Analysis: Are the good times over for the Chinese economy?By Michele Penna Oct 08, 2013 2:41PM UTC
China’s growth has been astonishing in the past two decades, averaging over 10 per cent of gross domestic product (GDP) every year between 1992 and 2007, with the only exception being the few years after the Asian financial crisis. Those who have predicted the country’s downfall have always been proven wrong: so far, the People’s Republic of China has been no paper tiger.
The financial crisis of 2007, which hit the US badly and triggered the excruciating European debt crisis, left China relatively unscathed. In 2007 the country’s Gross Domestic Product (GDP) growth hit 14.2 per cent and in 2010, after a brief slump, it was back at 10.4 per cent. Before the crisis, some thought that the reliance on exports of many Asian countries would hit producers, but when China kept marching on despite plunging US and European demand, the theory of “decoupling” spread. The idea was that emerging economies could follow their own development path, regardless of what goes on in developed countries.
Since 2011, however, numbers have been quickly weakening in an dance of ups and downs. In the third quarter of 2012, growth slowed to 7.4 per cent. Pessimism spread. Then indicators rebounded in the fourth quarter to 7.9 per cent. Optimism was resurrected. But only for a while, until it became apparent that improving conditions were just the outcome of a short-term government boost. Icy winter winds blew on the Statistics Bureau, cooling off numbers again to 7.7 per cent in the first quarter of 2013 and to 7.5 in the second. In June, a circumscribed credit crunch ensued and it has since become common to be worried about exceeding credit in the Chinese economy.
Things got better again in the past weeks, but experts are already raising doubts about the sustainability of the process. Yesterday, the World Bank said it expects China’s GDP to expand by 7.5 per cent this year, down 0.8 per cent from its April forecast. The institution has lowered forecasts for the whole of emerging Asia, reducing its expectations to 7.1 per cent this year and 7.2 per cent in 2014, down from 7.8 per cent and 7.6 per cent.
“I think that the third quarter will be better than the second: economic activity is rebounding. But the driver seems to be infrastructure spending and credit, so the rebound is unlikely to last for long. In fact, the structure of the economy is getting worse,” said Qingwei Wang, China economist at Capital Economics, told Asian Correspondent.
Getting it right in economics is a difficult business and black swans – unexpected events which eventually do occur and do have consequences – swim hidden in every lake. Only a minority of experts, for example, were alarmed by economic indicators prior to the collapse of Lehman Brothers, whose securitized products were awarded an awe-inspiring triple-A by rating agencies up until 2006. That did not prevent them from turning into junk the following year. And it is much easier to remember those who feared Japan’s challenge to American supremacy in 1980s than those who could see the bubble enlarging and eventually blowing up to sink the Japanese economy.
Why is it so hard to tell what is going on in the economy? For a start, because economics is a social science and, albeit being more “numerical” than its peers, is still unpredictable. Karl Popper, the Austrian philosopher, eloquently explained that nobody can tell what will happen in a society at any given point in the future because people are unpredictable themselves. What will Ben Bernanke do about the tapering? Will the civil war in Syria cause a disruption in oil supplies? How will the European Union tackle its crisis? There is no clear-cut answer to these and many other questions, which in turn makes it impossible to tell exactly what the situation will look like even in a few months from now. And then there is the complexity of economic systems: millions of consumers, hundreds of thousands of companies, numerous indicators.
In the case of China the trade is harder than usual. “I think that the Chinese economy shows uncertainties especially in terms of policies,” said Mr Wang. “Take, for example, infrastructure spending and the issue of reforms. In November, there will be the Plenary Session of the Party: they might undertake reforms to tackle the imbalances in the economy, but we do not know the details and how fast the process will go. That’s why it is hard.”
Accurate information is another headache that grows bigger as you get within Chinese borders. According to Donghyun Park, Principal Economist at the Asian Development Bank, this poses a twofold problem: “The first is that there is a lot of scope for improvement in the quality and accuracy of China’s economic data. The lack of high-quality, accurate data makes it a difficult challenge to assess the state of the Chinese economy with any degree of certainty. The second is that many of the normal macroeconomic policy tools which are available in market economies are not yet available in the PRC, especially for monetary policy. This makes it difficult to judge the stance and future path of macro policy.”
This is the reason why, “to a large extent, the inaccurate predictions reflect wildly divergent subjective perceptions of the PRC’s role in the world economy. People believe what they want to believe. China optimists tend to believe that China is the next big hope for the world economy and the new global engine of growth. On the other hand, China pessimists tend to see and only see the various risks, from financial backwardness to large and growing local government debt, plaguing the Chinese economy. The truth is likely to lie somewhere in between.”
Last week, the Asian Development Bank reported it expects East Asia’s economy to grow 6 per cent, down from the 6.6 per cent forecast made in April. For 2014, growth is now projected at 6.2 per cent, down from a previous 6.7 per cent.
In the end, economic predictions are a bit like gazing through a foggy crystal ball: you hardly see what is going on behind the misty glass. And when you see something, it is shadows, rather than hard facts. This means that analysts – and journalists, too – might have to borrow something from Hamlet, the famously undecided character born out of Shakespeare’s genius: “will it grow or will it not, that is the question.” Hopefully, the fate of the world economy will not end like the famous play.