Be Careful What You Wish for from Chinese Policymakers

For years, I’ve read lament after lament that China’s economic model, far from being the New New Thing, is badly broken, leading to all sorts of distortions and imbalances in the world. Only when the Chinese reform that model, the argument ran, would the global economy manage to right itself.

We’re about to see that hypothesis put to the test.

The Wall Street Journal notes that China’s slowdown is rippling through the global economy:

As the numbers pile up showing China’s sizzling growth cooling down, industries world-wide—from German paper-cutter makers to Indonesian palm-oil exporters—are confronting an altered landscape of winners and losers.

The ones that benefited the most from China’s rise are now being hurt. Others, aiming at China’s 1.3 billion consumers, are faring better.

Growth in China, the world’s second-biggest economy after the U.S., has been slowing since 2007’s peak, but that slowdown has accelerated recently.

China’s second-quarter gross domestic product released early Monday showed the economy expanded 7.5% from the year earlier, slower than the 7.7% growth in the first quarter.

That matches the government’s full-year growth target of 7.5%, a rate that would make this year the slowest since 1990. Some economists figure China will grow even slower than that.

I’m gonna assume it’s slower than that, because, to be honest, the difference between 7.5 percent and 7.7 percent ain’t that big of a deal.

What’s hugely ironic about this is that the current Chinese leadership appears to be doing, well, exactly what the international community has been asking it to do for years — a point Bettina Wassener and Chris Buckley pointed out in the New York Times.

To a large degree, China’s recent cooling has been engineered by the authorities in Beijing, who are trying to steer the economy from an increasingly outdated growth model toward expansion that is more productive and sustainable.

While this slowdown has been happening for more than two years, a flood of comments from policy makers in recent months has made it increasingly clear that the new leadership that took the helm in March is serious about tolerating significantly slower growth for the foreseeable future in return for the longer-term gains of a more balanced economy.…

For years, China has relied on cheap credit, heavy manufacturing, infrastructure investment and exports as key economic drivers — a combination that produced double-digit annual growth rates for much of the past 30 years.

Increasingly, however, this growth model is running out of momentum. China’s population is aging and its labor force is shrinking, meaning that labor productivity has to be raised to make up for the shortfall. Rising wages and a stronger renminbi have eroded China’s competitiveness and are undermining its status as the blue-collar factory floor of the world.

This leads to two big questions that I would like to ask smarter China-watchers than I. First, does the current Chinese leadership actually have a plan? As Wassener and Buckley note:

Much uncertainty remains, however, as to the timing, pace and exact nature of the changes that Beijing wants to achieve: The policy pronouncements so far have been broad in nature, and little more detail is likely to be forthcoming until a meeting of the Communist Party Central Committee this autumn.

I think one can point to signs that Xi and Li are serious — but I’m not sure one can point to their blueprint on getting from an unsustainable to a sustainable path.

The second question is whether the Chinese leadership will be competent enough to execute this plan. Last month’s credit crunch does not necessarily offer that much comfort. As Simon Rabinovitch noted a few weeks ago:

[T]he central bank did a poor job of communicating its policy. It did not warn banks of the coming squeeze and was slow to explain what it was trying to achieve. In an interview with Reuters, Jiang Jianqing, chairman of Industrial and Commercial Bank of China, the country’s biggest bank, made revealing comments about how his institution was in the dark at the height of the panic. “Those few days, even for us, we were genuinely a bit tense,” he said.

Huang Haizhou, an executive with China International Capital Corp, a top investment bank, was even more direct. “The central bank has to increase its transparency,” he said at a public forum.

By triggering a cash crunch, the central bank had hoped to warn banks that markets are not predictable. But what it has done instead is show that financial policy in China is even less reliable.

The critics of the current Chinese economic model aren’t wrong. The system needs reform. But the current model worked for quite some time for some very powerful actors, so this change is unlikely to be smooth.

Developing … in some very uncertain ways.