This isn’t the time to be critical of China’s 2009 economic boom.
That’s clear enough from the hate mail that clogs the inbox of anyone who dares suggest China won’t grow 8% forever. Even Sarah Palin, a former Republican vice-presidential candidate, seemed to pull her punches while addressing a conference in Hong Kong on Wednesday.
Neither strong feelings nor politeness toward your host changes the fact China is setting the stage for something we may look back on as a lost decade of sorts.
OK, lost decade may seem an exaggeration. It’s often a loaded term, and one coloured by Japan’s deflationary 1990s. Such periods can take different forms—even in the world’s fastest growing major economy. The 2000s have been such a time for the US, I would argue. It began with the Clinton administration helping Republicans turn markets into casinos. Then came George W. Bush with his trillion-dollar tax cuts for the wealthy, contempt for diplomacy and disregard for science. Bush’s successor, Barack Obama, has so many forest fires to put out that he will scarcely have a moment to look ahead and prepare the nation for the decade ahead.
It’s dawning on Asia, too, that the 2000s where a time of missed opportunities. Stimulus and low interest rates supported the region during the last 12 months. There’s much soul-searching today over Asia’s failure to rebalance economies away from exports. It has been a decade since the Asian financial crisis, and there is little to show for it.
Palin versus ADB
That brings us back to China, which is probably happier this week with Palin than with the Asian Development Bank (ADB). During the same week that President Hu Jintao is taking a victory lap in the US, Palin called for closer cooperation with China, according to people who attended the closed session organized by CLSA Asia-Pacific Markets. Palin also criticized Obama’s decision to impose duties on Chinese tyres. The Manila-based ADB came closer to hitting the nail on the proverbial head. The lender warned that China’s stimulus spending and record bank lending are interrupting efforts to restructure the economy away from investment- and export-led growth toward private consumption.
Credit where it’s due: China acted quickly and forcefully with a 4 trillion yuan ($586 billion) stimulus package to counter a slump in exports. Hu can expect more than a few pats on the back at this week’s Group of Twenty meeting in Pittsburgh. The US economy remains a mess, while China is zooming along.
China’s stimulus boom is making the world’s third biggest economy even more dependent on investment. In the short run, the challenge is to balance the need for economic support against the risk that excessive lending funds speculative stock and property investments, undermining the quality of bank assets and fuelling inflation. Such a scenario would require a sudden round of monetary tightening that hampers growth. It’s an incredibly delicate balancing act for the most advanced economies. It’s an even more daunting one for a nation at China’s level of development.
My concern is about the longer term. The median estimate of economists polled last month by Bloomberg was for 9.5% growth in 2010. So, the conventional wisdom is clearly weighted toward China holding its ground.
The problem is that China isn’t boosting efforts to convert its export machine into a more normal economy. It must act to create more balanced and sustainable growth in the medium and long term. Strengthening the social safety net, cultivating the services industry and boosting consumption are the keys to making China less subject to the whims of global hiccups. Many will argue that’s just what China did this year. China can only get by for so long with domestic stimulus. Government spending loses its potency over time. Without a global recovery, China will have trouble repeating this feat. There’s a limit to what public investment and monetary expansion can achieve. The cost could be a painful bad-loan crisis in the years ahead.
Palin attacked the Federal Reserve for creating asset bubbles and encouraging excessive risk-taking that hurt working-class Americans. China runs similar risks, ones ADB is watching nervously. The extent to which China is distracted from the bigger picture can be seen in the focus on currency reserves. More than $2 trillion of reserves is a great thing to have during a crisis. They give China a level of leverage over key economies, including the US’, that is unique among developing nations.
It’s more about weakness than strength. The linear focus on holding down the yuan traps China in a counterproductive cycle of export dependence. A rising currency would increase living standards, raise the global purchasing power of 1.4 billion people and foster the creation of new companies and industries. A weak yuan, meanwhile, makes bubbles more likely. China is delaying its long-term development for short-term gain. It makes perfect sense politically, less so economically. BLOOMBERG
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