China’s growth pattern mirrors other economies in Asia

January 20, 2014 3:12 pm

China’s growth pattern mirrors other economies in Asia

By Jamil Anderlini in Beijing

When analysts talk about the past three decades of Chinese economic growth it is often in reverential, quasi-religious terms. China’s 35 years of 9.7 per cent average annual expansion “is a miracle unprecedented in human history”, says Justin Lin Yifu, who was chief economist at the World Bank from 2008 to 2012.The lifting of 400m to 600m (depending on whom you ask) out of poverty could possibly count as a miracle but the model of growth, and the expansion rates, are not really unprecedented, even among China’s neighbours.

“We’ve seen this movie before – in South Korea, Taiwan, Hong Kong, Japan. We’re just seeing a bigger and more colourful version in China,” says Frederic Neumann, co-head of Asian economic research for HSBC. “Japan in the 1960s grew at 10 per cent a year and was considered the miracle economy of the time.”

China’s economy expanded 7.7 per cent in 2013, government figures on Monday showed, on par with the revised 7.7 per cent growth rate for 2012. But most analysts expect growth to decelerate this year to its slowest pace in more than two decades. Many are starting to wonder if the similarities between China and its neighbours extend to their downturns as well as their booms.

As in most former high-growth Asian countries, the growth lift-off was driven by investment in cheap manufacturing for its powerful export machine, which was able to drive expansion for more than a decade. Also, as in other countries, slowing growth in exports has been replaced in China in the past few years by credit-intensive domestic investment, particularly in infrastructure and real estate.

The next step in the process in each of its more developed neighbours was an abrupt slowdown as overreliance on credit-fuelled infrastructure investment reached its limits.

“It’s not inevitable that China will also face a sharp correction as those other countries did but the danger is definitely there,” says Mr Neumann. “To think that the Chinese economy is immune to the same forces as other economies is to put misplaced faith in the idea of Chinese exceptionalism.”

The consensus forecast among private-sector economists is for 7.4 per cent growth in 2014, the slowest growth rate since 1990, when China faced international sanctions in the wake of the 1989 Tiananmen Square massacre.

Of course, a larger Chinese economy growing at a slower rate contributes more to global gross domestic productthan a smaller China growing faster. But even the most optimistic forecasters say Beijing must implement painful economic reforms just to maintain these lower, less miraculous, rates of expansion.

The International Monetary Fund predicts average growth of about 6 per cent a year from now until 2030 under a best-case scenario where the government successfully implements reforms to rebalance the economy.

Top of the list is financial sector reform so the government can get a handle on China’s credit addiction and debt load. Total debt as a percentage of GDP rose from 130 per cent in 2008 to more than 200 per cent by the end of 2013, the kind of increase that has often preceded financial crises in other economies.

Beijing is trying to rein in excessive credit growth and wasteful borrowing by local governments obsessed with debt-fuelled infrastructure spending but it has to be wary not to tighten too much for fear of precipitating a financial crisis.

While many of the reforms envisioned by its leaders will contribute to the slowdown in headline expansion, not all of them are anti-growth.

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“The key for the leadership will be balancing the pro- and anti-growth reforms and implementing them in the right sequence,” says Stephen Green, head of research for greater China at Standard Chartered. “Anti-growth reforms include deleveraging and closures of overcapacity – laying people off from steel mills – while pro-growth reforms include opening of new sectors like telecoms, railways and financial services to private investment, promotion of service sectors and cutting of administrative licenses and approvals.”

How fast the government can move ahead with its reform agenda depends greatly on how comfortable it feels with slower rates of growth. For decades, China’s authoritarian leaders have explicitly acknowledged that their unelected rule relies on continued high rates of economic expansion and the creation of millions of jobs each year.

In each of the past two years, slower growth in the first half of the year prompted Beijing to waver in its commitment to reining in credit-fuelled infrastructure investment and loosen policy around the middle of the year to keep GDP growth from slowing too much.

If the government continues to turn the taps on and off in fear of slowing growth, the much-vaunted rebalancing of the economy may be perpetually delayed and the eventual reckoning could be worse than the slowdown its leaders are trying to avoid.