Posts Tagged ‘wen jiabao’

file000940095816

There are almost as many opinions as there are Chinese. Some say the Chinese growth miracle is at an end. Others see a temporary lull. Others still, point to demographics and see problems ahead. Yet others say we are confusing western culture with that of China; that it is unstoppable. Some go even further and say that China – via its system of central control – has been deliberately manipulating a system and it will soon reign supreme over the global economy. Or to put it another way: some say ‘this time it is different’, and although China portrays many of the hallmarks of a bubble, it is just different from the West, while others say the claim that ‘this time it is different’ is always – and without fail – a sign that things are set to come very badly unstuck.

You may have picked up on the irony. After 1989, the consensus seemed to be that capitalism had won; that any system of central control was doomed to fail. Now there seems to be a view held by many that China is unstoppable precisely because it has so much central control that its state can force through reforms and regulations that western governments can only dream of.

This view is almost certainly wrong. For one thing, to argue that China is unstoppable because of its central control appears to be ignoring the lesson of the history of the last half of the 20th century. For another thing, it is debatable how much power the Chinese government really has. China is a massively complex country, and while Beijing may issue directives on how things must be done, the extent to which they are followed across the country is open to debate. In any case, China’s government is terrified of social discontent. For the country’s government there is always the fear of how the people will react if the government mismanages the economy.

This fear of popular discontent can often stop the government from doing precisely the things it should do for longer term prosperity. Take as an example its policy regarding its currency – the yuan. The US government is screaming at China to let the yuan trade freely. Many US politicians blame a cheap yuan on just about all of the US ills. They are surely wrong, but there is no doubt that if the yuan were to rise, US exporters would benefit, but how much is open to debate? But what people often overlook is that there is very strong evidence to suggest that China too needs a more expensive currency.

A consequence of China’s currency policy has been too low interest rates, which has all kinds of undesirable consequences – among them a credit bubble, too much emphasis on investment, and there appears to be evidence that low interest rates have led to Chinese companies paying out lower dividends, which has helped to accentuate imbalances in the economy.

Part of China’s problems can be dated back to 2008, when the West hit the crisis button. China responded with a massive stimulus of its own. It kept growing during the worst days of 2008 and 2009 but at what cost? According to the IMF, in 2008 China’s money supply jumped 30 per cent – and that is ironic. While China was accusing the West of debasing its currencies via QE, and lecturing the US on living within its means, China began to apply the kind of policies that got the West into its mess in the first place.

Then there is credit. In 2008 total outstanding credit in China was 130 per cent of GDP – a level that had pretty much been unchanged for several years. Now the ratio is at 187 per cent – that was a massive hike for just half a decade. The IMF has said that when a country sees credit increase by 3 per cent of GDP or more in a year, there is a good chance that a crisis may follow. Yet In China the rate of credit growth dwarfs what the IMF might refer to as the danger level.

For China corporate sector debt is the real danger. This has risen from just over 20 trillion yuan in 2007 to over 60 trillion in 2012.

This may all sound like western cynicism, but just remember it was the man who until last year was China’s premier – Wen Jiabao – who described China’s economy as, “unstable, unbalanced, uncoordinated, and unsustainable.”

It is not all woe, however. Recent anecdotal evidence such as the latest Purchasing Managers’ Indices, and data on freight transport, electricity output and volume of cargo all point to China’s economy seeing a mild pick-up. It is not going to see growth in excess of 10 per cent again for a while – if ever – but the recent data is consistent with growth of around 7.5 per cent, which is much better than many had warned.

The pick-up may be occurring because once again China is implementing short-term policies to push up growth via the very things that it has too much of anyway – namely investment, government spending, credit. But with signs that the US economy is at last on the mend, it may be possible for China to tighten up monetary policy allowing the yuan to rise, without taking too big a hit on exports.

Looking further forward, what China really needs is higher wages. Well this is happening. McKinsey has forecast that by 2022, 75 per cent of China’s urban workers will earn between $9,000 and $34,000 – a level that sits half way between current levels in Italy and Brazil. To put this figure in context, in 2000 just 4 per cent of Chinese urban workers had earnings falling within that band. McKinsey also forecasts that by 2022 urban income will double from current levels. These are precisely the developments China needs.

Then there is education. The OECD measures pupil skills in reading, numeracy and science, in a test known as PISA. The BBC recently quoted Andreas Schleicher, a leading figure behind these PISA tests, saying there are signs that China is closing – if it has not already closed – the education gap with the West. Shanghai has excelled, but said Mr Schleicher: “What surprised me were the results from poor provinces that came out really well. The levels of resilience are just incredible.” He said that he gets the impression China is investing in the future. Unlike the US, there are indications of a high degree of education equally between rich and poor.

China’s next big challenge is how it can manage being a middle income country. Over the last half a century only a handful of countries managed that transition. Many saw rapid growth, but then stopped before income levels had reached anything like western levels. Will China be one of those rare successes?

It does have one major hurdle to climb, however, and that is demographics. According to the UN, the population of China aged between 15 and 59 is set to fall by 7 per cent between 2010 and 2030. The policy of one child per family is about to be relaxed, but even so, many Chinese couples don’t want more than one child. In any case, even if the birth rate shot up overnight, it would take the best part of two decades before this showed up in the work force.

