Remember the Chinese miracle? Now imploding….
A few thoughts by UBS’ Magnusson on the Chinese imploding miracle. Via Macro business.
One way or another, China is going to rebalance. The question is whether it occurs in an orderly fashion with the investment side of the economy slowing to a rate less than the growth in GDP, but still growing. Or whether it happens in the context of a sharp decline in investment, with more alarming economic and political consequences that will cut across the economy.
After two decades of unparalleled economic success, we believe China now needs a reform programme on a scale similar to that adopted 30 years ago. Without it, a heavily investment-centric and credit-intensive economic model could soon become unstable, and later stall in a middle income trap. There’s only so much labour transfer from rural areas to urban factories. There’s a limit to how high the investment share of GDP can go. Rapid population ageing is chipping away at Chinese growth. The exceptional impact of accession to the WTO a decade ago is fading. And the significant, direct role of the government, state banks and SOEs in the economy as agents of economic policy, and owners and providers of heavy investment and infrastructure may no longer be appropriate as the economy becomes richer, more complex, and in need of greater competition and innovation.
In our view, the bottom line about reform is whether the CPC is willing and able to do three fundamental things. First, we feel it should move towards a fuller market economy, changing the legacy role of the state. Second, it should allow power to drain from itself, regional governments, state entities and the military towards the private sector and households. And third, it should introduce rules and transparency, including adoption of the rule of law, into the overall system of governance.
You can be optimistic or pessimistic about the outcomes, but you can’t speak of the China or, by implication Asia, miracle nowadays, without considering the chances of successful political and institutional reforms. More to the point, perhaps, what would the consequences be for China if, for existential reasons, the CPC wasn’t willing or able to go down this path?
Full reading here.