On Friday, I was on Bloomberg TV talking about China’s latest economic data for October (at the time of my interview, only the inflation figures had been announced), and some of the key challenges facing China’s ruling party as it begins its once-in-a-decade leadership transition. I took a distinctly contrarian view on the latest inflation numbers, arguing they do not create room for monetary loosening to give the economy a quick and easy boost, because the issue isn’t just how much money is sloshing around China’s economy, but where that money is going. To the extent that prices in certain key sectors like steel and coal — and I would add real estate, despite the official statistics saying otherwise — are falling, it reflects real overcapacity compared to real demand, and the absence of real value being created. The PBOC is right to resist pumping in more money and reflating bloated investment sectors, which would only reinforce the imbalances in China’s economy and prevent the kind of adjustment China needs towards more meaningful growth. You can watch my interview here.
I also discussed aspects of President Hu Jintao’s big address to the 18th Party Congress. Let me just highlight four key points of the speech that caught my attention:
1) Hu promised to double China’s 2010 GDP by 2020. That sounds really impressive, but it actually equates to just 7% growth going forward — and I’m assuming here that he meant double real, not just nominal GDP, because otherwise the real growth rate would be even lower. So really, he’s lowering the bar in a pretty significant way. Hu also set the goal of doubling per capita income by 2020. The problem is, if GDP and per capita income both double, China won’t see any meaningful rebalancing towards consumption, because household income won’t grow as a portion of GDP — and again, that’s assuming he’s talking about real income growth, because if income only doubles in nominal terms, it will decline relative to real GDP. To rebalance its economy China needs to grow income faster than GDP — which could either mean faster growth in income, or slower growth in GDP.
2) Hu spoke forcefully about how corruption seriously threatens to undermine the Party’s rule. I agree, and talked in my Bloomberg interview about why it’s so hard to deal with this problem. I should also add that inflation — driving investment growth by pumping more and more money into the economy — is one of the major factors contributing to corruption, because it drives a widening gap between those who have pricing power and those who don’t, and those who have access to credit and those who don’t. Inflation (from a big lending boom), and inflation-driven corruption, were two of the main grievances that fuelled the Tiananmen protests in 1989.
3) Hu also spoke of the need to “resolutely safeguard China’s maritime rights and interests” and called on China to become a “maritime power.” Given recent confrontations in the South China Sea (with the Philippines and Vietnam) and the East China Sea (with Japan and South Korea), as well as the launch of China’s first aircraft carrier, these lines surely caught the attention of China’s neighbours (as this FT article suggests).
4) Hu also appeared to push back against reformers’ calls to reduce the role of the state sector in China’s economy. Instead, he insisted China would “unswervingly” adhere to “the basic economic system in which public ownership is the mainstay and economic entities of diverse ownership develop together,” and said the party and government “should steadily enhance the vitality of the state-owned sector of the economy and its capacity to leverage and influence the economy.” His stance appeared to run contrary to the prescriptions in the World Bank report issued earlier this year in conjunction with top Chinese policy makers, which appeared to have the support of Hu’s protegé, Premier-in-waiting Li Keqiang, and had raised hopes that positive reforms might take place after the leadership transition. We’ll have to wait to see what, if anything, the new rhetoric means for actual policy.
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