Back in 2007, Premier Wen Jiabao called the Chinese economy increasingly unstable, unbalanced, uncoordinated and ultimately unsustainable. He has used the same language this year and there’s every chance the description will still apply in another four years.
The timing of when China’s growth model will “ultimately” run out of steam is probably the most critical question facing the world economy.
Mature economies such as the United States and Germany are lucky to grow faster than around 3 percent. China, by contrast, has expanded 10.1 percent a year on average since 1978.
Its gross domestic product, measured in dollars at market exchange rates, has doubled in four years, boosting oil and commodity prices and reshaping swathes of the global economic landscape in the process.
So the trajectory of China’s growth — a gradual deceleration or an abrupt full stop — matters far beyond its borders.
Li Daokui, an adviser to the central bank, reckons the economy can maintain annual growth of 9 percent for the next five years.
But some economists see the day of reckoning approaching fast. Nouriel Roubini of New York University has warned of a sharp slowdown, most likely after 2013, once it becomes impossible for China to keep increasing fixed investment, the main driver of growth.
The odds are that China can keep the show on the road for some time yet and will not be forced to overhaul its growth model until much later in the decade.
“Everything that is happening in China today is unsustainable at the current pace. That’s not good or bad. It’s just an observation,” said Andy Rothman, China macro strategist in Shanghai for CLSA, a brokerage.
The breakneck growth of China’s iron ore consumption five years ago could not last, Rothman said. Nor could the 2010 pace of car sales. The same will be true at some point of negative real interest rates, house price growth and inequality.
“But none of these things being unsustainable over the long term mean they have to come crashing down,” he added. “If you were a real bear, you would argue that some day just everything will collapse. But it’s hard for me to see that scenario playing out.”
BANKS UNDER SCRUTINY
China’s economy is nothing if not resilient. In recent years it has defied predictions of a hard landing due to everything from bad loans to investment-led overheating, food inflation that exceeded 20 percent in early 2008, the threat of protectionism and the global financial crisis.
China’s response to that crisis is grist to the mill of both bulls and bears. The former point to the success of massive and rapid pump-priming, made possible by the Communist Party’s ownership of the banks.
Sceptics say the state-directed investment binge is simply storing up problems by saddling the banks with huge, incipient bad debts as a result of lax lending to local governments.
Jason Bedford with accounting and consultancy firm KPMG in Beijing acknowledged the risks to banks in the event of a big slump in the property and land they hold as collateral for loans.
But he played down specific worries about a souring of home mortgages, since home buyers in China must make a down payment of at least 30 percent.
“I certainly don’t envisage the potential for anything approaching the destructive nature of the collapse in the U.S. real estate market, simply because, if there is a bubble here, it is not a debt-financed real estate bubble,” Bedford said.
Another objection to the argument that China can keep expanding at 7-8 percent a year for some time to come is that Japan, South Korea and Taiwan all tended to slow after about 30 years of turbo-charged growth.
But China’s development surge started from a much lower level. Its GDP per capita of $4,200 in 2010 was still only 9 percent of that in the United States. China’s standard of living today is comparable to that of Japan in 1954, Taiwan in 1972 and South Korea in 1976, according to Ting Lu with Bank of America Merrill Lynch.
Despite the image of a country sweeping all before it, China has a lot of ground to make up. It must boost the skills of its work force; ramp up innovation and research; raise the capital base of the poorer interior; move another 250 million or so farmers into cities; and meet the needs for transport, clean water and myriad other public goods and services.
“The tailwinds of growth are so strong. You’ve still got a lot of growth that can come in a fairly straightforward manner through completing infrastructure and heavy industry and urbanisation,” said Arthur Kroeber, managing director at GaveKal Dragonomics, a consultancy in Beijing.
“As long as you have a model where simply accumulating capital is your main source of growth and the efficiency with which that capital is used is not important, then all of these processes can continue unimpeded and they don’t really obstruct growth,” he said.
Once efficiency becomes imperative, however, China will struggle to convince vested interests, notably big state-owned companies that have benefited disproportionately from subsidies and stunted competition, of the need for reform.
“I would say that’s a very, very serious risk because you don’t have the kinds of institutions like a free press or regulatory agencies or NGOs that act as a check on these kinds of concentrations of financial power,” Kroeber said.
“But that’s more on a decade horizon than on a five-year horizon.”