Global: China Goes for Growth
Stephen Roach (from Hong Kong)
Forget about the China slowdown. That was the distinct message I took away from my annual trek to the China Development Forum in Beijing. Since its inception in 2000, I have attended five of the six Forums. Over the years, I have found this to be the single most important conference in China. Hosted by the Premier and the State Council -- China’s cabinet -- it is scheduled immediately after the National People’s Congress, thereby providing the senior Chinese leadership with its first opportunity to engage the international community on the new policy agenda for the year. In past years, the Forum has provided a clear read on major policy changes to come -- China’s countercyclical actions during the world recession of 2001 and last year’s tightening measures were important cases in point. This year was no exception.
The basic message from China’s senior economic and financial decision makers is that the medicine has worked -- that last year’s combination of so-called administrative measures and macro adjustments was successful in tempering the excesses of an overheated Chinese economy. In the words of Premier Wen Jiabao in his national “work report” delivered in early March, these measures “…worked to solve prominent problems threatening steady and rapid economic development.” Contrast that with his comments a year ago when he stressed that “overheating is my biggest concern.” As is always the case in Chinese economic policy, the Premier has the first and final word -- the rest of the economic team very much marches to the same beat. That was certainly the case at this year’s China Development Forum.
The victory-lap message was delivered most emphatically by Minister Ma Kai, head of the State Development and Planning Commission and China’s de facto senior central planner. With the economy on a tear in early 2004, Minister Ma used his appearance at last year’s Forum to send a very clear message: “If such an illogical mode of economic growth is maintained,” he said at the time, “it will be difficult to keep economic growth at 7%.” This was another way of saying that the bottlenecks of a year ago were so serious that, if left unchecked, they might constrain the economy from hitting the lower bound of the growth target. Coming from one of China’s most powerful economic policymakers, this left little doubt that China was preparing a major tightening campaign. And, of course, that’s exactly what happened just a few weeks later when temporary credit controls were implemented and sector-specific constraints were imposed on investments in key bottleneck areas. This year, Minister Ma had a very different spin on China’s growth challenge. He underscored the importance of last year’s tightening measures to deal with “unhealthy and unstable elements” that had cropped up in the fast-growth economy. But he drew great comfort from the belief that the “apparent effects have been achieved.”
Don’t get me wrong. This doesn’t mean that Chinese economic policy is going from restraint back to stimulus. Both Premier Wen and Minister Ma were quick to stress that the efforts of macro control are still in a preliminary stage. Bottlenecks are still viewed as a problem, as are, in Ma Kai’s words, other “irrational elements of economic structure.” In fact, the government has instituted further measures in the last few days aimed at dealing with the excesses in the real estate sector -- a central bank tightening of mortgage credit and a locally mandated capital gains tax on certain Shanghai property transactions. And there may well be more such actions to come if circumstances so dictate. But the basic message I take away from all of this is that the biggest part of the push toward restraint in China is now over. The government is much more satisfied with the state of the economy today than it was a year ago.
There’s an equally important secondary message that follows from this conclusion: When push comes to shove, China still has a strong preference to use micro policy tools to achieve economic adjustment rather than deploy the blunt instruments of macro stabilization policies. During the entire slowdown campaign of the past year, there has been only one modest monetary tightening, no change in currency policy, and only a very recent announcement of a modest shift toward fiscal restraint. Because China is a blended economy, its macro managers still appear very uncomfortable in using conventional policy tools to deal with macro adjustment issues. Last year’s tightening campaign was framed almost exclusively around the old-fashioned central planning techniques of micro management. By expressing satisfaction with the fruits of those efforts, China’s economic team is sending a strong hint to look for more of the same if excessive growth causes problems again. The recent tightening measures in the real estate sector seem to bear that out.
