The year 2015 saw the advent of a new global phenomenon: widespread panic about the state of the Chinese economy. This article argues that despite China’s obvious slowdown, forecasts of imminent collapse are almost certainly exaggerated, and the negative thinking that inspires them is in need of correction.
In the wake of the loss of 18 percent of the value of China’s stock market during two weeks in January, it seemed that Western financial experts were lining up to declare economic disaster for not only China, but for the rest of the world as well. George Soros was the most notable of these doomsayers: he declared that China was already in the midst of a crash that was impossible to stop. Ambrose Evans-Pritchard of The Daily Telegraph was another who wrote a series of articles claiming that the end of the Chinese boom was nigh.
Yet six months later nothing much has happened. While it is true that the Chinese economy is slowing, since even the government’s official GDP growth figures are now fading to below 7 percent annually, there seems to be a lack of evidence thus far of the type of massive crash predicted by many pundits.
More interesting than the negative forecasts of many Western experts in themselves is the reasoning and motivations behind them. Are they really based on straightforward rational fear about the state of the global economy and the possibility of a Chinese crash triggering a broader global crisis? Or are there other emotions and reasoning underlying the negativity? Since it is notoriously difficult to predict economic trends, as the sudden and unexpected 2008 global financial crisis proved, is it necessary to focus on long-term negative trends in the Chinese economy as if they are proof of some kind of fundamental flaw? Or do Western pundits need to correct their thinking?
China’s Economy: Not What it Appears
It is not correct to say that there are not inbuilt weaknesses in today’s Chinese economy: there are. These are manifold and well documented. Nevertheless, like the inherent weaknesses in other countries’ economies (for instance Japan’s two decades of stagnation or the massive national debt in the US), the weaknesses of the “China model” do not necessarily mean that China is automatically doomed to collapse.
Take for instance the Chinese stock market. The nature of this beast dictates that its rises and falls should not be taken as seriously as many Western “experts” not versed in the reality of Chinese economics assume.
Anybody who has tracked the Chinese stock market long-term will have noticed that it is almost constantly out of sync with global trends, for instance rising when other markets fall, and falling when others rise. This is because it is neither representative of the wider Chinese economy nor properly linked in to global markets. Most major Chinese companies only have a relatively small proportion of their shares for sale on the open market, often around 20 percent, while the remainder are generally controlled in one way or another by central or local governments. The shares that are for sale are bought and sold by a far larger number of small investors than in stock markets in developed countries, since ordinary Chinese citizens have few other opportunities to invest (or gamble) their money. These factors render the Chinese stock market far closer to a casino than exchanges in Western countries, where a far higher proportion of shares are held by institutions and funds. For these reasons there is less reason to panic than there might appear even if the Shanghai stock exchange registers apparently dramatic losses.
Experts also point to China’s apparent housing bubble as a sign of imminent collapse. Yet, as Arthur Kroeber points out in his masterful new book entitled China’s Economy: What Everybody Needs to Know, due to the immaturity of the Chinese housing market, which only really came online in the late 1990s, there may not be as much of a bubble as there appears to be. To sum up his analysis, Kroeber, who has worked in business in mainland China for sixteen years and thus has an insider’s view of the workings of the Chinese economy, believes that in view of the large number of potential house buyers who are not yet on the property ladder, demand for housing among Chinese consumers may not yet have peaked.
Kroeber also gives short shrift to those who see Chinese disrespect for intellectual property rights, support for state owned enterprises (SOEs), and a centrally-controlled currency exchange rate as signs of weakness in the economy. He points out that the same strategies were used by the US in the late nineteenth to early twentieth centuries when it was in the midst of its biggest growth phase.
Similarly, China’s large amounts of debt circulating in the domestic economy are a matter of concern, but probably not remotely as terminal as commentators such as Evans-Pritchard believe. Japan and the US also have vast amounts of debt circulating in their economies, but continue to function, although debt is a drag on growth. Although China is at a totally different stage of development, its debt is mostly internal and can therefore be restructured by the government within the domestic system without such severe repercussions as might be assumed. Indeed, China has already successfully restructured the debt of SOEs once before, in the late 1990s to early 2000s; Beijing is now attempting to pull off a similar trick by exchanging ownership of debt by financial institutions for equity in failing companies, thus cleverly killing two birds with one stone.
