The American Interest
Analysis by Walter Russell Mead & Staff
Confucian Confusion: As Chinese Economy Slows, What Comes Next?

The dismal Chinese economic data continues to roll in. What had initially been considered a blip on the radar is looking more like a long-term slowdown. Many analysts (including, somewhat surprisingly, a Chinese government think tank) now believe China’s GDP growth will likely have a 7 in front of it; if so, it would be the first time in over a decade the country has grown at less than 8 percent.

And while debate remains as to whether this deceleration is the result of a natural slowdown for a developing economy entering a new, lower-growth phase, an inevitable response to a global slowdown or whether it’s due to a sclerotic political and economic model in dire need of reform, Beijing neither saw the slowdown coming nor accepts it now as inevitable. How could it? Given the nexus between social stability and high growth, China’s rulers rightly fear that a relatively sluggish economy could erode whatever remains of its legitimacy among the citizenry.

So how will the government respond?

The last time the government faced an economic crisis, during the global financial crisis of 2008–09, it responded quickly with a massive stimulus package. As the Washington Post reports, a similar proposal this time has been ruled out…or has it?

On the one hand, officials have insisted that there will be no new stimulus. On the other, the Central Bank has announced new rules to ease liquidity, and the main economic planning agency, the National Development and Reform Commission, has accelerated approval of hundreds of projects this year, many in the solar power and alternative energy sector.

“They’re very schizophrenic,” said Patrick Chovanec, an American who teaches finance at Tsinghua University in Beijing. Government policymakers are “stepping on the accelerator and stepping on the brake at the same time. They want the growth, but they don’t want the problems that come with the growth, the bad debt and the inflation.”

“I think they’ve painted themselves into a corner,” Chovanec said. “They have a limited number of levers, all of them come at a cost.”

This confusion is not something China’s current generation of leaders is used to confronting. Since they took power in 2002, the country has experienced unprecedented prosperity. Not once did growth fall below even 9 percent, and in the heady days of 2007 it reached an extraordinary 14.2 percent. While the benefits of this boom have been unevenly distributed, enough has trickled down to lift hundreds of millions out of poverty and into a thriving middle class.

In one sense, the timing couldn’t be worse for Chinese policymakers. With the leadership transition looming later this year, a series of political hitches and above all the Bo Xilai firestorm have left the ruling elite distracted with palace intrigue at a time when they ought to be focused on the economy. An increasingly assertive American presence in the region is also creating headaches for Beijing.

But the purge of Bo could prove a blessing in disguise. He belonged to a faction that advocated more, not less, government control over the economy. If the modernizers remove enough of Bo’s allies, then the scandal may in fact present an opportunity for the country to open up its economy, boost consumption and exports, and ween itself off the crack cocaine of massive investment projects.

China’s unique mix of authoritarian capitalism has served it well for the past thirty years.  But that growth model and the social passivity on which it depends are showing their age. Whether the ruling elite possesses enough flexibility and political will to manage the next stages of China’s development remains to be seen.

Published on June 7, 2012 12:00 pm
  • Eurydice

    Well, they cut rates by 25 bp this morning and they’ve loosened the interest rate restrictions on their banks, which people seem to think is pretty unprecedented.

  • http://facingzionwards.blogspot.com/ Luke Lea

    @ – “Many analysts (including, somewhat surprisingly, a Chinese government think tank) now believe China’s GDP growth will likely have a 7 in front of it; if so, it would be the first time in over a decade the country has grown at less than 8 percent.”

    A little more skepticism please. The Chinese lie by habit, the Chinese Communist Party lies most of all: we have no idea what the real growth rates are in China. Two days ago there was a story in the WSJ about the latest China statistics which mentioned in passing that “they should be taken with a grain of salt.” Didn’t stop them from writing a long story about them though, drawing all sorts of conclusions.

    Peter Hessler in his books about China observes that the most important things in official Chinese news releases is what they leave out. It takes practice to surmise what those things are.

