China, Dying for Growth, Is Paying a High Price

China, Dying for Growth, Is Paying a High Price

iStockphoto/The Fiscal Times

You may have read about the bridge that collapsed in northern China this past weekend. It was all of nine months old. Four trucks went down with the 330-foot span that gave way: three deaths and five injuries.

Poor design, poor materials and hasty, careless construction are to be blamed for this, the sixth major bridge to fall in the past year. It was only a year ago that one of China’s spanking new high-speed trains plowed into another train, killing 39. Again, design flaws were to blame.

Does anyone need clearer signals that China has been moving too fast? You have to worship GDP with joss sticks to think this kind of record—dying for growth, literally—is acceptable. In many respects China needs a slow down to bring economic growth to a healthy, sustainable range.

Economists and equity analysts fret that the sluggishness now evident in China will ruin us all. People who tow this line are either fear-mongering or failing to understand China’s trajectory.

China’s technocrats want to bring growth down from the 8 percent that has been required more or less since the reform period began in 1980. It’s simply not possible to maintain that rate in an economy that has grown more complex by magnitudes. China’s gross domestic product will come in at about 7.6 percent this year; the International Monetary Fund still stays with an 8 percent forecast.

One does want to see what is next, though. At some point this autumn, the Communist Party will name a new Standing Committee to run the nation. What is it going to do about the economy? Who will its members be—reformers or command economy types? This is the key question. My guess is that the new generation of leaders will deliver exceedingly modest and measured reform.

First of all, we have to recognize what has been going on in China since the financial and economic crisis of 2008. I was in China at the time and recall the reaction well. Beijing almost instantly stepped forward that autumn with a stimulus package of almost $500 billion.

That went toward two things: export-related industries and public-works projects of the kind that has produced falling bridges. It was “anything to keep going,” but nothing changed: The reliance on exports remained high, investment remained an essential economic driver, and domestic consumption remained underdeveloped.

We are now witnessing the gradual exhaustion of an economic model that is past its sell-by date. You can take this as a short– or long-term observation. In the short term, China can go no further by way of investment in infrastructure and other such stimulus projects; the growth kick from these is declining, and it has plainly pushed too hard at any rate.

Longer term, it has to advance on the promises of the five-year plan issued last year. That is, it has to reduce its dependence on exports and raise the share of the economy that is devoted to domestic consumption. This is a political question as much as an economic problem.

I stand with Patrick Chovanec of Tsinghua University on this point. For one thing, China was never meant to be the world’s growth engine, pulling us all out of our miseries. It is too poor and has too many problems at home to play that role. For another, the West wants China to manage precisely the transition described in the five-year plan. Think of it: China, a nation of consumers.

It is true that Europe’s crisis and other external factors have negatively affected China’s 2012 performance. But this is not 2008. Back then China’s problems were primarily external; now they are internal, as Chovanec points out.

Fair enough, China’s slowdown is almost certain to affect raw materials prices and demand in commodity-producing economies such as Brazil, Australia, Chile, Angola, and South Africa. But which way are we headed on this question? Not much more than a year ago, the world fretted that China was going to monopolize commodity markets and drive prices out of sight. Take it as it comes, I say.

As the commodities issue illustrates, the China question today comes down to a kind of schizophrenia among China’s trading partners -- the U.S. and Europe highest among them. They want reform in China, and greatly enhanced consumption. (The market of a billion still beckons.)

A slowdown could bring a swifter shift to a consumption-led economy. But then many China-watchers and executives fall into a fright at the first sign of what will come to one of the most fundamental transformations since the collapse of the Qing dynasty in 1911.

Eswar Prasad, formerly head of the IMF’s China division, put it well enough recently. The strategy outlined in last year’s five-year plan laid bare the problems. It can turn China in the direction it needs to go. “Given the severe political constraints China’s leaders face, however, modest reforms by stealth are better than no reforms at all.”