How Much Slowdown Can Beijing Tolerate?

The notion of a bottom line for growth and stability is a myth. The truth is more complex.

Minxin Pei, 07/22/13

The once-mighty Chinese economy is now headed in one direction only – downward. GDP growth was 7.5 percent in the second quarter of this year, down slightly from 7.7 percent in the first quarter. In the last quarter of 2012, the Chinese economy grew 7.9 percent. The deceleration from 7.9 to 7.5 percent may seem relatively minor – only 0.4 percentage point in six months. However, when annualized, this figure means that the Chinese economy has lost about one-tenth of its growth momentum since last year.

The question on the minds of most people is how much of a slowdown Chinese leaders can tolerate. Many people, including senior government officials in the West, seem to believe that Beijing will not allow its GDP growth per annum to fall below 8 percent (sometimes one also hears 7 percent as the magic number) because growth below that line is supposed to trigger social unrest. Typically, those who place a lot of faith in this number argue that unemployment will explode once growth stalls. For a government obsessed with domestic stability, that would be a nightmare.

While seemingly persuasive and plausible, the widespread notion that there is one magic growth number that will trigger panic in Beijing is simply a myth.

One reason to dismiss the purported connection between growth and unemployment-based social unrest is the divergence between growth and employment in the Chinese economy in recent years. Because of its investment-driven growth model, China’s economic expansion has been capital-intensive but labor-light. Modern power plants, steel mills, toll roads, and ports are expensive to build, but require a small number of workers to operate. As a result, each additional yuan invested in the Chinese economy is generating fewer jobs. This disconnect between investment-driven growth and job generation can be seen in these numbers. Between 2004 and 2009, Chinese investment in equipment and plants quadrupled, but the number of manufacturing jobs increased only by 15 percent.

Another factor that has greatly alleviated the pressure on employment is China’s aging population. The labor force is shrinking. Consequently, economic slowdown will not result in an instant increase in unemployment. Even in today’s environment of decelerating growth, China’s unemployment has not worsened.

To be sure, Chinese leaders would prefer balanced high growth to low growth. However, the current leadership is aware of the enormous risks of allowing highly distorted growth to continue. Since 2008, Beijing has maintained growth with a massive injection of credit, much of it invested in speculative real estate, excessive industrial capacity, and infrastructure with dubious financial viability. Continuing this disastrous policy would imperil the political future of new Chinese leaders, particularly Xi Jinping and Li Keqiang, who will be up for reappointment in 2017.

That is one of the main reasons Chinese leaders seem to tolerate persistent growth slowdown – so far.

But will they lose their calm if growth falls below a certain level?

The truth is that Chinese leaders themselves probably do not know the magic growth number that will force a decisive response. The factors that go into the political calculations of Chinese leaders are complex and dynamic. They are not as simple as the number of unemployed workers or the amount of bad loans in the banking system.

In all likelihood, the most important factor determining Beijing’s response to a slowing economy is the level of confidence and security of its top leaders. Typically, less confident and secure leaders tend to respond with panic whenever the economy shows signs of weakness, as we saw in 2008-2009. More confident and secure leaders are more likely to show a greater tolerance of subpar growth. In the wake of the East Asian financial crisis of 1997-1998, the Chinese economy stopped growing altogether, but the premier at that time, Zhu Rongji, did not react with undue alarm. Instead of throwing good money after bad, he proceeded with a massive restructuring of hundreds of thousands of moribund state-owned enterprises, resulting in 35 million lay-offs. Of course, the level of social unrest rose. But the Chinese Communist Party (CCP) weathered the storm, with plenty of help from its anti-riot police and security forces.

Another critical factor in influencing Beijing’s response is the effects of an economic slowdown on the ruling elites. Less informed observers give more weight to the CCP’s fear of mass uprising in economically distressful times. They overlook the regime’s enormous capacity for repression. Of course, social unrest may rise during recessions, but if the party can count on its repressive apparatus, such unrest is easily contained, as was the case during the mass layoffs at the end of the 1990s.

What Chinese top leaders really fear is the impact of a slowing economy on elite unity. In China’s investment-driven economy, slow growth means less investment, which in turn means fewer spoils to be divided among the ruling elites. Local officials with less money to build projects will lose corruption income and opportunities to burnish their record and advance their careers. Their anger and frustrations will be concentrated on the top leadership, which will be heavily lobbied to loosen credit and rekindle growth. In this case, economic policymaking at the top will be swayed not by the relationship between growth and employment, but by pure elite politics.

If there is one economic factor that truly worries top Chinese leaders, it is the systemic fallout from economic slowdown. More specifically, in a highly leveraged economy, as China is today, a significant deceleration could quickly lead to cascading financial defaults. Deeply indebted real estate developers, local governments, and state-owned enterprises will not pay their creditors (both banks and suppliers), thus triggering chain default. This could throw the entire economy into turmoil. We saw a little preview of this during the credit squeeze in June.

What this analysis shows is that many factors, some of them intangible, determine Beijing’s tolerance of slow growth. No magic number will make Chinese leaders think or behave differently.

http://thediplomat.com/2013/07/22/how-much-slowdown-can-beijing-tolerate/

The Myth of China’s Economic Reform

William Pesek, 07/19/13

Can we please have a moratorium on the word “Likonomics”? Premier Li Keqiang’s plans to overhaul the Chinese economy have hardly earned such a grand moniker yet.

Say what you will about “Thatchernomics” or “Reaganomics,” but Margaret Thatcher and Ronald Reagan fundamentally altered the British and American economies. No one is rolling their eyes at “Aquinomics,” President Benigno Aquino’s thus-far successful prescription for the Philippines, the onetime “sick man of Asia.” By contrast, Likonomics is a ridiculously premature nod to ideas that are, at best, still on the drawing board and might never come off it.

In Japan, economists and a cheerleading media now seem to realize they bought into “Abenomics” too hastily, creating the myth that Prime Minister Shinzo Abe’s revival plan is succeeding when it has only just begun. Game-changing reform efforts take several years to implement. We are a long way from knowing if Li has the skill or political will to manhandle China onto a more sustainable growth path, led by domestic demand.

How will we know? There are three clues to whether Likonomics is more than a hollow slogan.

