The Real Global Threat From China’s Eroding EconomyDr. Harry G. Broadman
(Forbes) – China’s “economic miracle” over the past 35 years has been the envy of many other emerging market countries; indeed, of some advanced countries too. Yet in just over a period of a few weeks, global economic officials are deeply concerned about the policy deftness of China’s leaders and the growth prospects of the world’s second largest economy. With many countries still trying to rebound from the recent financial crisis, this couldn’t come at a worse time.
So it is little surprise that headlines focus on the contagion from the confluence of China’s continuing trend of declining GDP growth, recent crashes in the country’s stock exchanges, the sudden devaluation of the yuan, and significant successive easing of monetary policy by the Peoples Bank of China in an attempt to inject liquidity into a moribund banking system. It is the international effects of China’s “perfect storm” that is keeping policy makers and investors in New York, Frankfurt, London, Tokyo and Washington up at night—big time.
As important as the concerns are—and to be sure they are fundamentally worrisome—they may well be a side-show. The real threat for China—and therefore the world—are the impacts these events are having, and will continue to have, within China itself. There is a palpable and deepening erosion among the Chinese population in Beijing’s credibility in economic stewardship.
And worse still, this domestic “crisis of confidence” is not new—a surprise to even the most vigilant China watchers. It is rooted in long-standing policy contradictions fundamental to China’s “socialist market economy” development model (the topic I wrote about last month), which for decades have become increasingly and painfully apparent to the citizenry. It is only now that the rest of the world is tuning in and beginning to see the soft underbelly of China’s economic prowess.
Unless China’s leadership takes decisive steps now to address these contradictions head-on, the loss in their credibility will only intensify and could significantly undermine domestic social and political stability, let alone the country’s economic fortunes. It is this turn of events that gives China’s government and Communist Party leaders insomnia.
At the heart of the Chinese public’s erosion in the leadership’s credibility is the lack of accurate information about the economy, especially at the most basic level.
In part, this is due to the fact that in China prices and costs are not really commercially-determined. Nor are the prices charged and the costs expended fully transparent. And because of the enormous scale, geographic breadth, and the level of development of the country as a whole, the collection of sound economic data at the market level—where they matter most–is close to an insurmountable task.
But even more important is that, by the Party’s design, no one, likely even at the upper reaches of the State Council, really has a birds-eye and consistent view of what is actually going on within the fabric of China’s economy. Information—one of the most coveted commodities in a society like China–is often stove-piped or sometimes only partially disclosed.
This is especially the case within government, including across ministries at the Central level. But even if it wasn’t, the same incentives at Provincial- , Municipal- and Township-level governments impact the completeness and accuracy of the data those entities in turn pass on to Beijing.
In this setting, an economic puzzle cannot be fully put together if pieces—sometimes crucial ones–are missing. The Party is like a firm organized as a partnership: with a bit of exaggeration “everyone is in control and no one is in control.”
There are many areas of economic management by Beijing that over numerous many years has eaten away at the population’s confidence in the government and the Party. But here is perhaps the most striking one.
It is almost universally taken as a given, both inside and outside of China, that much (though not all) of China’s macroeconomic performance since 1978—the advent of the country’s modern reform era—has been very strong, perhaps at times, even exceptional. Having worked extensively on-the-ground throughout the country for decades, as well as in many other emerging markets with which meaningful comparisons might be made, this is probably not implausible–at least if one looks at changes in physical levels of economic activity, for example, the number of cargo containers leaving ports, volume of soybeans produced, kilometers of rail lines in use, and so on.
But as a professional matter, there is a lot of doubt. Why? Because the only meaningful measures of a country’s economic performance, such as the traditional “gross domestic product” (GDP)–and there are many others, some of which are superior to GDP–are based on value-based metrics of economic activity that take into account not just physical movements but also the prices of goods and services sold, wages, costs of raw materials, etc. After all, one cargo container being shipped out of the port of Qingdao filled with unfinished steel does not reflect the same level or composition of financial, technical, material, and human resources utilized in China as a cargo container leaving Qingdao filled with iPhones.
Although official Chinese statistical methodologies have begun to improve in recent years, especially since 2008, the fact is that it is difficult to meaningfully capture economic value when the underlying data are flawed for one reason or another.
To wit, China’s data on GDP and other value-based gauges of economic activity have stretched the credulity of the Chinese public (as well as some outsiders). Indeed the government’s economic forecasts have been uncannily accurate—almost to the decimal point—for years. Worse still, the government makes frequent revisions to earlier reported data so comparisons across time cannot be rendered consistent. (I speak from personal experience here.)
Against this backdrop, is it really a surprise, then, that Li Keqiang, the current Premier, a few years ago privately told the U.S. Ambassador to China that the country’s GDP data are “man-made and therefore unreliable”?
Ironically should current rumors prove true that Premier Li will become a sacrificial lamb for China’s current economic woes, Beijing may be losing one of the few who actually have some degree of credibility.