How long can China’s economic trajectory last? That’s the big question now, isn’t it?
Recently we looked at a top-ten list of problems that the Chinese government will need to face. In terms of economic issues we listed real-estate prices as well as economic problems caused by the relationship between the local and federal government levels in China. I’ve read a few articles since then, which have highlighted this and rammed home the reasons why the Chinese leadership is going to need to consider new modes of economic development, sooner rather than later.
Whilst I wouldn’t be so presumptuous as to claim to have the answers to this question, there are two points I’d like to put forward for consideration. The first point was included in this Wall Street Journal article and blog post at China Bystander, which I came to via this article at the China Law Blog. Essentially, the thrust of the articles were that in order to become an advanced economy a country must undertake significant reforms. Strong institutions are a must, as is economic liberalization. At a certain annual per-capita income level (which they posit is $10,000 – $12,000 USD) the country reaches a make-or-break point, where the future is reform or stagnation. South Korea and Singapore made it. Mexico and Thailand didn’t. On current trends, China will reach this point in less than a decade.
There are of course, a number of factors at play here, some working in China’s favour and some not. I do wonder how the high incidence social and economic inequality in China factors into these calculations. This is usually always seen as a negative thing, but on the other hand, one might argue that this distorts the real ‘average’ income of Chinese citizens and might mean that there’s another year or two before reaching that income tipping point. As a numbers argument this might hold water but most would argue that this inequality is more likely to hasten developments rather than delay them.
That being said, China has a number of elements which set it apart from other economies, not the least of which is its sheer size.
The second point I’d introduce, is the precarious economic situation China already finds itself in. In this surprising interview with National People’s Congress Foreign and Economic Affairs Committee Vice Chairman Yin Zhongqin, Yin discusses the scale of the problem of local government debt. Essentially he admits that the local governments have no intention of paying back their debt. Another amusing article at China Debate highlights why there isn’t really any reason for local governments to make good on their debts. They get rewarded and promoted for growth, but they can avoid scrutiny when it comes to bad debt.
The result is $10 trillion yuan worth of debt and a structure which is still geared towards piling up debt via the construction of (often dubious) infrastructure and property development.
I’m consistently bemused by the pundits who extol the virtues of the Chinese economy after comparing it to the US economy (which is still coping with the aftermath of their housing bubble) all the while ignoring the fact that a similar act of self-deception is occurring on a grander scale throughout China, and this time it’s institutionalized within Chinese local government rather than the rapacious purchases of Wall Street bankers or optimistic home-buyers. At least, in the US case, there was somebody other than government to blame (though one could argue that the bailout has since nullified that line of argument).
If a Chinese crash occurs, who exactly, is going to take the blame? Which is my roundabout way of asking, does this have the potential to interrupt China’s ascent to the $10,000-$12,000 tipping point?