First, can Li avoid further stimulus? The premier’s supposed shock-therapy program already has its own myth: that China is engineering a sharp slowdown. Li doesn’t WANT growth to slide toward 5 percent -- no Chinese leader in his right mind would at a time when protests are becoming commonplace. Rather, China’s export- and investment-led growth model is burning out on Li’s watch.

Magic Wand

Well before Li and President Xi Jinping officially took the reins in March, exports were falling, manufacturing was contracting and economists were downgrading forecasts. Big reforms are always easier when growth is booming. If Li could wave a magic wand and get gross domestic product back into double-digit territory without pumping more air into China’s credit bubble, he would in a Shanghai minute. He needs reasonable growth to stabilize his power base and figure out how to turn the economy upside down without crashing it.

At the same time, Li’s program is about “deceleration, deleveraging and improving growth quality,” according to economist Huang Yiping of Barclays Capital Asia Ltd. in Hong Kong, who is credited with coining the term Likonomics. Carrying it out will hasten China’s downshift. The premier is sure to face mounting calls for the government to throw new cash at the economy -- from businesses and from 1.3 billion Chinese, who are becoming more vocal and defiant.

Li himself has pledged that China’s growth and employment will stay above a certain floor. That raises doubts about whether he’s ready to accept the pain necessary to see through his reforms. Economists are already buzzing about a “Li Keqiang put” not unlike former Federal Reserve Chairman Alan Greenspan’s. More stimulus would only exacerbate China’s overcapacity problem and make the eventual debt reckoning bigger and costlier.

Second, is Li ready to allow a headline-grabbing default or two? The secret to China Inc.’s success has been plentiful and mispriced credit. Reckless borrowing, largely through local government-financing vehicles, was the fuel behind China’s years of double-digit growth. Special-purpose companies set up by authorities across China used this cheap money to fund giant infrastructure projects.

Companies such as China Rongsheng Heavy Industries Group Holdings Ltd., China’s biggest shipyard outside state control, are already begging for bailouts. Entire cities such as Ordos -- a white-elephant project in Inner Mongolia -- need help, too. According to the National Audit Office, the brand of financing vehicles that got Ordos in trouble amassed totaling $1.7 trillion at the end of 2010 (you can bet it’s much, much higher now).

Cutthroat Politics

Only after a big default or two will markets begin to price Chinese risk appropriately, allowing Beijing to liberalize interest rates. Is Li willing to accept the consequences -- turmoil in markets, mass unemployment and credit downgrades?

That’s nothing compared to the third test: inviting the Communist Party’s wrath. There’s ample reason to doubt Li’s doctorate in economics will help him navigate Beijing’s cutthroat politics. If you think Abe faces resistance from vested interests, imagine what awaits Li as he tries to get Communist Party power brokers, ambitious regional leaders, a vast network of state-owned companies and the Chinese people to make sacrifices.

Li must take on thousands of party stalwarts who make millions, or billions, of dollars from dodgy land grabs, insider trading and old-fashioned rent-seeking. Politics will stymie Li’s every effort to reduce the state’s role in the economy and create the vibrant private sector China needs in order to thrive. We’ll have a sense of whether he’s serious when the number of unnamed-source gripes in the official media starts to spike.

We are years from knowing if Li can live up to the example set by Deng Xiaoping, who truly did revolutionize China’s economic system. If Li can, Likonomics will deserve to go down in history as a model for developing nations everywhere. Until then, let’s give the phrase a rest.

(William Pesek is a Bloomberg View columnist. He is based in Tokyo and writes on economics, markets and politics throughout the Asia-Pacific region.)

To contact the writer of this article: William Pesek in Tokyo at wpesek@bloomberg.net.

To contact the editor responsible for this article: Nisid Hajari at nhajari@bloomberg.net.

http://www.bloomberg.com/news/2013-07-18/the-myth-of-china-s-economic-reform.html

Hitting China’s Wall

Paul Krugman, 07/18/13

All economic data are best viewed as a peculiarly boring genre of science fiction, but Chinese data are even more fictional than most. Add a secretive government, a controlled press, and the sheer size of the country, and it’s harder to figure out what’s really happening in China than it is in any other major economy.

Yet the signs are now unmistakable: China is in big trouble. We’re not talking about some minor setback along the way, but something more fundamental. The country’s whole way of doing business, the economic system that has driven three decades of incredible growth, has reached its limits. You could say that the Chinese model is about to hit its Great Wall, and the only question now is just how bad the crash will be.

Start with the data, unreliable as they may be. What immediately jumps out at you when you compare China with almost any other economy, aside from its rapid growth, is the lopsided balance between consumption and investment. All successful economies devote part of their current income to investment rather than consumption, so as to expand their future ability to consume. China, however, seems to invest only to expand its future ability to invest even more. America, admittedly on the high side, devotes 70 percent of its gross domestic product to consumption; for China, the number is only half that high, while almost half of G.D.P. is invested.  

How is that even possible? What keeps consumption so low, and how have the Chinese been able to invest so much without (until now) running into sharply diminishing returns? The answers are the subject of intense controversy. The story that makes the most sense to me, however, rests on an old insight by the economist W. Arthur Lewis, who argued that countries in the early stages of economic development typically have a small modern sector alongside a large traditional sector containing huge amounts of “surplus labor” — underemployed peasants making at best a marginal contribution to overall economic output.

The existence of this surplus labor, in turn, has two effects.

First, for a while such countries can invest heavily in new factories, construction, and so on without running into diminishing returns, because they can keep drawing in new labor from the countryside.

Second, competition from this reserve army of surplus labor keeps wages low even as the economy grows richer. Indeed, the main thing holding down Chinese consumption seems to be that Chinese families never see much of the income being generated by the country’s economic growth.

Some of that income flows to a politically connected elite; but much of it simply stays bottled up in businesses, many of them state-owned enterprises.

It’s all very peculiar by our standards, but it worked for several decades. Now, however, China has hit the “Lewis point” — to put it crudely, it’s running out of surplus peasants.

That should be a good thing. Wages are rising; finally, ordinary Chinese are starting to share in the fruits of growth. But it also means that the Chinese economy is suddenly faced with the need for drastic “rebalancing” — the jargon phrase of the moment. Investment is now running into sharply diminishing returns and is going to drop drastically no matter what the government does; consumer spending must rise dramatically to take its place. The question is whether this can happen fast enough to avoid a nasty slump.

