China in Economic Transition: Common myths challenged
The Financial Times reports that copper, considered a barometer for global economic growth because of its wide range of industrial uses, fell to a six-year low below $5,000 a tonne on Thursday. Oil, which dipped almost 20% since a rally in October, fell under $45 a barrel on Thursday, less than half the level it traded at for much of this decade. China again is the focus and Goldman Sachs said this week that recent data pointed to contracting demand in China’s “old economy” as the government struggles to manage a transition to more consumer-led growth. However, it's not all doom and gloom and a three-decades long foreign resident has highlighted five myths about the Middle Kingdom.
In recent times sales at Chinese retailers recovered before Wednesday’s Singles Day — a record shopping extravaganza championed by Alibaba Group Holding Ltd — China's huge e-commerce service.
The supercharged demand for commodities was bound to slow down and the FT says that by some measures commodity prices are back where they were before China started on its path to urbanisation more than a decade ago. Other leading commodity indices are back at levels last seen in 2001, while shares in Anglo American fell to their lowest since the company’s UK listing in 1999 on Thursday. A stronger US dollar has also weighed on raw material prices.
Jonathan Woetzel of McKinsey, the US consultancy, has lived in China for the past three decades and he suggests that a one-dimensional view is far from reality. He challenges five common assumptions.
1. China has been faking it
Clearly, China lacks some elements of a modern market economy — for example, the legal system falls short of the support for property rights in advanced countries. Nonetheless, as China-economy scholar Nicholas Lardy recently pointed out, the private sector is vibrant and tracing an upward trend line. The share of state-owned enterprises in industrial output continues to drop steadily, from 78% in 1978 to 26% in 2011.Private industry far outstrips the value added in the state sector, and lending to private players is growing rapidly.
Woetzel says "much of China’s development model mirrors that of other industrializing and urbanizing economies in Asia and elsewhere. The high savings rate, initial investments in heavy industries and manufacturing, and efforts to guide and stabilize a rapidly industrializing and urbanizing economy, for example, resemble the policies that Japan, South Korea, and Taiwan followed at a similar stage of their development."
2. China’s economy lacks the capacity to innovate
My work with multinationals keen on partnering with innovative Chinese companies suggests that there’s no shortage of local players with a strong creative streak. A recent McKinsey Global Institute (MGI) study describes areas where innovation is flourishing here. Process innovations are propelling competitive advantage and growth for many manufacturers. Innovation is at the heart of the success of companies in sectors adapting to fast-changing consumer needs, so digital leaders like Alibaba (e-commerce) and Xiaomi (smartphones) are emerging as top global contenders. Heavy investment in R&D—China ranks number two globally in overall spending — and over a million science and engineering graduates a year are helping to establish important beachheads in science- and engineering-based innovation. (See “Gauging the strength of Chinese innovation.”)
3. China’s environmental degradation is at the point of no return
China is spending heavily on abatement efforts, as well. The nation’s Airborne Pollution Prevention and Control Action Plan, mandating reductions in coal use and emissions, has earmarked an estimated $277 billion to target regions with the heaviest pollution. That’s just one of several policy efforts to limit coal’s dominance in the economy and to encourage cleaner energy supplies. My interactions with leaders of Chinese cities have shown me that many of them incorporate strict environmental targets into their economic master plans.
4. Unproductive investment and rising debt fuels China’s rapid growth
China’s rising debt, of course, continues to raise alarms. In fact, rather than deleveraging since the onset of the financial crisis, China has seen its total debt quadruple, to $28.2 trillion last year, a recent MGI study found. Nearly half of the debt is directly or indirectly related to real estate (prices have risen by 60% since 2008). Local governments too have borrowed heavily in their rush to finance major infrastructure projects. While the borrowing does border on recklessness, China’s government has plenty of financial capacity to weather a crisis. According to MGI research, state debt hovers at only 55% of GDP, substantially lower than it is in much of the West. A recent analysis of China’s financial sector shows that even in the worst case—if credit write-offs reached unprecedented levels — only a fairly narrow segment of Chinese financial institutions would endure severe damage. And while growth would surely slow, in all likelihood the overall economy wouldn’t seize up.
5. Social inequities and disenfranchised people threaten stability
On this one, I agree with the bears, but it’s not just China that must worry about this problem. While economic growth has benefited the vast majority of the population, the gap between the countryside and the cities is increasing as urban wealth accelerates. There’s also a widening breach within urban areas—the rich are growing richer. Urban inequality and a lack of access to education and healthcare are not problems unique to China.
China is keen to reform its economy while clinging on to growth. George Magnus, associate at Oxford University's China Centre, explains to FT's Dan McCrum who is exposed to China's slowdown and how it is changing:
Pic above: Dance with snake (Source: Xinhuanet)