Beijing’s ammunition and omens for the Chinese economy

May 16, 2016 13:30
Those who bet on an irreversible cooling down of China's economy may lose, since, at least in the short run, Beijing will stop at nothing to keep the ball rolling. Photo: Baycrest

The well-being of the Chinese economy, the world’s second-largest, is of great concern to all.

While overcapacity, mounting stockpiles, unchecked monetary supply, and so on, are the usual byproducts of a prolonged period of rapid growth, one thing unique about China is that the Communist Party would never sit idle and watch a recession take hold of the economy, as otherwise the authority of the toffee-nosed party cadres who steer the market would crumble, and so would the people’s confidence and social stability.

Beijing will stop at nothing to keep the ball rolling, even though the momentum of economic growth has obviously waned.

It’s interesting to see the strikingly divergent views on the prospects for the Chinese economy among speculators and market predators.

Famed investor and activist shareholder Carl Icahn has reportedly dumped all of his China-concept stocks, yet Jim Rogers could’t be more upbeat.

The legendary US investor was quoted as saying recently that his firm is sitting on a large position of Chinese stocks, and so are the retirement accounts of his two young daughters.

A word of caution: either bullish or bearish, these people won’t tell you their next move in advance but will only spill the beans after they’ve made their bets.

Those looking to follow suit may end up as cannon fodder.

Hedge fund guru George Soros never minces his words, particularly when it comes to Beijing’s economic policies.

He said no government can walk away neatly after meddling in the economy, either administratively or politically.

But Soros was interpreting the Chinese economy from a typical free-market perspective, and thus his observations may not correspond to the situation on the ground.

Like many other western commentators, he underrates the power of a centralized system: Beijing has ample ammunition in store to chart the path of its economy and keep everything in check.

Soros may be right in the long run. Still, we may already be dead in the long run before we can see how things will eventually play out.

My own take is a mixed one.

Beijing’s supply-side reform is a step in the right direction, but the country may not be immune from one particular repercussion from its one-child policy.

The number of Chinese in the prime productive period of their life, those aged between 25 and 59, has now started to shrink, even before the economy can shift its dependence from exports to domestic consumption.

China had an average annual labor supply of 12.5 million new workers from 1973 to 2008, lending crucial lift to the economy as many of them bought homes, cars and other durable or nondurable goods.

But 2018 will mark a dreadful inflection point: the start of a feared two-decade-long demographic sinkhole in labor supply.

This forecast is based on solid calculations of actual figures like birthrates.

Another dire implication is the swelling in size of the population aged 65 and above.

An aging population means a heavier burden on the shrinking labor force, which in turn will add more strain to social and political stability.

Meanwhile, there are still signs for optimism.

The restructuring and upgrading of Chinese manufacturers can pick up more steam with the country's development of higher education and Beijing’s policy blessings and ample funding.

McKinsey & Co. said in its report "Gauging the Strength of Chinese Innovation" that by 2020 innovation will contribute 35-50 percent of growth in gross domestic product, helping offset the fallout from shutting down zombie companies.

The country's investment in research and development accounted for over 2 percent of its GDP in 2014, a big jump from the paltry 0.64 percent in 1994.

And its expenditure on R&D, in purchasing power parity terms, is set to top the world chart in three years.

There is more to note.

Almost half of China’s college graduates have science or engineering degrees.

By 2030, 27 percent of China’s labor force will have a tertiary education.

Furthermore, the number and growth rate of the country's patent registrations are already the world’s highest, European Patent Organization figures show.

Beijing is likely to attain the feat of economic transformation if it can steer a smooth passage through all the internal and external threats.

This article appeared in the Hong Kong Economic Journal on May 10.

Translation by Frank Chen

[Chinese version 中文版]

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A famous Hong Kong writer; founder of the Hong Kong Economic Journal