And the answer, increasingly, seems to be no. The need for rebalancing has been obvious for years, but China just kept putting off the necessary changes, instead boosting the economy by keeping the currency undervalued and flooding it with cheap credit. (Since someone is going to raise this issue: no, this bears very little resemblance to the Federal Reserve’s policies here.) These measures postponed the day of reckoning, but also ensured that this day would be even harder when it finally came. And now it has arrived.

How big a deal is this for the rest of us? At market values — which is what matters for the global outlook — China’s economy is still only modestly bigger than Japan’s; it’s around half the size of either the U.S. or the European Union. So it’s big but not huge, and, in ordinary times, the world could probably take China’s troubles in stride.

Unfortunately, these aren’t ordinary times: China is hitting its Lewis point at the same time that Western economies are going through their “Minsky moment,” the point when overextended private borrowers all try to pull back at the same time, and in so doing provoke a general slump. China’s new woes are the last thing the rest of us needed.

No doubt many readers are feeling some intellectual whiplash. Just the other day we were afraid of the Chinese. Now we’re afraid for them. But our situation has not improved.

http://www.nytimes.com/2013/07/19/opinion/krugman-hitting-chinas-wall.html?_r=0

We've heard of 'Bernanke put', but a 'Li Keqiang put’?

Dhara Ranasinghe, CNBC, Senior Writer, 07/16/13

China's Premier Li Keqiang is likely to unveil measures in coming months to prevent growth in the world's second largest economy falling too sharply, say analysts at Bank of America Merrill Lynch in what they describe as the "Li Keqiang put."

The phrase stems from the "Bernanke put," a term used to describe an implied floor under the market created by Federal Reserve Chairman Ben Bernanke maintaining aggressive monetary stimulus.

(Read More: Will Bernanke surprise markets again this week?)

In the context of China, where data on Monday showed the economy slowed for a second straight quarter, the "Li Keqiang put" means that China's premier is likely to take some action to make sure Beijing achieves its 7.5 percent growth target for 2013.

"The 'Li Keqiang put' means that in the first couple of years, Premier Li will try to prevent a growth hard-landing and a financial crisis," said analysts at BofA Merrill Lynch in a note.

"That's why we expect Li's cabinet will introduce some measures to arrest the growth slowdown (in year-on-year terms) in the next couple of quarters," they added, saying that they expect growth-supportive measures such as infrastructure projects that can be used to fight pollution and encourage the growth of consumption.

(Read More: Just how low will China allow growth to go?)

Li Keqiang, the man in charge of China's economy, formally became Chinese premier in March and will hold the post for the next 10 years.

So far China's new leaders have expressed a tolerance for a slowing economy as China makes a shift away from a reliance on exports and dependence.

7.5%: The floor for growth?

"As the government is highly unlikely to accept missing the 7.5 percent growth target, we expect modest, targeted measures in the third quarter to boost aggregate demand – accelerated approvals of infrastructure projects, improving interbank liquidity and more fiscal spending," Dariusz Kowalczyk, senior economist at Credit Agricole, said in a note.

Data on Monday showed the Chinese economy grew an annual 7.5 percent in the second quarter of the year, in line with expectations, down from 7.7 percent in the first quarter. Some analysts forecast the economy could slow to as low as 4-to-5 percent by the end of the decade.

(Read More: Watch out: China's growth could fall to 4-5% by 2020)

"There are lot of things going on in China that suggest the government is trying to make some changes and that some pain is required in order for those changes to take place. And we're keen to understand whether the government will stay the course or if they will pander to investors," said Marc Desmidt, managing director at asset management firm Black Rock Asia-Pacific on CNBC Asia's "Squawk Box" on Tuesday.

"We'd like to see them hold the course. They have 10 years and they [China's politicians] know they have a couple of years to make the changes and then reap the rewards," he said, adding that there was a fine line between whether or not to head back down the stimulus path.

-- By CNBC's Dhara Ranasinghe; Follow her on Twitter: @DharaCNBC

http://www.cnbc.com/id/100888337?__source=yahoo%7Cfinance%7Cheadline%7Cheadline%7Cstory&par=yahoo&doc=100888337%7CWe%27ve%20heard%20of%20%27Bernanke

下限論 防止經濟失速

經濟日報/香港特派員 李春，07/15/13

大陸總理李克強近期提出了個「下限論」，北京財經圈中有個說法，說這「下限論」來自韓亞航空空難的啟發。大意是韓亞航空最近航機失事，是因降落時低速破限，導致了「硬著陸」；李克強認定大陸經濟不能失速，否則也會「硬著陸」。

這種說法是牽強的臆斷，但李克強因何要提出「下限論」，是否擔心大陸經濟失速，經濟又會否出現「硬著陸」，倒值得討論。

對大陸經濟來說，7月15日是個重要的日子，這天大陸國家統計局要公布關鍵性的宏觀經濟數據，其中最重要的是國內生產總值（GDP）的數據，6月的數據一公布，第二季的數據和上半年的數據也就出來了，大陸經濟成長速度及走勢到底如何，謎底可告破解。

回過頭來看李克強的「下限論」，是他7月9日在廣西主持部分省區經濟形勢座談會上提出來的。召開地方「片會」，在關鍵數據公布之前，透露宏觀調控政策走向，是中共領導人的慣例。李克強在這次會上的講話，被視為經濟政策的一種轉向，引起很強烈的關注，甚至後來股市的急升，被認為來源於此。

李克強在這次會上的講話，提出的「下限論」，原話是：

「經濟增長率、就業水平等不滑出下限，物價漲幅等不超出上限。在這樣一個合理區間內，要著力調結構、促改革，推動經濟轉型升級。」

所謂「下限」，主要有經濟成長率和就業水平兩個指標。

大陸就業困難正在加劇，就業問題會否惡化和能否解決，與經濟成長的速度有密切關係，所以「下限」更受關注的，是經濟成長速度的「下限」。

經濟成長速度的「下限」，李克強沒有明言，但外界都理解是指全年經濟成長的預期目標，今年大陸國務院定下的全年經濟成長預期目標是7.5%，這個目標已算是下調了，多年來這一目標都以「保8」為底線。