Associated with demographics is the question of the so-called Lewis Turning Point – a point familiar to economists – when a country runs out of workers to migrate into urban areas.

Let’s finish with what the IMF says on this subject: “Within a few years the working age population will reach a historical peak, and will then begin a precipitous decline. The core of the working age population, those aged 20–39 years, has already begun to shrink. With this, the vast supply of low-cost workers—a core engine of China’s growth model—will dissipate, with potentially far-reaching implications domestically and externally. The reserve of unemployed and underemployed workers (which is currently in the range of 150 million)—will fall to about 30 million by 2020 and the LTP [Lewis Turning Point] will be crossed between 2020 and 2025.”

For more see:

IMF: Chronicle of a Decline Foretold: Has China Reached the Lewis Turning Point? 
Trading Economics: China Labour Costs 
Ernst and Young: China’s productivity imperative 
FT: China’s debt in charts
McKinsey: Mapping China’s middle class 

© Investment & Business News 2013

This column has said some pretty positive stuff about China’s Premier Wen Jiabao in the past. Mr Wen is a smart guy. He was once seen at the annual conference of the world’s leaders at Davos, carrying a worn, and obviously much loved, copy of Adam Smith’s Wealth of Nations. He has repeatedly warned of bubbles forming in China’s economy, of the need to get consumer spending up and imports up, and for China to become less reliant on export led growth. He has warned of the dangers of a property bubble, and even dropped hints about China’s currency, the yuan, being allowing to trade freely – music to the ears of US politicians (not  that they want their ears to receive music, when there are cheap political points to be had by slagging off China at every opportunity).

It is just that reports have been circulating about Mr Wen’s fortune. He is a rich man, and so it appears is his family, and their wealth appears to have been acquired during the last ten years while he occupied a powerful position in China.

How did he acquire such wealth?

While Mr Web is important, he is not China’s most powerful man; that description belongs to Hu Jintao, the President.

As you probably know, China is about see a once in ten years’ transfer of power.

Messrs Wen and Hu will be off, eating grass, gardening, or perhaps pulling strings in the background.

This week, Mr Hu gave his state of the nation speech – an annual event, which on the eve of the power transfer took on more meaning than usual.

His speech was notable for two reasons. Chinese media coverage may have been notable for another reason.

Mr Hu talked about the target of seeing average wages in China double over the next ten years. If this can be achieved, it will be good news indeed. Good news for China’s  workers of course, good news for western companies – including the likes of Tesco and Marks and Spencer – and good news for the global economy, which needs to see a more evenly balanced Chinese economy.

Some say it will be bad news for Chinese manufacturing, as rising labour costs mean it will lose its competitive edge. So, goes the argument, jobs will be lost to the likes of Indonesia and other countries in South East Asia. Jobs may even be lost to the US, and indeed a report today said that Foxconn – the company which makes Apple’s products in China (as well as products for rivals) – is looking at setting up TV assembly plants in LA and Detroit.

But then again, Chinese manufacturing is moving up the value chain, and data indicates that despite rises in Chinese wages, Chinese productivity per unit of labour is rising.

But the second reason for noting Mr Hu’s speech is the emphasis he placed on fighting corruption or ‘graft’, as he called it.

He said: “Combating corruption and promoting political integrity, which is a major political issue of great concern to the people, is a clear-cut and long-term political commitment of the party. If we fail to handle this issue well, it could prove fatal to the party, and even cause the collapse of the party and the fall of the state. We must thus make unremitting efforts to combat corruption.”

He continued: “All those who violate party discipline and state laws, whoever they are and whatever power or official positions they have, must be brought to justice without mercy.”

And guess where the TV camera went when Mr Hu expressed those words. Why, straight to the face of Wen Jiabao.

Writing in the Telegraph, Ambrose Evans-Pritchard suggested the changeover in power will lead to a lurch back to the left, and the anti-reformists will gain control. See: China’s Hu Jintao clings to socialist economy in Mao nostalgia speech

Maybe. The truth is that we don’t know. Take Bo Xilai; he is the disgraced former high flyer in Chinese politics, whose wife was found guilty of murdering British business man Neil Haywood. When Mr Bo was a commerce minister, he was considered to be something of a liberal. When he was promoted to Party chief in Chongqing his views seemed to change out of all recognition, bringing back memories of Mao. So who knows what China’s new generation of leaders will say once they gain power.

But what we can say is that China is entering an important period. For growth to continue, China needs more free markets, more enterprise, and more dynamism.

But does more capitalism lead to more calls for democracy? In ancient Greece, the military innovation called the phalanx meant ordinary soldiers became more important; more vital to military success. Some say the development of the phalanx led to the development of Greek democracy. In China, workers are set to become more important for continued growth. Will their greater economic power, mean they will demand more political power?

What is for sure is that no Chinese senior politician wants to be remembered as China’s Mikhail Gorbachev. Mr Hu’s likely successor Xu Jinping and Mr Wen’s likely successor Li Keqiang don’t want to be seen promoting the Chinese equivalent of perestroika and glasnost. So somehow they must find a half-way route. Reform, but not too fast. And finding that will prove to be very hard indeed.

©2012 Investment and Business News.

Investment and Business News is a succinct, sometimes amusing often thought provoking and always informative email newsletter. Our readers say they look forward to receiving it, and so will you. Sign-up here