As another point of juxtaposition, a Financial Times article published anonymously argues the case that economic supervisors need not slow down the Chinese economy at all. While citing the same problems faced by the Chinese economy – state banks and local governments that aren’t accountable for losses, the potential for a real estate bubble, etc. – the article points out a different worry: that Chinese consumers haven’t been consuming. In order to achieve some semblance of a trade balance, not only is some time of Renminbi revaluation necessary, but the Chinese government must encourage consumption spending.
The implication of this, as pointed out in the article, is the predicted political effects of more empowered customers. This particularly seems to be the case with the diffusion of technology, and especially with information technology and telecommunications. Allowing Chinese citizens unprecedented access to information, especially from international sources, and facilitating a greater degree of almost instantaneous interactivity between diverse interest groups poses a strategic threat to the way the Communist Party manages the state. How the Party will manage the relationship between increasing economic and political freedoms is the fundamental problem facing the Chinese government today.
The article in full:
Even in good times, an economy that manages to grow at 11.9 per cent annually – as China’s did in the year to the last quarter – will turn heads. With a global slump barely behind us, it takes one’s breath away. What lessons can be drawn from China’s achievement?
First, it removes any doubt that government stimulus policy can work. Naysayers in Washington who claim the contrary may want to pay a visit to Beijing. The latest bounce in China’s economic output was not driven by net export growth. In fact, the trade surplus shrank in the first quarter and briefly turned to deficit in March – the first time this has happened in six years. Instead, the growth resulted from a massive increase in infrastructure lending.
Is such breakneck economic expansion sustainable? Not by these means: China’s credit inflation must eventually lead to a slew of bad loans that will bring lenders down. But this problem can be contained. These are state-owned banks that do as they are told and whose losses will mainly fall on the state. They are in effect bailed out in advance, not entirely unlike bankers with guaranteed bonuses.
The more important question is whether the speed of the economy itself, and not just the policies fuelling it, is dangerously excessive. Worries abound that China is overheating. But there are several reasons to think that China can safely grow at high rates without stepping on the brakes quite yet.
One is that price inflation is easing. As the government tightened credit conditions, the rate of increase of consumer prices slowed to just 2.4 per cent in the year to March, from 2.7 in February. If growth pushes inflation up, that will add to the case for a renminbi revaluation – already on the cards – which would bring it back down.
It is in housing that skeptics see the most red-hot conditions. House prices are indeed rising fast. But the real estate bubbles in China are largely local, in high-end segments of cities such as Shanghai. Overall urban housing prices have risen 11.7 per cent in the past year, a rate that would indeed look bubbly in a rich economy of sedate growth, but not in China, where it does not even keep up with the increase in the country’s income.
The challenge faced by the pilots of China’s economy is not, for now, its ballooning size. What they must worry about is its composition. Extraordinarily low consumption means poor Chinese have for a decade been subsidising western consumers’ credit cards. A large national savings rate has its counterpart in the trade surplus. A renminbi revaluation may change this – if Beijing really accepts the economy’s restructuring away from net exports towards domestic demand.
That requires bigger shifts than a revaluation. Households must be allowed to spend more – consumer credit growth suggests this is happening – and productive infrastructure tuned to domestic needs. Leaders must also accept the political effects of more empowered consumers. Marxists think politics merely reflects economic forces; China’s faux communists may still rather see it the other way around.