    Americans are so naive about all things China. ViaMedia needs to wise up.

  • Anthony

    What come next WRM is that China will remain a highly centralized bureaucracy adjusting to imperatives of modern economics – both authoritarian and laissez faire capitalism; however as Francis Fukuyama intimates, China may have to square its bad emperor problem with new social arrangements.

  • http://facingzionwards.blogspot.com/ Luke Lea

    OT: “ChinaAid identified a leader of a house church in Tibet who was “managing an orphanage with 30 orphans. They’re deserted on the street and there’s no government system to take care of them. It was the Christians who brought them into their homes, fed them and gave them education. Then the government arrested them, and forced this leader to put [the children] on the street. He said we would rather [see] them on the street than being taken care of by the Christians.”

    Mr. Fu has been begging Obama administration officials to publicly take up the cause of Chinese dissidents since they first entered office. They’ve generally demurred. Former President George W. Bush met Mr. Fu’s delegation of “top Chinese human-rights lawyers” three times, but President Obama has refused. In 2011, ChinaAid’s request for a White House meeting was “totally ignored,” Mr. Fu says.”

    http://tinyurl.com/7kmbjxv

  • http://facingzionwards.blogspot.com/ Luke Lea

    OT [or is it?]

    China Declares Christian ‘House Churches’ a ‘Cult,’ Advocacy Group Reports

    http://tinyurl.com/6s99cgu

  • http://facingzionwards.blogspot.com/ Luke Lea

    This looks more promising.

    http://preview.tinyurl.com/3s5y75k

  • http://facingzionwards.blogspot.com/ Luke Lea

    “We have a religious belief just like hungry people have a need to eat something,”

    http://tinyurl.com/3s5y75k

    I suggest Walter take up this cause and start reporting it regularly. Don’t wait til Christmas. :)

  • http://facingzionwards.blogspot.com/ Luke Lea

    [to ViaMedia editors -- I'm getting amazing hits by Googling "Falun Gong" and "house churces" together.]

  • http://facingzionwards.blogspot.com/ Luke Lea

    One of the themes in Peter Hessler’s Oracle Bones [American Book Awards Finalist] is Chinese fakery: nothing is as it appears. You be the judge: is this real GDP or fake GDP?

    http://tinyurl.com/5spx4zp

  • http://facingzionwards.blogspot.com/ Luke Lea

    Information About Chinese Firms Declared Off Limits
    Due diligence, investment decisions hampered as China becomes a ‘black box’

    Read this in WSJ today. Here’s a source:

    http://www.theepochtimes.com/n2/china-news/information-about-chinese-firms-declared-off-limits-247595.html

  • http://facingzionwards.blogspot.com/ Luke Lea

    fe: fakery

    As I was saying,

    “Zinch China, a consulting company that advises American colleges and universities about China, published a report last year that found cheating on college applications to be “pervasive in China, driven by hyper-competitive parents and aggressive agents.’’
    An excerpt from the Zinch report:
    The result? Fake achievements, often concocted by agents. Based on our interviews, this happens on about 10 percent of applications. Sometimes a student’s silver medal is turned to gold, and sometimes a student lists an award for an activity he or she never completed. At a top Beijing high school this year, ten students claimed to be Class President!
    Most Chinese parents now understand that American schools are looking for “well-rounded” students who combine strong test scores, transcripts, and extra-curricular achievement. The problem is that most Chinese students don’t have time to participate in many extra-curricular activities — they are too busy studying for and taking tests. In fact, many Chinese parents see extra-curricular activities as a dangerous distraction from studying.”

    http://tinyurl.com/7us9vpc

  • http://facingzionwards.blogspot.com/ Luke Lea

    From Seeking Alpha:

    “I was reading two stories recently. They were positioned right next to each other. Both stories were about China. One was about a specific data point issued by the Chinese government, the Purchasing Managers Index (PMI) for March. The other story was about a crackdown in China on microblog websites. The microblogs were shut down allegedly for spreading rumors about the purge of Bo Xilai, the controversial party secretary of Chongqing. Most investors, economists and analysts would dismiss any connection between economic information and political gossip. They would be wrong, because both stories were about something crucial to markets: information.

