Give Xi a break on China's economy

CUT THE NOISE: President Xi is trying to change China's engines in midflight. Having analysts screech about the growth rate cannot be helping him.


    Oct 29, 2014

    Give Xi a break on China's economy

    IS CHINA headed for a boom or bust? Depending on whom you read, the world's most populous nation is on the cusp of either a debt meltdown or a middle-class expansion.

    A recent Conference Board report paints a dire picture. Authors David Hoffman and Andrew Polk predict that Chinese gross domestic product (GDP) growth will drop below 4 per cent in the next decade.

    At the same time, more optimistic takes from the Asia Society Policy Institute and the Rhodium Group argue that financial upgrades are under way in China that could produce a more sustainable growth path.

    Those who fear a slowing economy might spark riots and instability also have to be heartened by new data that suggests incomes across China are rising more than is commonly acknowledged.

    Instead of obsessing over every tick up or down in China's GDP growth rate, the investment world needs to give Chinese leaders time and space to implement the reforms they have pledged thus far.

    When Deng Xiaoping opened China's economy in the 1980s, he followed several of the dictates of Adam Smith. Current President Xi Jinping must reinvent the world's second-biggest economy in entirely new ways.

    He must sideline the state-owned enterprises that make the political class wealthy, rein in a sprawling shadow-banking system with tentacles everywhere and gradually decelerate the economy as it transitions from an investment-heavy, debt-fuelled growth model to one based more on consumption and services than exports.

    Mr Xi is trying to change China's engines in midflight. Having an army of analysts screech about every zig and zag in the growth rate cannot be helping him concentrate.

    I am tempted to suggest a moratorium on Chinese GDP figures for a couple of years. That sounds hypocritical, I realise, given that we in the foreign media always demand greater transparency from China. Yet, even if the Chinese economy slowed to the 3.9 per cent rate former United States treasury secretary Lawrence Summers thinks lies ahead, would Beijing admit it anyway?

    There are many other ways to take China's pulse. Economists' favourite reality-check indicators include HSBC's purchasing manager's index and the trajectory of prices of commodities that China dominates, like iron ore and coal.

    Mr Xi's challenge was clear last week when the global media convulsed over news that China had grown the slowest in five years in the third quarter.

    This is what is truly hypocritical: Even though everyone acknowledges that China must stop artificially pumping up its economy, markets panic at the slightest hint that its GDP is losing altitude - as if China were some giant company that must constantly impress us.

    The last thing China should do is embark on a fresh stimulus kick to placate the nail-biters: That would result merely in more debt and unproductive investment, and even bigger asset bubbles. The world needs a stable China more than it needs a fast-growing one. And on that front, the economy is doing surprisingly well.

    Buried in recent data, Bloomberg News reported, are signs that average Chinese are benefiting more despite slower growth: The disposable incomes of urban residents jumped 9.3 per cent in the first three quarters from the same period a year ago; rural residents' cash income leapt 11.8 per cent. The 176 million migrant workers at factories and construction sites are also enjoying wage increases.

    None of this means China will avoid a date with financial destiny - just about every developing nation crashes. But we are years away from knowing whether China ends this decade in the boom or bust category.

    Mr Xi's job is difficult enough without our impatience pushing him into ill-considered decisions. Give the man a chance.