Juan Carlos Martinez Oliva: Reflections on China's Growth

2015-11-09 IMI

Juan Carlos Martinez Oliva: Principal Director for Economics, Statistics, and Research, Bank of Italy The panicking attitude of markets and analysts vis-à-vis the ongoing economic slowdown in China might be a surpriseif one considers that a shift in aggregate demand components, and a moderation in the pace of China’s GDP growth,was long announced and expected. Indeed, the goal to reorient growth towards a more balanced and sustainable pattern, embedding economic, social, and environmental objectives, was clearly stated in the twelfth five-year plan approved by the National People’s Congress in March 2011. The message was subsequently reiterated in various occasions,and reaffirmed a year ago by President Xi Jinping in his announcement that Chinese economy was moving towards a new normal. In that occasion President Xi confirmed that the service sector and consumption demand were becoming the main driver of the Chinese economy and that urban-rural and regional disparities were shrinking. As a matter of fact, partial evidence on the changing attitudes of Chinese consumers suggests that people in China are spending larger amounts of their earning for health care and education, as well as for travelsand for entertainment. Such behavior is reflected by the service sector whose share of the economy has become greater than that of industry as a result of its faster dynamics. Shifting demand components from investment and net exports to private consumptionis a complex task requiring careful policy effort. If some conditions, such as implementing appropriate structural reform, are fulfilled, the growth risk arising during the transition may nonetheless be kept within a reasonable range. Fears by analysts and the market can be partially justified if viewed as a reflection of the growing relevance of China in the global economy, and its potential impact on the rest of the world.The widespread joke “when China sneezes the world catches a cold” exposes the undeniable fact that for its size and connection with the rest of the world, China has the potential to affect the global economy. The potential risk arisingfromChina’s growth transition is the main factor behind the International Monetary Fund revision of its world output growth forecastfor 2015 and 2016,by 0.4 and 0.2 respectively vis-à-vis the figures of last April’s World Economic Outlook. Economic agents usuallybenefit from successfully anticipatingmarket variables’ behavior;when high uncertainty affects the medium term outlook, forecasting may prove a frustrating exercise. Greater volatility in the marketsthen arises, due to inconsistent behavior determined by such frustration.This has been particularly true in the case of China, where the concern on GDP growth perspectives has been compounded in recent months by the massive downwards adjustmentof stock prices in China, which unleashed doubts that sometimes the authorities would not control the process, and sometimes they were controlling it too much. While stock prices adjustment seems now completed, market fears on the growth perspectives in China are nonetheless persisting. The polarization of views among analysts on the subject today is not different than three years ago, when the Lardy vs. Pettis debate took place on the WSJ’s China Real Time blog. Lardy and Pettis’ opposite viewsbasically regarded the pattern of the needed downsizing of the investment share over GDP, and how consumption could take the role of major determinant of growth. They also touched upon the ability of the state in China to implement reforms that might erode entrenched vested interests. Differently than Lardy, Pettis was doubtful that China’seconomy might escape the model followed by many countries before her in the past century. Such countries, after experiencing successful growth patterns driven by investment,had fallen in the trap represented by imbalances created by the build-upof huge stocks of indebtedness and debt servicing that financing past investment had entailed. Another contentious matter, according to Pettis, was the feasibility of the unrealistically high private consumption growth rates which would be needed to guarantee an acceptable GDP dynamics after the transitional shift in demand components. While that debate is still open today among economists and practitioners, with each side supporting its own views and argument, one more general consideration should be kept in mind. It is that when considering today’s China, conventional wisdom, policy blueprints, and the historicalexperience of other countries are of little or no use. For its ability to successfully pursue hard-to-reach goalsand to challenge conventional views, China has regularly surprised analysts and commentators. Among the most amazing examples, a special mention deserves the process of renminbi internationalization which, for its peculiar features and unprecedented speedis one of China’s most amazing successes.While successfully pursuing a process which has turned the RMB into a broadly accepted currency at the international level, and ready to enter in the SDR basket of currencies, China has challenged the opinions of those who thought that a “dual track reform” was doomed to failure. China is also displaying an extraordinary vitality and activism in creating visionary projects, such as the One Belt One Road initiative, or the AIIB, which are poised to improve promote growth and prosperity and improve lives in the regions affected. The growing use of RMB in trade and investment in Asia is fostering the activity of joint ventures and activities located in Hong Kong, the largest offshore RMB centre, meant to finance infrastructure projects in the Asian region. As I have argued some time ago, there is a mutually reinforcing interaction between the spread of RMB across the world markets and offshore issuances of RMB bonds aimed at financing infrastructural project. One should finally mention that China strikingly differentiates from other economies by being the fastest-growing country in world’s historical experience of the past 150 years. When China’s leader Deng Xiaoping started a revolutionary reform process in 1982, China represented 2.2 percent of the world’s GDP. That figure recorded a sevenfold increase in 30 years, to 14.6 percent in 2012. According to Daniel Kliman, a senior adviser for Asia at the German Marshall Fund, among other powers that were at the start of their economic ascent, such as Germany, Japan, the Soviet Union and the United States, only the latter was able to nearly double its share of world GDP in 30 years since the beginning of its rise. It is a widespread attitude of the economic profession to rely on coeteris paribus assumptions, linear projections, and cross-country comparisons. In the case of a very dynamic emerging economylike China this attitude might nonetheless prove counterproductive for a comprehensive analysis of its fast changing patterns.

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Juan Carlos Martinez Oliva: Reflections on China's Growth

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