今年初，普遍預測大陸經濟將開始反彈，會出現「8上」，即經濟成長速度超過8%，4月第1季經濟數據出來，GDP增速回落至7.7%低位。當時傳出李克強接受經濟調低的現實，不會出手刺激經濟，而要增強調整結構，經濟界更以之為「克強經濟學」的核心內容。

15日公布的GDP增速，曾有不少預測，其中預測得最多的是7.6%，也就是說，經濟增速會較首季再有輕微的下行。但下限何在，有認為會是7%，有人甚至認為是6.5%，但以7.5%為下限，可能更符合事實，這是向全國人大報告的全年預期目標，以此為李克強「下限論」的圖解，可能更符合事實。

在北京官場還有另一種解讀，說這「下限論」不完全來自經濟的低位運行，會帶來多大的現實威脅，而在於李克強前一段的表現，引來利益集團的反彈；這利益集團包括多方面，既有地方利益集團也有中央利益集團。

所謂地方利益集團的反彈，可以理解地方經濟的下滑，已令地方諸侯哇哇叫了；中央利益集團則可以理解壟斷勢力，包括金融也包括其他大型中央級國企，他們也感受到經濟下滑帶來麻煩。

在7月10日到13日的三天內，李克強兩度提出「穩增長」。其實在「下限論」之外，更要注意的是，李克強提出了一個「合理的宏觀調控政策框架」，他心目中這個框架的核心內容是九個字，即「穩增長、調結構、促改革」。

也就是說，李克強有意適當讓步，以適當放寬政策來穩增長，換取調結構的空間，贏得促改革的時間，這才是他宏觀調控的主調。在這種理解下，大陸經濟下半年預計會步步回穩，經濟成長可望由低而高。

http://udn.com/NEWS/MAINLAND/MAI1/8028566.shtml?ch=pdm_main

中國擁鄧小平風潮背後的玄機

【泰國世界日報/社論】 ， 07/08/13

北京的「學習日報」7月1日刊登「鄧小平的政治智慧」一文，引起北京政壇廣泛注意。這篇文章被認為是近期擁鄧風潮中的一個小高潮，而且進一步挑明擁鄧潮的政治玄機，不僅鮮明反左，更是文諫勸進。

學習時報是中共中央黨校機關報，撰寫「鄧小平的政治智慧」一文者，是中共中央黨校黨建教研部主任王長江。王長江近年來是中共一系列重要文件的起草參與者，同時也是色彩鮮明的改革派。他這篇長文，主要總結鄧小平「奪旗幟、塗顏色、算明帳、不爭論」四大招。

所謂「奪旗幟」，是超越意識形態，把大量失去的話語權收入囊中；「塗顏色」，即以「中國特色」，既回擊僵化保守力量對改革開放路線質疑，又切斷西方勢力要中國走資本主義道路的念想；「算明帳」，說的是對好的東西，該承認就承認下來，不含糊，不藏著掖著、吞吞吐吐，但心中有數，不被人牽著鼻子走；「不爭論」則主要是指不搞無謂的意識形態論爭。鄧小平不止一次稱這是他的「一個發明」。

鄧小平這些政治智慧，人人皆知，王長江這篇文章為何引起北京政界關注，甚至有些方面表現振奮呢？首先這篇文章，代表著擁鄧的小高潮。

作為在中共官場內有一定影響力及在理論界被視為風向標的刊物，在王長江此文之前，學習時報已刊發了另一篇文章，題為「逆水行舟，不進則退 -- 重溫鄧小平的改革觀」，作者是中共中央黨校馬克思主義理論教研部的李海清。但作者名聲沒王長江大，觀點沒有王文辛辣鮮明，影響力稍小。

但李海清文與王長江文有個共同特點，即名為擁鄧，實為對中共「今上」勸進。李海清的文章中說，「在固化的求穩思維之下，風險稍大的做法就可能不會嘗試，改革的探索就有可能趨於保守，然而謹小慎微的做法往往會使改革機遇在猶豫不決、瞻前顧後之際喪失。而一味拖延、貽誤機遇的後果就是使難題解決的條件越來越不具備，解決問題所付出的代價與成本越來越高。」

王長江的文章更進一步說，「我們不難發現，千招萬招，在(鄧小平)他老人家那裡，我們絕對找不到退讓這一招。躲閃，畫地為牢，把自己封閉起來，讓出陣地，與他老人家的性格和勇氣是格格不入的。」

擁鄧風潮不僅捲起在學習時報這塊近期的反左陣地之上，在其他改革派活躍的地方和改革派人群中，也有表現。改革派學者名譽的吳敬璉，就大講鄧小平不爭論，但有自己的改革總體規畫。著名學者張維迎，更直指改革的挑戰，取決於中共領導人本身，因為在中國的體制下，現在領導人不像鄧小平那樣有權威性，也不像毛澤東有權威性。領導人本身不能缺少膽略，像80年代的時候改革寧肯犯錯誤，也不能不改革，要殺出一條血路。

在王長江、吳敬璉等人之外，還有更多的理論界和知識界人士，近期在擁鄧上已有不約而同之舉。其最初表現，應當是針對近期左的回潮，包括憲政爭議風波等，而作出反擊。到近期，其相關言論，已直接推到當今領導人身上，著名學者周其仁更說出「拖延改革，永無寧日」的重話。

無法迴避的是，目前越來越強烈的擁鄧潮，話都是說給今天中共最高領導人習近平聽的。在北京知識界、理論界中，一個成形的看法，是在中共18大後，特別是今年3月人事大調整結束以來，習近平出現全面左轉的表現，引起他們極大憂慮。

當然，對習近平左轉，目前仍有兩種解說，一說習近平是「打左燈向右轉」，為消解左派制約而轉左，以謀更大的向右；一說是傳統左派勢力，綁架習近平向左轉，取得初步成功。不管那種說法，擁鄧潮的出現，目的都是拉習脫左，回歸改革。其成效和結果，我們只有等著看。

【2013-07-08/泰國世界日報】

http://mag.udn.com/mag/world/storypage.jsp?f_ART_ID=465034

China’s Great Rebalancing Act              

The government is at last showing signs of resolve, but the road ahead will be testing.

