There has been overwhelming concern over China’s economy in recent times. This can’t be helped, given that the world’s second largest economy has been an important global growth contributor in the past several years.
As a percentage of global growth, China contributed roughly 25%-30% in the past few years. Its dominance in the global economy has not gone unnoticed. Fears that China will, one day, become an undisputed economic superpower unnerves more than a few quarters. In fact, some believe that the root cause of the ongoing trade war goes beyond the trade deficits that the US is incurring with China. It is, instead, the emergence of China as a global production and technology powerhouse that will rival the US in the near future.
Pessimists have, for several years, predicted the downturn of China’s economy, something that has yet to materialise. Recent macro releases showing the economy growing at the slowest pace since 1990, at 6.6% in 2018, have magnified the voices of those who predict the impending collapse of China’s economy. This is hardly surprising, as the deadly cocktail of high credit growth, surging property market and astronomical debt could, in theory, spark off a Lehman Brothers episode for China, at least according to some media reports. China is said to be buying time to fix its system. But many argue that the problems are just too huge to handle, and the government is much too slow in addressing them. More drastic measures are needed to fix the economy now.
Such arguments have been around for a while. Those who went through the Asian financial crisis in 1997 can clearly remember how these arguments resemble those heard over two decades ago. At the height of the crisis, calls for countries to ‘bite the bullet’ were echoed everywhere. Take a drastic approach and clean up once and for all and start fresh. That was the resounding argument then.
Standard economic templates from mainstream economists were forced down the throats of some Asian economies then. Fiscal austerity was the right way, goes the argument, despite the social disorders that erupted in many countries. To restore market confidence, budgets need to be quickly balanced, interest rates kept high and weak institutions closed immediately. This is despite them knowing how fickle financial markets can be. And the repercussions on financial markets and social orders, seen in countries like Indonesia after 16 commercial banks were shut down in November 1997, were taken for granted.
As Nobel Prize economist Joseph Stiglitz puts it (as this, in my opinion, applies to the current context of China), sequencing and pacing are important. Measures can be good, but if they are not implemented in the proper order or do not take into account the broader social context, chaos will result. In the case of the Asian financial crisis, the lack of institutional reforms and social safety nets in many of the troubled countries in the 1990s led to chaos, especially when capital account liberalisation was done far too quickly.
While economic progress and development are important for social and economic stability, the reverse is also true. This is why Asians tend to value stability as a whole and often consider it as a crucial ingredient for undisrupted development and prosperity.
An example of another country that seeks stability during an economic crisis is no other than Malaysia. During the Asian financial crisis, Malaysia imposed a drastic measure, i.e. pegging its currency to the US dollar. One of the reasons for such a controversial move was to ensure a stable business environment, which can arguably be achieved if there is no extreme volatility in exchange rate movements. An unstable currency makes business decisions extremely difficult, resulting in massive cutbacks in business spending. This will exacerbate the downturn of the economy. Forcing the economy to stabilise – although this was highly criticised at the time – to some extent, facilitated business planning decisions.
Similarly, social stability is often considered an important element for uninterrupted development and prosperity of a country. China deeply believes in this. Thus, the argument for the need to make sudden and swift moves to rebalance the economy whilst disregarding the importance of social stability should be taken with not a pinch but a spoonful of salt, at least from China’s perspective.
To be fair, China has not gone without reforms. Reforms are ongoing, but at a gradual pace – something that is causing dissatisfaction among some quarters. These modest reforms, according to researchers at Hoover Institution, Stanford, California in one of the economic working papers in 2018 (by Xiang Xu and Alice Siqi Han), are undertaken with an anti-crisis approach to minimise instability to the economy. The authorities also react swiftly to internal and external shocks through a combination of fiscal and monetary policies. From a structural point of view, the fact that social resources are controlled by the Chinese authorities means that there is “an implicit guarantee against potential collapses”, according to the study.
It is also argued that a high degree of political consolidation and China’s economic structure that promotes a gradual move towards market-oriented enterprises are key ingredients that prevent a Soviet-style collapse that happened in the early-1990s. China is also protected by its relatively closed capital account – something that is often criticised, but remains a relevant factor in ensuring the stability of its economy. Such a measure helps policymakers implement exchange rate policies that avoid abrupt appreciation or depreciation of the renminbi. Given its massive reserves, the government has adequate leeway in maneuvering its fiscal policy.
That said, the current economic and political backdrop have received greater attention from the authorities. The world is learning to see China maturing on the economic ladder. Gone are the days of high single-digit growth rates. At the same time, economic ammunition could be less effective than in the past. Macroeconomic imbalances are still overshadowing its economy – no doubt about this. And critical issues like infringement of intellectual property rights need to be addressed. However, from China’s perspective, the gradual approach in maneuvering its economic development has its merits. Social and cultural factors cannot be ignored in the country’s pursuit to achieve economic stability and prosperity.
This article was first published in The Edge Malaysia Weekly dated Feb 4, 2019 – Feb 10, 2019.