprise sector to allow more private capital investment. How urgent is the need for liberalization of private investment, and how far will Beijing allow private investors to go?
China’s private sector has provided most of the country’s new jobs since the turn of the century. But for the last few years, an appreciating currency has meant that privately owned export-oriented manufacturers in labor-intensive sectors have been struggling, if not declining. And regulatory barriers make it difficult for private entrepreneurs to set up businesses that capitalize on domestic market opportunities in the way that they built factories to capitalize on robust foreign demand prior to the Great Recession. The Chinese government has pledged to allow a large role for market forces in sectors that are dominated by state-owned firms, but this pledge has been made many times before and the reality has historically fallen short of the promise. The most reasonable expectations for the liberalization of heavily regulated sectors in 2014 would be modest ones.
China‘s weak manufacturing PMI worries many analysts. Given that manufacturing makes up only 41% of China‘s economy today, while the service sector accounts for 49%, do you think this focus on factory production as a gauge of China‘s economic health is missing the point?
The manufacturing PMIs are excellent indicators: They monitor an important sector, they are reported in a consistent and easily interpreted way, and they trend with China’s overall business cycle. Now, in 2014, defaults on loans made during the years after the Great Recession, when credit rained from the sky in China, are the bigger risk to the economy. But Chinese data on defaults and debt restructuring isn’t as timely or comprehensive as data on growth, so economists are forced to track the problem through other means.
How will a scarcity of natural resources impact the success of China‘s transition or rebalancing to a service- and consumption-based economy?
When we talk about China’s rebalancing to a more sustainable model of growth, we are usually talking about a transition to an economy that is more directed toward consumer demand and less reliant on exports or ever-rising property prices. A more consumer-oriented economy is sustainable in the sense that growth is less likely to be interrupted by an asset bubble collapsing or a global recession, but it would not necessarily be less resource-intensive. Think about it – what would the Chinese economy make, if it were more oriented toward domestic consumer demand? What do Chinese consumers want more of? Bigger houses, new cars, roads to drive their cars on, and electronic devices to play with while they are stuck in traffic – resource-intensive stuff.
Beyond headline economic and industrial data, what else should our readers look out for when trying to understand the direction of the Chinese economy?
Today, hundreds of millions of Chinese people live middle class lifestyles, but lack access to the clean air, clean water, safe food, and other amenities that middle class consumers in most developed countries take for granted. I am watching for the growth of industries to fill in Chinese consumer demand for these things that China’s breakneck growth has so far not delivered.
Could you speak about your current areas of research and interest regarding the Chinese economy? What are you currently working on that you think is important?
I’ve recently been looking at the global links in China’s food supply chain. Whenever trade with China comes up in conversation in the US, Americans tend to lament that everything we buy is made in China, but China doesn’t need anything that the US makes – not realizing that one-fifth of the feed grain used to raise Chinese pork, chicken and beef is imported, or that the US is one of China’s biggest grain suppliers. This international dimension is why pork prices are always the first part of the Chinese CPI basket to shoot up during a spike in global inflation: Pork is raised on feed grain, much of it imported, and so the cost structure of producing it follows global price trends that the Chinese government doesn’t control.
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