James Parker, 07/05/13

The rebalancing of China's economy could well be one of the most profound stories of the early 21st century. If the rebalancing efforts fail, the significance will be much greater. After years of false starts, it appears that this epic process may finally be getting underway in earnest. At the very least, China’s leaders are making the right noises.

In China’s context, rebalancing implies the complicated and difficult process of lowering investment levels, increasing household consumption, reducing the role of the state sector, and significantly altering the way credit is allocated. Complicating this mission is an environmental crisis, the weak global economic backdrop, serious inequality within the population, widespread corruption, a tough real estate market, and the growing mountain of debt in China’s sprawling, distorted financial system. Despite these challenges, the rebalancing process must be undertaken soon if China is to achieve sustainable growth in the future, allowing it to continue its re-emergence onto the global stage and deliver on the ever-increasing economic expectations of its people.

Two key factors jump out as one considers how this process must proceed. First and foremost, strong political resolve will be vital for successful rebalancing. Moreover, there will be unexpected negative consequences that will cause various players to adjust their expectations and behavior in reaction to the changes that emerge. Knowing when to counteract these negative shocks and when to let them run their course will be an unenviable and delicate balancing act unto itself.

Recent events have illustrated potential and inevitable difficulties in this ongoing process. A cash crunch in China’s interbank markets caused a mild panic as well as several failed debt auctions (including by the Ministry of Finance and the Agricultural Development Bank of China). Growth rates and other data are worsening, prompting downgrades to growth forecasts and even a sovereign debt downgrade by Fitchearlier this year.

Although growth has moderated from the double-digit highs of the previous decade, even maintaining more comfortable high single-digit GDP figures is proving increasingly tough, despite credit growth spiraling at more than 30 percent per year since the global financial crisis. As the limits of over-investment and overcapacity are reached, a rebalancing is ever more urgent. The alternative is a larger debt crisis and collapse in growth down the line.

In order to rebalance away from inefficient and increasingly wealth destroying investment-driven growth, China’s consumption rates must grow faster than GDP for many years, as has long been argued by Peking University’s Michael Pettis. The difficulty is that China’s economic and financial system is heavily skewed towards supporting production and investment at the expense of consumption and household income.

This distortion is based on the provision of subsidized credit to often-inefficient firms through financial repression, an undervalued currency that helps exporters at the expense of everyone else, the transfer of wealth from households to companies through inadequately compensated land seizures (the source of much unrest at the local level), and wage growth significantly lagging productivity levels.

Rebalancing all this will not be easy.

Why? First consider the issue through the prism of “political resolve.” Subsidies, be they implicit or explicit, as well as ever increasing amounts of easy credit, have been addictive. What’s more, they have been allowed to continue for so long that “addict” sectors and industries (particularly state-owned enterprises with better credit access) have grown out of proportion—both in terms of their importance to the economy and their influence in China’s political patronage system. Examples are numerous, but shipbuilding, steel, aluminum and the solar industry are most often cited.

This resolve has been found wanting in the past. Former Premier Wen Jiabao talked many times about tackling China’s “unbalanced, uncoordinated, and unsustainable” economy and the associated real estate bubble, but ultimately, Wen’s government was unable to deliver. Increasing consumption was included as a goal in the last five year plan, and had been discussed by various leaders for years. Again, changes thus far have not been sufficient, and consumption remains relatively weak.

Part of the reason was that the comfortable external environment which had been absorbing much of China’s overproduction collapsed in 2008, just as consensus for change in China was building. The post-crisis stimulus unleashed yet more credit and investment, principally aimed at avoiding the biggest fear of China’s leaders – a growth slowdown and unemployment – rather than at putting the economy on a more sustainable, balanced path. Rescuing growth meant a big step backward in nascent financial sector reform. Since 2009, every time measures were introduced to tighten and restrict normal or “shadow” credit, to control the property sector or to rein in local government debt, the subsequent falls in growth rates and feared employment effects prompted U-turns and delays in proposed policies. The resulting piecemeal measures prevented China from rebalancing, and indeed runaway credit growth has continued. Now, time is running out.

The result: One of the biggest questions currently facing the global economy is whether or not the new government of Premier Li Keqiang and President Xi Jinping in Beijing has the necessary political capital (or confidence) to push through the painful rebalancing against entrenched interests and inertia in local governments, state owned enterprises, the export sector and indeed the financial system itself.

On the latter target, the People’s Bank of China (PBOC) appeared to show a great deal of resolve when it recently refused to come to the aid of China’s interbank and money markets as rates spiked and pressures grew. Since then, its stance has apparently moderated slightly but as the potential significance of the new less-supportivereality set in, China’s stock market investors panicked, sending the country’s main indices tumbling.

Yet, here is an example of the second factor affecting China’s rebalancing: As the economy adjusts, the reactions and behavior of various players will have unexpected consequences that could exacerbate any slowdown or increase instability. For example, the recent fall in China’s stock markets effectively delayed the plans of many medium sized Chinese banks to list shares in Hong Kong. At the time of writing, current valuations would breach rules that forbid them listing at low price-to-book ratios. The knock-on effects on their capital raising, and thus business, are significant. This situation may reverse, but it is still illustrative of the kind of unexpected consequences that can ripple out from any attempts to rebalance the economy.

Equally, as the China “high-growth story” ends, forecasts are downgraded, and headlines turn negative, it would not be surprising for both foreign and domestic players to reduce their investment and expansion plans for China. Reduced investment, while a desirable part of rebalancing, must also reduce GDP growth (absent an offsetting increase in consumption, exports or government spending). This is one of the reasons why China must slow. Yet such a “feedback” loop could push things too far and result in investment collapsing rather than reducing in an orderly, easy-to-manage fashion. Indeed, some genuinely productive investment could disappear alongside the waste as expectations about the country’s outlook change and pessimism replaces the previous euphoria.

The long journey of rebalancing on which China must embark contains numerous potential negative feedback loops, all of which will challenge political resolve. Nowhere is the potential for disruption as high as in the country’s distorted and opaque financial system.

The PBOC’s aforementioned panic-inducing squeeze on the interbank markets was aimed at parts of the shadow banking system enabling irresponsible lending, specifically wealth management products (WMPs), and the use of reverse repurchase agreements (reverse repos) to avoid regulatory risk controls. Credit (especially the shadow kind) is being used to roll-over non-performing loans. Any crackdown will seriously hit both corporate and financial sector balance sheets. Even if no bank is allowed to collapse, recapitalizing them (again) will hit existing shareholders. Recent bank share price drops are entirely justified.

