China's Coming SlowdownPrintable Version
Tuesday, March 6, 2012
Over the past thirty years, China's economic growth has been unparalleled. Is China's economic growth unsustainable at its current pace? CNP President, Scott Bates and a panel of experts discussed whether China is undergoing a fundamental reassessment of its current economic platform.
Rebalancing the Giant
Nicholas Lardy, Anthony Solomon Senior Fellow at the Peterson Institute, outlined China’s medium-term economic risks and the appropriate policy responses associated with rapid growth and the concurrent slowdown. Mr. Lardy’s primary concern is the structural imbalance between investment and consumption rates. Property investment is the central driver for this problem, with what appears to be a growing housing bubble. With an unreliable (and unregulated) equity market, many people in China are turning to real estate assets as an alternative investment strategy. Property lending accounts for 20% of the loan portfolio for Chinese banks - a significant indicator of low domestic consumption.
Mr. Lardy believes this investment focus is unsustainable and that the way forward for the Chinese economy is a tangible emphasis on private consumption. For Mr. Lardy, the most significant policy prescription is market oriented interest rate liberalization. The underlying goal is to slowly give households more disposable income, which in turn will increase household spending. With increased flexibility over benchmarks, lower rates of savings from disposable incomes, and higher deposit and lending rates, private consumption will be encouraged with movement away from real-estate investment. In Mr. Lardy’s estimation, distortions in the economy (stimulated not by urbanization but by an unregulated equities market) lead to the buildup of an unsustainable asset investments model that can and should be addressed.
A Sound System
For Albert Keidel, Senior Fellow at the Atlantic Council, there is no great imbalance between investment and consumption in the Chinese economy. The operating distinction that informs Mr. Keidel’s point is the difference between share of consumption of GDP and rate of consumption. The share of GDP is not that high, yet the rate of consumption is still increasing as it follows strong growth. Moreover, Mr. Keidel argues that rapid investment is net-positive for consumption long-term (as it can be pegged to strong growth), and that active rebalancing could actually inhibit these rates in the long-term.
Adding to this discussion of balance in the Chinese economy, Mr. Keidel argued that China’s growth has not been primarily export led, and thus not beholden to U.S. demand. High rates of investment are not an indictment on the Chinese system, but rather indicative of how they respond to episodic crises (SARS outbreak, Financial Crisis) and these rates generally decline after the initial stimulus. For Mr. Keidel, the lowering of the target growth in the new 5-year plan to 7.5%, relates more accurately to the economic uncertainty in Europe rather than a cynical view of its own economic prospects. Additionally, the incredibly large amount of Chinese investment in public goods and services has served to support the fast growth model, not undermine it. Mr. Keidel contends that their system is sustainable and that the Chinese leadership knows this as well.
Rather than looking for the U.S. to implore China to more readily accommodate our economic interests, it is suggested that the U.S. rely instead on its own internal fiscal reforms to spur growth. Scott Bates closed the conversation by reiterating that a serious Chinese economic setback does not seem to be a short-term concern.