In short, China’s economy, although admittedly not exactly as robust as the Chinese government would like, is not necessarily as weak as it appears.
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Gauging the Future
Although it is not actually possible to forecast future economic trends with as great a degree of accuracy as some economists appear to assume, there are a few pointers to where China’s economy is headed. Understanding these can help investors and experts avoid panicking.
First, China is definitely facing a demographic drag which is likely to pull down its economy in the long-term. Simply put, within ten to fifteen years there are going to be too many old people and not enough young workers in the economy. This is likely to lead to Japan-style stagnation by the late 2020s, if not before, but will not in itself cause total collapse, as Japan’s example clearly demonstrates.
Second, due to stimulus measures adopted after the global financial crisis in 2008, China is suffering from severe over-capacity in construction and industry. This is why the government has signalled the need for what it calls “supply-side reforms”, by which it means a shift of focus away from heavy industry towards services, innovation and high-tech. China is also trying to utilise at least some of its excess capacity in overseas infrastructure projects such as railway, port and dam building in countries it has included in its ambitious “Belt and Road” initiative, which sets out to connect East Asia with Europe and Africa. Whether these measures to cope with over-capacity will be successful is difficult to say, but at least we can be sure that the government has recognised the problem and is trying to do something about it.
Third, China’s central control over its currency and lack of freedom in markets are less of a concern than they may appear. In fact, China’s ability to regulate its economy in ways that are unfamiliar to Westerners steeped in liberal economic theory gives it something of an advantage in terms of long-term planning, although this comes at a cost. China’s SOEs tend to bloat and become burdened with debt and corruption. Nevertheless, if Beijing can continue to trim the SOEs as it has been since the late 1990s, and to make them more answerable to market forces, then more of them may become national champions in the same way that Japan’s Toyota and Sony and South Korea’s Samsung and Hyundai have been. In fact, companies such as Lenovo and Huawei have already achieved considerable success as multinationals, but there is surely more to come from other Chinese companies.
Fourth, China does risk becoming caught in a “middle income trap” of plateauing salaries and per capita GDP if more innovation and entrepreneurship are not encouraged. Centralised control, as Kroeber points out, does not assist with breaking out of the trap, since it makes people reluctant to take risks. This is likely to lead to economic stagnation unless the government can free up Chinese economic and social life more, and this is not going to be good for anybody. So this is a major challenge for Chinese political elites to solve, and it is not at all certain at this stage that they are going to manage it.
Summary: Try Not to Panic
So, although China’s economy presents its government with a complex set of problems which are difficult to surmount, and are likely to contribute to a continuing slowdown, the chances of a crash or hard landing, while real, are actually not as great as some observers claim. In fact, the cold reality of a gradual soft landing needs to be factored in to analyses of China’s economic future. If this is done, there is no need to panic when presented with the types of fluctuations in China’s stock market or currency exchange rates which are only to be expected under the circumstances.
In some cases, negative analyses of China’s economy are probably due to three psychological factors: wishful thinking from those who would like to see the Chinese government get its come-uppance, fear of China taking over, and suspicion of an alien culture and socio-political system. A calm analysis of the Chinese economy requires getting rid of these types of cognitive and emotional biases and seeing China for what it is: a continent-sized country containing a complex economic system full of built-in problems which demand ingenious solutions, but not one that is necessarily in imminent danger of collapse.
Panic can be averted if other countries take a calmer view of China that is not inspired by fear, and allow for the Chinese government’s ability to plan with long-term goals in mind. This is something that may be unfamiliar to Westerners accustomed to short-term thinking and opportunism in most of their democratically elected politicians (who want to be re-elected). Beijing operates according to completely different rules, and this requires a change of thinking among Westerners who ought to aim to understand China properly instead of just interpreting unfamiliar phenomena as symptoms of a crashing economy.
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About the Author
Jeremy Garlick lectures on the international relations of China at the Jan Masaryk Centre for International Studies, Faculty of International Relations, at the University of Economics Prague, Czech Republic. He specialises in China-Europe relations, with a particular focus on China-CEE relations, and also on theories of China’s rise. His doctoral thesis explored China’s future through scenarios. He previously spent six years teaching at universities in mainland China and South Korea.