Another area of financial concern is China’s domestic bond market, which has still not seen a “real default” in which bondholders have been forced to take significant losses. This process is a necessary step if China is to achieve its goal of improving the bond market’s ability to price risk, raise funds, and allocate them to worthy borrowers. However, when the first such cases occur, they will shift the risk-benefit calculations of all bondholders. Again, the results could be as hard to manage as they are unpredictable.

Yet another potential area where unexpected consequences or feedback loops could hit is the property sector. Closely connected to the financial system, efforts to control the property market always cause concern. Indeed this fear is probably responsible for the persistent failure of the government to effectively tackle the runaway real estate market, despite several policies and numerous statements signaling an intent to do so. Whether the local bubbles pop or are gradually deflated, the construction sector affects not only its associated industries and employment, but also the value of the land which local governments have used to capitalize their financing platforms.

A tremendous amount of political resolve is necessary to stay the course through slowing growth, numerous potential mini-panics, and employment shocks. However, the alternative would prove genuinely disastrous. Although put off for many years, it seems China’s difficult rebalancing process may finally be underway.

James Parker is an Atlantic contributing editor.

http://thediplomat.com/2013/07/05/chinas-great-rebalancing-act/?utm_source=The%20Diplomat%20List&utm_campaign=3264bcff87-Diplomat%20Brief%202013%20vol24&utm_medium=email&utm_term=0_359f367095-3264bcff87-265482181

(請參照【中美關係 - 和為貴】欄下的《迎接新世代中國 - S. Roach》一文 – 卜凱)

China and America’s related, but inverse, dilemmas

Ian Bremmer, 07/03/13

As protests sweep the developing world and Europe struggles through an austerity hangover, China and the U.S., relative to their peers, look like the best in class. They are both comfortable with their modest growth rates (compared to their norms of the past decade), and insulated from the kind of social unrest we are seeing in Egypt, Turkey or Brazil. But both countries have a deeper intractable challenge that will, in the longer-term, get worse. What’s interesting is that they’re the inverse of each other:

in the U.S., wealth and private sector interests capture the political system. In China, politicians capture the private sector and the wealth that comes with it.

The U.S.’s struggles with lobbying, pork-barrel spending, and the corporate sector’s general overlord status in Washington are well documented. Campaign finance reform is long past. Corporate personhood is well-entrenched. Super PACs are ascendant. A representative democracy is being crowded out by a capitalist one.

The cycle is hard to break. Politicians’ interests become aligned with those of the corporations that help them get elected. But even more troubling is that so many American politicians are gearing up to join the lobbying machine after they retire from government. In 1974, 3 percent of retiring members of Congress became lobbyists. Today, the figure stands at half of senators, and 42 percent of the House.

China has a related but different problem: its politicians control too much of the money themselves. Politicians and elites in China enrich themselves, their friends, and their families by managing and siphoning China Inc. -- China’s state capitalist enterprise. Chinese industry is controlled by the state, and thus it’s the property of the people who run the state. Last year, state-owned enterprises and affiliated businesses accounted for over half of Chinese economic output and employment. There were 70 mainland Chinese companies on the 2012 Fortune Global 500 list; 65 of those were state-owned.

As an example, look no lower than China’s People’s Congress. The United States’ House of Representatives and Senate has no billionaires. China’s parliament has 83. According to Bloomberg, “The richest 70 members of China’s legislature added more to their wealth last year than the combined net worth of all 535 members of the U.S. Congress, the president and his Cabinet, and the nine Supreme Court justices.” If you’re part of the state, state capitalism is the best -- even if the system is centralized, corrupt and calcified.

That is where China’s trouble is:

its inability to create a robust industrial sector that can spread the wealth.

It’s leading to severe income inequality. Reliable financial metrics can be hard to come by in China, but a survey by a Chinese university suggests the wealth gap is now well above the world’s average and

“10 percent of Chinese households held up to 57 percent of all disposable income.”

Income inequality is of course a problem in the U.S. as well. Just this week, the New York Times reported on how medical and pharmaceutical companies have ensured that giving birth in America is costlier than anywhere else in the world. Yet the country is still sufficiently stable, resilient and wealthy. America’s poor people are still well-to-do from a global perspective. China’s? Less so. One in ten Chinese live on the equivalent of $1.50 a day or less. In other emerging markets this has (and is) leading to mass protest. But in China what can be done to placate the masses when it comes to corruption?

Xi Jinping is very popular, and he’s eager to make a show of addressing political corruption. He announced a fight against the “four forms of decadence” -- formalism, bureaucracy, hedonism and extravagance. The party leadership may be priming itself for a purge -- locating local and midlevel officials that are low-hanging fruit: people they can make a public example of without impacting the top of the pyramid. As for the wealthiest, they are undergoing a PR campaign of sorts, trying to display more modesty. (China’s foreign minister just traded in his Audi for the same domestic model that Mao used to drive around in.) Make no mistake -- these actions are largely cosmetic. They mitigate public dissent in the short-term, but they don’t get at the root of the problem. Why is that? China’s leaders can’t fundamentally go after the problem because the problem is them.

And so we’re left with a world in which the two strongest countries offer mirrored visions of what it takes to get to the top. In the U.S., the biggest danger of the capitalist system is that the private sector captures the state. In China, the biggest problem with state capitalism is that the state has already captured the private sector.

This is not to say that China is doomed. It, like the U.S., is in a powerful position despite its fundamental inefficiencies. The world’s two largest economies are humming along at modest clips -- and economic growth has a way of shading over entrenched structural concerns. Both the United States and China are positioned to kick the can for the foreseeable future -- but eventually they will have to face their biggest issues. And it’s best that they do so sooner rather than later.

It’s fascinating that the two countries with the largest economies have inverse imperfections. But will they have inverse fates?

This column is based on a transcribed phone interview with Bremmer.

