Tuesday 20 August 2019

Comment: China's crisis raises major questions for, and about, its leaders

The Pudong financial district of Shanghai, China is seen from across the Huang Pu river. Photographer: Dermot Tatlow/ Bloomberg News.
The Pudong financial district of Shanghai, China is seen from across the Huang Pu river. Photographer: Dermot Tatlow/ Bloomberg News.
A man on a bicycle rides past a residential construction site near Canton Tower in the Haizhu district of Guangzhou, China, on Saturday, Nov. 23, 2013. Photographer: Brent Lewin/Bloomberg

John Bruton

Can China re engineer its economy without crashing? Will the Chinese Communist leadership be able to communicate the need for major changes, both to its own people, and to global financial markets whose confidence must be maintained?

The future of the global economy, including that of Ireland, depends on the answers to those questions.

In the short run, a slowdown in the Chinese economy will hit some countries harder than others. Around 30pc of all Australian exports go to China. That will affect the many Irish people living there, while 29pc of South Korea's exports go to China and 18pc of those of Brazil.

On the other hand, only 5pc of Germany's exports go to China, and the figure is less for the rest of the EU. But if China's problems destroy confidence in the future, everyone will suffer.

The Chinese stock market has fallen 40pc from its 2015 peak. By comparison the US market is only 10pc down from its 2015 peak, and the Eurozone only 15pc. But it should not be forgotten that the stock market in China is still 50pc higher than it was 18 months age. Recent entrants to the market, mostly small savers, have lost a lot, but longer-term investors are still winning.

I have visited China a number of times in the last few years. The transformation of China in the past 30 years is one of the greatest economic transformations in history. The Chinese economy is six times as big as it was 20 years ago. Living standards for much of the population have been transformed beyond recognition.

But huge imbalances remain. House prices in major Chinese cities are out of reach of most employees, partly because of speculative pressures. The stock market was puffed up by Government policies. Air quality in the same cities is poor because China relies disproportionately on coal as a source of energy.

A residence permit system penalises and exploits country people going to work in cities. The one-child policy has already shrunk the labour force by 40 million people.

Although China is ageing rapidly, it does not have a comprehensive welfare state, so families have to rely on savings, sometimes in the form of stocks and shares, and house property, to provide for their retirement.

As happened in Ireland, government in China has come to rely to an unhealthy extent on property-related revenues. This is particularly the case with local government. Any unwinding of the property bubble could worsen an already widening gap between revenue and spending, exactly as happened in Ireland.

China has relied far too much on physical investment to stimulate its economy. At one stage China was pouring up to 40pc of its GDP into physical investment. When one is investing to that extent, one is bound to be putting some of the money into projects that will never yield a return.

Some of the newly built roads I saw seemed to me to be almost empty.

On one of my visits to China, in 2013, I drew the attention of my Chinese audience to the then latest IMF report on the country.

It contained warnings that will sound familiar to those who have studied recent Irish economic history.

The IMF talked, even then, of the risks in China of

* "a steady build up of leverage eroding the strength of the financial sector",

* "a boom in non-traditional sources of credit", and of the need to take

* "steps to reduce moral hazard to ensure that banks do not engage in potentially destabilising competition".

On the other hand, The IMF recognised that China has very well capitalised banks.

Most commentators believed that the Chinese Communist party, with its immense concentration of talented people in key positions, would be able to manage the huge structural changes required in the Chinese economy. It was believed they could impose technocratic solutions more easily than would be possible in a democracy.

The changes required, all of which must now be undertaken simultaneously, include:

* managing the dissipation of the stock market and housing bubbles,

* shifting from reliance on investment in physical infrastructure to consumer spending.

* allowing people to live and work wherever they can best make a living

* shifting away from coal to cleaner energy sources.

All these changes will create losers as well as winners, among a population that has become used to rapidly rising incomes. That is where the political difficulties will arise for the Communist Party leadership.

The fact that the Chinese authorities seem to have been taken by surprise and have had to revert to a policy of currency devaluation is worrying. So also is the apparent incoherence of their efforts to boost the falling stock market.

All this creates the suspicion that they are not as firmly in control of the situation as one might have thought, and may not be able after all to manage the structural changes required, without the sort of political turbulence we have seen in democratic countries.

Of course the Chinese economy is fundamentally very strong. But if perceptions are not managed well, that can be undermined.

Irish Independent

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