This message from the Chinese leadership was delivered in the face of some admittedly perplexing economic data for early 2005. In contrast to the slowdown evident in the second half of 2004, there was a pronounced reacceleration of growth trends in industrial output, fixed asset investment, and exports in January and February of this year (see my 15 March dispatch, “China Zigs, Not Zags”). Occurring against a backdrop of sharp renewed increases in prices of energy and many other commodities, China’s overheating problem was back with a vengeance, many in the West were quick to conclude. The senior Chinese policy officials I just met with didn’t buy this explanation. Nor did the businesspeople and investors I spent time with in Shanghai and Beijing. Those inside China viewed the January-February trends more as statistical noise distorted by the Lunar New Year holiday -- distortions that even two-month averages don’t accurately filter out. The policy authorities stress the need to see the data for March and April before any trend break can be validated one way or another. Those on the business side of the China equation had a similar take: While growth, in their view, remains very strong, they have not detected a sharp incremental acceleration in early 2005.
I think there is a very important lesson in all of this. China is a huge growth machine, but it is growth with a big asterisk. Rapid GDP growth of at least 7% per annum is necessary to compensate for the headcount reductions that arise from ongoing reforms of state-owned enterprises -- an elimination of some 8–10 million jobs each year. As such, sustained rapid growth is vital for stability of the Chinese system -- stability in economic, social, and even political terms. As Minister Ma stressed a year ago, the overheating and bottlenecks of early 2004 were very much viewed as a threat to stability. And so the government acted accordingly. But in a transitional economy, there is always a delicate balance between the hard and the soft landing. That’s because market-based shock absorbers are not fully developed. So rather than deploy the blunt policy tools of more advanced economies -- monetary, fiscal, and currency -- China prefers to stay in its comfort zone and rely far more on the time-honored micro adjustment techniques of its central planning days. By celebrating the successes of last year’s tightening campaign, the Chinese leadership is telling us that it has no desire to go overboard and trigger an unexpected hard landing that would jeopardize its all-important stability constraint. Instead, the leaders would rather err on the side of tolerating more rapid growth and tweaking the excesses, if they arise, with sector-specific measures such as the recent actions in real estate.
For world financial markets, the China call is obviously very important. Those banking on a prompt policy response from Beijing to the surprisingly strong Chinese data for early 2005 are likely to be disappointed. At a minimum, the authorities seem willing to let the economy run for a while before they see how the data shake out in the months ahead. Barring a growth accident elsewhere around the world, that suggests little relief on the demand side of energy or other commodity markets -- further fueling inflationary expectations, central bank tightening, and a general back-up in the bond market. My bottom line for the markets: With China’s risk-reward calculus acutely sensitive to the all-important stability constraint, I read the message from this year’s China Development Forum as pretty much a green light on the growth front.
As always, the highlight of this conference is a private session with the Premier in the Great Hall of the People. Not surprisingly, this year’s discussions were framed around the hot topic du jour -- Chinese currency policy. Our group of outside experts laid out both sides of the debate to Wen Jiabao. He said nothing to tip his hand and simply reiterated that China continues to actively study the issue and is “now trying to select both the proper plan and timing for RMB reform.” Here, as well, I suspect it will all boil down to stability. In my own speech to the Forum, I stressed that the coming global rebalancing could have surprisingly important implications for Chinese stability -- especially for a dollar-pegged currency that gets caught up in America’s long overdue current account adjustment (see “China’s Rebalancing Imperatives,” presented to the China Development Forum, 20 March 2005). Because of its rapid integration into the global economy and world financial markets, China may well find that its stability anchor is less secure than widely perceived.
At the end of the meeting, the Premier shook his head and exclaimed, “I cannot sleep well at night with this issue of the RMB.” He then glanced at his watch and politely excused himself. As we left the Great Hall, a noisy motorcade rolled up to the official entrance. We went out one door, and US Secretary of State Condoleezza Rice literally went in the other door. There was a lot on Premier Wen Jiabao’s plate that day. The growth and currency debates are only one piece in the big Chinese puzzle. But in the end, always think stability when it comes to China -- whether the issue is economic or geopolitical. For that reason alone, and based on what I picked up at this year’s China Development Forum, I have little reason to doubt that China is once again going for growth.
morganstanley.com |