Ian Bremmer (born November 12, 1969) is an American political scientist specializing in US foreign policy, states in transition, and global political risk. He is the president and founder of Eurasia Group, a leading global political risk research and consulting firm, and a professor at Columbia University. (from wikipedia)

http://blogs.reuters.com/ian-bremmer/2013/07/03/china-and-americas-related-but-inverse-dilemmas/

Why Real Reform in China Can No Longer Wait

Zhou Qiren, 07/02/13

This article originally appeared in Caixin (財新).

BEIJING- Not long ago, I raised the question of why 35 years after China began to open up its political and economic system, the task of reform seems harder than ever. Why, in other words, is it so difficult to change a system? Wouldn't it be better to just proclaim that China has built a brand new system so reform is no longer needed?

After much deliberation, the answer is a clear 'No', because without true reform, even bigger trouble will be waiting.

First, reforms must be made in certain key areas such as the orientation of a socialist market economy and progress in the functioning of a social democratic political system. Without tangible signs of advancement on these fronts, conflicts are bound to erupt.

Browsing China's news lately, the following stories have made headlines: Liu Tienan, the Deputy Director of National Development and Reform Commission was accused of misdeeds and removed from his office; Liu Zhijun, former Railway Minister, is being tried on corruption charges; three major fires broke out in a four-day span in the northeast provinces including one in a poultry factory that killed 120 people; and we witnessed the brutal display of an urban management agent stepping on a man's head in public.

It's true that in a country as big as China there will always be bad news and bad people. Still, the news coverage reflects that woven into the social fabric of a rising China lies a certain disturbing institutional disease.

X

X

Take the corruption cases as an example. The sums of bribes involved are astronomical. But even more crucial is that it all seems to be the by-product of these high officials' "normal work". The loopholes that allow for institutional abuse of power are unending.

As for the Jilin poultry factory fire, though economic development should support the free-market economy, private enterprises should also protect their workers' interests. Simply relying on the good conscience of private companies falls far short in protecting workers and citizens. It is fair to say that "the government was absent" in this tragic case. The question is what mechanism can monitor whether the government is doing its job of overseeing the private sector?

China's economic situation since 2012 is suddenly sinking from its pinnacle of the past decade. "It is easier to climb up than come down a hill," as the Chinese proverb goes. Conflicts can be kept hidden when times are good. China's current situation doesn't allow us to "cross the river by feeling the stones." When troubling issues remain unsettled it can create even more problems.

Second, China's younger generation is becoming the driving factor in society. Their evaluation of the system, policy and the surrounding environment is different than previous generations -- and they also have higher expectations.

For example, for those who experienced the Great Famine of 1959-1961, the People's Communes and the Cultural Revolution, the changes and progress they have witnessed since China's reform and opening-up is huge. Yet, for those born in a relatively more open China, much is now taken for granted -- and if the world does not reach their standard of an ideal state, they will not be satisfied.

Great expectations

A society with true hope is one where each generation sets higher and higher expectations. Thus, reform ought to match the mainstream population's ideal. If improvements cannot keep up with young people's social expectations, problems will arise.

Finally, because institutional variables are changing too slowly or are absent, a parallel "extra-judicial" system is taking root. In many ways, the law says one thing while people actually practice something else. Many choose not to abide by the law because it is so unreasonable, while economic regulations are so impracticable that people end up going underground to survive.

The examples are all around: the proliferation of "black cabs" in Chinese cities to serve the ordinary people who can't afford legal ones, or the so-called "small-ownership properties", the houses owned and built by collectivities and sold to the public without proper legal protection in rural or suburban areas. Also, how many "black families" are produced because of the outdated One-Child-Per-Family policy?

The Chinese authorities seem to have forgotten that if nothing is to be challenged or reviewed, this will naturally lead to heterodoxy. In a fast-evolving society, reform should enhance institutional capacity and allow illegal behaviors that do little harm to others or the society to be put into the legal framework as much as possible.

China is standing before a critical crossroads, where reforms are as difficult as they are necessary. The more that progress is delayed, the harder it becomes. Not only are China's reforms up against the corruption of the system, but are also racing against the rising expectations of the younger generation. If Chinese authorities don't move fast enough, bigger troubles will surely be in store.

Reprinted with permission from Worldcrunch.

http://www.realclearworld.com/articles/2013/07/02/why_real_reform_in_chin_can_no_longer_wait_105293.html

China's Not Going to Rule the World    

Pepe Escobar, 06/22/13

(續上一篇貼文)

We Don't Want No Historical Nihilism

Xi, the dreamer, may simply be a master modernist PR tactician hiding an old school outlook. Hong Kong-based political analyst Willy Lam, for instance, is convinced that "ideologically Xi is a Maoist" who wants to maintain "tight control over the party and the military."

Consider the political landscape. Xi must act as the ideological guide for 80 million Communist Party members. The first thing he did after becoming general secretary was to launch an "inspection tour" of the major southern city of Shenzhen, which in the early 1980s was made China's initial "special economic zone." In this, he was emulating China's first "capitalist roader," the Little Helmsman Deng Xiaoping's landmark 1992 turbo-reform tour of the same area. It was undoubtedly his way of promising to lead the next capitalist surge in the country.

However, a fascinating academic and Internet debate in China now revolves around Xi's push to restore the authority and legitimacy of the Communist leader Mao Zedong. Otherwise, the president claims, there would be nothing left but "historical nihilism." As his example of the road not to take, Xi points to the Soviet Union; that is, he is signaling that whatever he will be, it won't be the Chinese equivalent of the USSR's last leader, Mikhail Gorbachev, nor by implication will he lose control over China's military.

Xi is indeed meticulous in his interactions with the People's Liberation Army (PLA), always stressing "the dream of a strong China" and "the dream of a strong military." At the same time, his attitude perfectly embodies the Communist Party's grand narrative about its own grandness. Only the Party, they claim, is capable of ensuring that living standards continue to improve and the country's ever-widening inequality gap is kept in check. Only it can ensure a stable, unified country and a "happy," "harmonious" society. Only it can guarantee the continuing "rejuvenation of the Chinese nation," defend "core interests" (especially what it refers to as "territorial sovereignty"), and ensure China, kicked around by other great powers in much of the nineteenth and twentieth centuries, global respect.

A Sinophile Western cynic would be excused for thinking that this is just a more elaborate way of stressing, as the Chinese do, that the might of the pen (bi gan zi) and the barrel of a gun (qiang gan zi) are the two pillars of the People's Republic.

