Giant on the move
Why China can’t save the global economy this time
By Nicholas Consonery
The opinions expressed are his own.
When the global economy broke down in 2008, China was the savior. At that time Beijing rolled out a massive stimulus that was one of the biggest—per size of the economy—that the world has ever seen. The resulting benefits bolstered China’s economic strength at a time when the rest of the global economy was staggering under the weight of failing banks and surging public debt.
But the success of Beijing’s stimulus has masked underlying weaknesses in the country’s growth model. And the market is now waking up to the realization that global economic growth might remain suppressed for years to come.
In this environment, investors should be aware that the Chinese economy won’t be able to serve as the beacon of global growth indefinitely. Exports and investment overshadow household consumption. Public pressure is growing on the government to make growth more sustainable. The yawn between rich and poor is widening. And the Chinese leadership struggles to negotiate such difficulties with a homogeneous 1.3 billion person population dispersed throughout a country that is in different stages of development at the same time.
Reigning over this conundrum is the Chinese Communist Party—the 80-million member strong political apparatus in the unenviable position of being responsible for ironing out the country’s massive economic imbalances.
In a new report entitled “China’s Great Rebalancing Act” my colleagues and I on Eurasia Group’s China Team offer our assessment of the Party’s capabilities.
Our conclusion? China’s weaknesses are not just economic but also political. We argue that the Chinese political system is an obstacle to economic change in China, because the top leadership currently lacks the willingness to push through bold reforms that would require picking clear winners and losers in the government and the state-supported corporate sector. These reforms would lead the Chinese economy away from public investments and toward a more robust and diversified growth model, with consumption playing a bigger role. But the results of Beijing’s efforts to “rebalance” in this way—which is the ostensible goal of the Party’s much-heralded 12th Five Year Plan—will be disappointing for foreign investors and for policymakers in Beijing alike.
Most worrying is that the Party will move only slowly in reforming the financial system—which sits at the very heart of China’s economic imbalances. In particular, fixed interest rates and often-unhindered financial support for state banks and companies artificially diverts China’s wealth away from Chinese families. Meaningful financial reform would include the liberalization of those interest rates. But the internal inertia against doing so appears too great at this time. Thus efforts to achieve more meaningful income redistribution in China will go unfinished. And even though gradual currency appreciation will help, so too will a real shift away from exports and investment and toward household consumption.
There will be some successes, though. Energy pricing reform and more variety in the country’s energy mix are achievable in the near-term, especially because the Party’s interests are broadly aligned with those of the increasingly powerful state corporate sector. Rapid urbanization is another inevitable trend that will yield consumption dividends for the economy. Beijing will have little difficulty investing more government cash into preferred industries to promote higher-tech production and Chinese innovation.
But the failures will weigh heavily. What’s the problem? In short, the Chinese Communist Party simply lacks the political gumption to force through changes that would require near-term pain–even if those changes assure longer-term gain for the country on the whole. The narrative that China’s policymakers are always able to make these kinds of difficult yet visionary choices is simply false. The best proof is that, despite all the talk of “rebalancing” so far, the share of consumption in China’s economic growth actually fell last year, to 34%.
What does this mean for China? The economy has sufficient momentum that Beijing can muddle through with piecemeal reforms for now. But a failure to comprehensively rebalance will mean that the Chinese political economy becomes more fragile over the next five years, as today’s imbalances are perpetuated. This suggests that the Communist Party will face much starker choices—and graver consequences—in planning for its 13th Five Year Plan in 2015.