We should be so lucky as to have China's crash: Olive

A fruit vendor checks her phone at a market in Beijing; growth continues, at a slower pace.

By: David Olive Business, Business Columnist, Published on Fri Feb 12 2016

E-commerce has taken a stronger hold in China than in most major economies.

Walt Disney Co.’s $5.5 billion (U.S.) investment in doubling the size of a Disneyland Shanghai, which will re-open in June, is a bet that China’s current tourism decline is an aberration, and that the enlarged park will be profitable as early as 2019.

China is more of a magnet for Taiwanese immigrants than ever, prompting fears in Taipei of a brain drain. More than 600,000 of Taiwan’s 23 million people live at least half the year abroad, about three-quarters of them in China.

And development continues on the world’s biggest megalopolis, Jing-Jin-Ji, connecting Beijing, Tainjin and the Hebei Province, with a population about the size of Japan’s 130 million. “JJJ,” with its vastly improved parks and other recreational amenities, along with 21st-century public-transit systems that will cut commuting times from 3 hours to 30 minutes.

It seems useful to mention a few of these Chinese realities since, in the West, there has been a conviction for the past year that the Chinese economy is cratering. And indeed, China’s rate of GDP growth last year was the lowest in a quarter-century, a “miserable” 6.6 per cent that is about three times higher than that of Canada or the U.S.

Of course, that humble growth rate (by Chinese standards) does contrast sharply with a Chinese Industrial Revolution that has caused China to eclipse Japan as the world’s second-largest economy; has lifted more than 400 million Chinese from peasantry to the middle class; and has greatly softened the blow in Canada of the Great Recession, given China’s voracious appetite for Canadian natural resource exports.

Now, however, the consensus of world economic experts is that China’s best days are behind it. The doomsayers focus on three things: GDP growth that has declined from double digits to single digits; a roughly one-third drop in the value of Shanghai-listed stocks in the past year; and China’s seemingly abrupt and desperate devaluation of its currency.

Punching “Chinese economic collapse” into Google yields 13.2 million results.

Here are some realities about China that might not be getting through:

China’s stock markets are expected to post a gain of about 25 per cent by decade’s end — that is, in the short space of four years.

China’s annual GDP growth rate will stabilize at about 5.5 per cent by then, a rate of economic vitality that other major economies would envy. (Canada, for one, will eke out GDP growth of about 1 per cent in each of the next two years.)

China’s GDP will jump another 50 per cent or so over the next four years, to about $15.4 trillion (U.S.).

GDP per capita, or standard of living, will surge by more than a third by 2020.

Labour costs will barely budge by 2020, yet total workforce wages will soar 41 per cent, which signals a tremendous increase in productivity, and strong growth in consumer spending power.

China has challenges in abundance. There is a troubling imbalance between a growing retiree population relative to working-age Chinese. There needs to be a cultural change from risk-aversion to risk-taking if the country is to be competitive in 21st-century technologies. And as long as China’s human-rights abuses continue, Beijing will lack credibility on the world stage.

That said, perspective is in order.

Only those who believe that trees grow to the sky could have imagined that China’s approximately three decades of double-digit GDP growth could be sustained indefinitely. Indeed, the complaint of Western critics until recently was that China was growing recklessly fast.

Beijing has acted astutely by reining in GDP growth. Equally beneficial for long-term prosperity has been the transition of that growth from pell-mell infrastructure building to nurturing the service industries in which most Chinese now work.

GDP is an over-rated metric, in any case, “Investment decisions in the U.S. or Europe are not based on GDP growth rates,” writes Andy Rothman, investment strategist at Matthews Asia, a branch of the San Francisco fund manager Matthews International Capital.

“The important statistics in China concern employment, income, inflation and consumer spending. All of these data points should be healthy in 2016.”

As for the plunge in Shanghai-listed equities, the market there was dangerously overheated. It was poised to give up gains after irrational exuberance had pushed the index up by about 250 per cent in just two years, starting in 2013. Wise investors have long placed their funds in the bigger and more stable Chinese enterprises that trade on the Hong Kong exchange.

The negativity about China has been dominated by investor losses on a speculative Shanghai market that does not represent the Chinese economy. “While this is a new environment for (Shanghai-market) investors, it doesn’t equate to economic Armageddon,” writes Winter Nie, professor at the Lausanne, Switzerland-based IMD business school.

Finally, Beijing has devalued the renminbi in a bid to maintain healthy GDP growth of 6 per cent to 7 per cent. In fact, euro losses have been greater than those of the renminbi in 2014-2015.

The real issue with devaluation is an alleged lack of transparency. Yet the rate-setting policymakers at the People’s Bank of China are closely watched. And their lack of transparency is not noticeably different from that of other major central banks (and governments). Their actions should be cause for shock only among the untutored.

Meanwhile, Beijing has been implementing a brace of reforms dating from late 2013. These will make the economy more efficient, and boost China’s status as a safe bet for domestic and foreign investors alike.

The three major elements of Xi’s reform agenda are major improvements in governance, the legal system, and fiscal policy.

Governance reform is largely geared to eradicating corruption and shifting power from more corruption-prone local governments to Beijing. In just over a year, Beijing has already investigated or disciplined more than 70,000 officials suspected of corruption, a campaign now moving into the senior ranks of People’s Liberation Army.

Expected legal reforms include prohibitions against Communist Party intervention in the courts; the creation of circuit courts that diminish the influence of local partisan officials; and public-interest litigation against polluting industries, despite the state-owned status of most of them.

And fiscal-reform initiatives include an overhaul of the tax system for the first time in two decades, a step long overdue in most Western economies.

Upheaval is a condition of industrial revolutions. History will show that China’s transition from peasant society to upper-middle-income country, as defined by the World Bank, has inflicted less collateral damage than its precursors elsewhere, while bringing more rapid social progress to more people.