Stephen Roach is banker who knows Asian and Chinese economies well, as he is Chairman of Morgan Stanley Asia. He is certainly not one of those full of it Western writers who make prediction of China collapsing due to massive bank debts, property bubbles, labour unrest and so on ad infinitum, based on a single visit to china.
The only part that I disagree is when he described those having the habit of writing on China economic collapse as cottage industry, when in fact those doubters are from the mainstream industry. I think the main flavour nowadays of the doubters or bashers are the so-called property bubbles and huge debt crisis.
My thinking on Chinese property bubbles: There are property bubbles in the cities, just like in most Australian cities. The difference is that debt levels of buyers are usually lower than in the West due to higher deposits requirements. Usually the buyers pay at least 30% cash upfront. Also, with increasing income due to the spectacular economic development, more people could afford expensive houses. Government measures to tighten the lid on increasing prices will also alleviate the situation. The new district in Ordos, Inner Mongolia is featured prominently by Western media as a ghost city. My view is that the new Ordos will be occupied in the next few years, as people will move once the school, hospital, etc start to operate and the right incentives are given. Ordos is one of the richest city in China (due to massive coal deposit nearby) and there is no way the city could go bust.
On high banking debt: Many of the loans have gone in investments, particularly infrastructures, manufacturing’s, real estates etc, and not into speculative activities, wars or other highly unproductive activities. For instance, billions are spent on constructing high speed train lines across major cities. The Beijing-Shanghai line will start operating soon. Already the Western critics are proclaiming the high speed trains and the huge stations as white elephants. Even if the trains are currently half empty (which is not true) , it does not mean it will remain half empty in the next few years, given that demand will grow. China plans for the future, and this is something that the critics tend to overlook in the haste to be critical.
NEW HAVEN – The China doubters are back in force. They seem to come in waves – every few years, or so. Yet, year in and year out, China has defied the naysayers and stayed the course, perpetuating the most spectacular development miracle of modern times. That seems likely to continue.
Today’s feverish hand-wringing reflects a confluence of worries – especially concerns about inflation, excess investment, soaring wages, and bad bank loans. Prominent academics warn that China could fall victim to the dreaded “middle-income trap,” which has derailed many a developing nation.
There is a kernel of truth to many of the concerns cited above, especially with respect to the current inflation problem. But they stem largely from misplaced generalizations. Here are ten reasons why it doesn’t pay to diagnose the Chinese economy by drawing inferences from the experiences of others:
Strategy. Since 1953, China has framed its macro objectives in the context of five-year plans, with clearly defined targets and policy initiatives designed to hit those targets. The recently enacted 12th Five-Year Plan could well be a strategic turning point – ushering in a shift from the highly successful producer model of the past 30 years to a flourishing consumer society.
Commitment. Seared by memories of turmoil, reinforced by the Cultural Revolution of the 1960’s and 1970’s, China’s leadership places the highest priority on stability. Such a commitment served China extremely well in avoiding collateral damage from the crisis of 2008-2009. It stands to play an equally important role in driving the fight against inflation, asset bubbles, and deteriorating loan quality.
Wherewithal to deliver. China’s commitment to stability has teeth. More than 30 years of reform have unlocked its economic dynamism. Enterprise and financial-market reforms have been key, and many more reforms are coming. Moreover, China has shown itself to be a good learner from past crises, and shifts course when necessary.
Saving. A domestic saving rate in excess of 50% has served China well. It funded the investment imperatives of economic development and boosted the cushion of foreign-exchange reserves that has shielded China from external shocks. China now stands ready to absorb some of that surplus saving to promote a shift toward internal demand.
Rural-urban migration. Over the past 30 years, the urban share of the Chinese population has risen from 20% to 46%. According to OECD estimates, another 316 million people should move from the countryside to China’s cities over the next 20 years. Such an unprecedented wave of urbanization provides solid support for infrastructure investment and commercial and residential construction activity. Fears of excess investment and “ghost cities” fixate on the supply side, without giving due weight to burgeoning demand.
Low-hanging fruit – Consumption. Private consumption accounts for only about 37% of China’s GDP – the smallest share of any major economy. By focusing on job creation, wage increases, and the social safety net, the 12th Five-Year Plan could spark a major increase in discretionary consumer purchasing power. That could lead to as much as a five-percentage-point increase in China’s consumption share by 2015.
Low-hanging fruit – Services. Services account for just 43% of Chinese GDP – well below global norms. Services are an important piece of China’s pro-consumption strategy – especially large-scale transactions-based industries such as distribution (wholesale and retail), domestic transportation, supply-chain logistics, and hospitality and leisure. Over the next five years, the services share of Chinese GDP could rise above the currently targeted four-percentage-point increase. This is a labor-intensive, resource-efficient, environmentally-friendly growth recipe – precisely what China needs in the next phase of its development.
Foreign direct investment. Modern China has long been a magnet for global multinational corporations seeking both efficiency and a toehold in the world’s most populous market. Such investments provide China with access to modern technologies and management systems – a catalyst to economic development. China’s upcoming pro-consumption rebalancing implies a potential shift in FDI – away from manufacturing toward services – that could propel growth further.
Education. China has taken enormous strides in building human capital. The adult literacy rate is now almost 95%, and secondary school enrollment rates are up to 80%. Shanghai’s 15-year-old students were recently ranked first globally in math and reading as per the standardized PISA metric. Chinese universities now graduate more than 1.5 million engineers and scientists annually. The country is well on its way to a knowledge-based economy.
Innovation. In 2009, about 280,000 domestic patent applications were filed in China, placing it third globally, behind Japan and the United States. China is fourth and rising in terms of international patent applications. At the same time, China is targeting a research-and-development share of GDP of 2.2% by 2015 – double the ratio in 2002. This fits with the 12th Five-Year Plan’s new focus on innovation-based “strategic emerging industries” – energy conservation, new-generation information technology, biotechnology, high-end equipment manufacturing, renewable energy, alternative materials, and autos running on alternative fuels. Currently, these seven industries account for 3% of Chinese GDP; the government is targeting a 15% share by 2020, a significant move up the value chain.
Yale historian Jonathan Spence has long cautioned that the West tends to view China through the same lens as it sees itself. Today’s cottage industry of China doubters is a case in point. Yes, by our standards, China’s imbalances are unstable and unsustainable. Chinese Premier Wen Jiabao has, in fact, gone public with a similar critique.
But that’s why China is so different. It actually takes these concerns seriously. Unlike the West, where the very concept of strategy has become an oxymoron, China has embraced a transitional framework aimed at resolving its sustainability constraints. Moreover, unlike the West, which is trapped in a dysfunctional political quagmire, China has both the commitment and the wherewithal to deliver on that strategy. This is not a time to bet against China.
Stephen S. Roach, a member of the faculty at Yale University, is Non-Executive Chairman of Morgan Stanley Asia and author of
The Next Asia.
Copyright: Project Syndicate, 2011.