    The PMI data was not interesting because it went higher or lower than the previous reading. It was interesting because the official information disagreed with information collected and analyzed by a private firm. Of course the discrepancy was often ignored. Many analysts not only assumed that the information was correct. They went happily on to assume that it actually meant something. Some of the more cautious tried to explain it. The truly analytical tried to correlate and justify the two readings to prove that there was some logic in the differences.

    The official PMI improved reaching its best level in 12 months. It climbed to 53.1 in March from 51.0 in February according to the China Federation of Logistics and Purchasing, which issues the data along with the National Bureau of Statistics. Above 50 is supposed to be an indication that the economy is expanding. In contrast final report from banking group HSBC and the London financial-services consultants Markit put the index at 48.3 for March, down from 49.6 in February, the fifth straight month of readings below 50.”

  • http://facingzionwards.blogspot.com/ Luke Lea

    The Quality of GDP matters (from Chovanec):

    “What I’m more concerned about — particularly in regards to China — is something Stiglitz mentions only in passing, the fact that GDP may overstate the real benefit of government spending or policies designed to artificially stimulate economic growth.

    The “resilience” of the Chinese economy right now is based, at least in part, on several factors that I find cause for concern:
    acceleration of a 20-year pipeline of infrastructure projects into a 5-year time horizon, including many seemingly redundant projects or vanity projects, or ones where the returns are far from clear (such as the construction of entirely new cities to replace perfectly good old ones);
    reconstruction in the aftermath of the Sichuan earthquake (which needs to be done, but is actually the replacement of destroyed value, not — as growth figures imply — a form of genuine economic expansion; otherwise you could tear down the whole country just to rebuilt it and call it “growth”);
    construction of large-scale luxury condo developments that go entirely unoccupied and serve merely as investment vehicles, on the expectation of future appreciation;
    easy state-provided credit that has kept businesses — many of them poorly run and financed — from exiting sectors (such as steel) that have chronic excess capacity;
    a massive shift in resources towards the State Owned sector and away from private enterprise (including the acquisition by the State of controlling stakes in successful private companies);
    misdirection of business loans into stock market and real estate speculation, fueling bubbles in both markets;
    direct investment by government ministries in order to speculate in — and thereby prop up – the real estate market, on the misconception that a rising real estate market is a “driver” of growth (rather than a result of real demand for more and better usable space driven by business expansion and rising living standards);
    the possibility of “channel stuffing,” where wholesalers and retailers are forced to build up unsold inventories to keep factories (particularly state-owned factories) running. Ironically, this shows up in China’s official statistics as “retail sales” because in China, retail sales are counted when the manufacturer ships, not when the products is sold to a consumer.

    I’m not saying everything about the Chinese economy is bad, although it might sound like that. There’s actually plenty that’s good. My main concern is that by pretending everything is wonderful, and brushing the real problems under the rug, China is missing a critical opportunity. Unlike India, which is struggling to revitalize its infrastructure, China already has the whole “building for the future” thing down pat. Bigger airports, taller skyscrapers, and more highways might be good, but they’re not the challenge China faces. Developing a vibrant service sector, improving quality and safety in manufacturing, building recognized and well-respected brands, developing more efficient and transparent capital markets, providing a social safety net that lubricates labor markets and liberates savings, moving towards full convertibility of the Renminbi, learning how to manage and grow businesses in political and social environments beyond China’s borders — these are the challenges China must master to take its economy to the next level. But I don’t see anything in the “8% growth” story that is moving China in that direction. It’s more (a lot more) of the same, and more of the same just won’t do. Count me as someone who still needs to be convinced on the “quality” of China’s current GDP figures.”

    http://tinyurl.com/832886b