All of this was essentially sketched out by senior PLA colonel Liu Mingfu in his recently republished 2010 book, China Dream: Great Power Thinking and Strategic Posture in the Post-American Era. On one thing Liu and Xi (along with all China's recent leaders and PLA commanders) agree: China is "back as the most powerful nation where it's been for a thousand years before the 'century of humiliation.'" The bottom line: when the problems start, Xi's dream will feed on nationalism. And nationalism -- that ultimate social glue -- will be the essential precondition for any reforms to come.

In April, one month after the National People's Congress, Xi repeated that his dream would be fulfilled by 2050, while the Party's propaganda chief Liu Yunshan ordered that the dream be written into all school textbooks. But repeating something hardly makes it so.

Xi's father, former vice premier Xi Zhongxun, was a man who thought outside the box. In many ways, Xi is clearly trying to do the same, already promising to tackle everything from massive corruption ("fighting tigers and flies at the same time") to government rackets. (Forget lavish banquets; from now on, it's only supposed to be "four dishes and a soup.")

But one thing is certain: Xi won't even make a gesture towards changing the essential model. He'll basically only tweak it.

Fear and Loathing in the South China Sea

Everyone wants to know how Xi's dream will translate into foreign policy. Three months ago, talking to journalists from the emerging BRICS group (Brazil, Russia, India, China, and South Africa), the Chinese president emphasized that "the China Dream also will bring opportunities to the world."

Enter the charm offensive: in Xi's new world, "peaceful development" is always in and "the China threat" is always out. In Beijing's terms, it's called "all-dimensional diplomacy" and has been reflected in the incessant global travel schedule of Xi and Prime Minister Li Keqiang in their first months in office.

Still, as with the dream at home, so abroad. Facts on the ground -- or more specifically in the waters of the South China Sea -- once again threaten to turn Xi's dream into a future nightmare. Nationalism has unsurprisingly proven a crucial factor and there's been nothing dreamy about the continuing clash of claims to various energy-rich islands and waters in the region.

Warships have recently been maneuvering as China faces off against, among other countries, Japan, Vietnam, and the Philippines. This unsettling development has played well in Washington as the Obama administration announced a "pivot" to or "rebalancing" in Asia and a new strategy that visibly involves playing China's neighbors off against the Middle Kingdom in what could only be considered a twenty-first century containment policy.

From Washington's point of view, there have, however, been more ominous aspects to China's new moves in the world. In bilateral trade with Japan, Russia, Iran, India, and Brazil, China has been working to bypass the US dollar. Similarly, China and Britain have established a currency swap line, linking the yuan to the pound, and France plans to do the same thing with regard to the euro in an attempt to turn Paris into a major offshore trading hub for the yuan.

Nor was it an accident that Xi's first trip abroad took him to Moscow. There is no more crucial economic and strategic relationship for the Chinese leadership. As much as Moscow won't accept NATO's infinite eastward expansion, Beijing won't accept the US pivot strategy in the Pacific, and Moscow will back it in that.

I was in Singapore recently when Secretary of Defense Chuck Hagel dropped in at the Shangri-La Dialogue, an Asian defense and security forum, to sell the new US focus on creating what would essentially be an anti-Chinese alliance in South and Southeast Asia, as well as the Pacific. Major General Qi Jianguo, deputy chief of the general staff of the PLA, was there as well listening attentively to Hagel, ready to outline a Chinese counter-strategy that would highlight Beijing's respect for international law, its interest in turbo-charging trade with Southeast Asia, but most of all its unwillingness to yield on any of the escalating territorial disputes in the region. As he said, "The reason China constantly patrols the South China Sea and East Sea is because China considers this to be sovereign territory."

In this way, the dream and nationalism are proving uncomfortable bedfellows abroad as well as at home. Beijing sees the US pivot as a not-s-veiled declaration of the coming of a new Cold War in the Asia-Pacific region, and a dangerous add-on to the Pentagon's Air-Sea Battle concept, a militarized approach to China's Pacific ambitions as the (presumed) next rising power on the planet.

At the Shangri-La, Hagel did call for "a positive and constructive relationship with China" as an "essential part of America's rebalance to Asia." That's where the new US-driven Trans-Pacific Partnership (TPP) -- essentially the economic arm of the pivot -- would fit in. China's Ministry of Commerce is reportedly even studying the possibility of being part of it.

There is, however, no way a resurgent Beijing would accept unfettered US economic control across the region, nor is there any guarantee that TPP will become the dominant trading group in the Asia-Pacific. After all, with its economic muscle China is already leading the Regional Comprehensive Economic Partnership that includes all 10 members of the Association of Southeast Asian Nations (ASEAN) plus Australia, India, Japan, New Zealand, and South Korea.

In April, after visiting Beijing, Secretary of State John Kerry began spinning his own "Pacific dream" during a stopover in Tokyo. Yet Beijing will remain wary of Washington's dreaming, as the Chinese leadership inevitably equates any dream that involves moves everywhere in Asia as synonymous with a desire to maintain perpetual American dominance in the region and so stunt China's rise.

However nationalism comes into play in the disputed, energy-rich islands of the South China Sea, the notion that China wants to rule even the Asian world, no less the world, is nonsense. At the same time, the roadmap promoted at the recent Obama-Xi summit remains at best a fragile dream, especially given the American pivot and Edward Snowden's recent revelations about the way Washington has been hacking Chinese computer systems. Perhaps the question in the region is simply whose dream will vanish first when faced with economic and military realities.

At least theoretically, a strategic adjustment by both sides could ensure that the dream of cooperation, of Chimerica, might prove less them chimerical. That, however, would imply that Washington was capable of acknowledging "core" Chinese national interests -- on this Xi's dream is explicit indeed. Whatever the confusions and difficulties the Chinese leadership faces, Beijing seems to understand the realities behind Washington's strategic intentions. One wonders whether the reverse applies.

Pepe Escobar is the roving correspondent for Asia Times, an analyst for the Russian network RT and al -- Jazeera English. His most recent book is Obama Does Globalistan. Follow him on Facebook.

This article was originally published on TomDispatch.com. Republished with permission.

http://www.realclearworld.com/articles/2013/06/22/chinas_not_going_to_rule_the_world_105268.html