Commentary | 09 April 2018

The collapse of the “Chinese collapse” theory

Originally published in the Australian Financial Review on 9 April 2018.

Originally published in the Australian Financial Review on 9 April 2018.

In Japan, they call it “the collapse of the ‘Chinese collapse’ theory.”

The line, which harks back to more than a decade of dire predictions about China, is a joking way to describe the state of the Middle Kingdom’s economy.

Far from falling in debt-laden heap, the economy is looking robust in the medium term. Many of the perennial China bears are retreating into hibernation.

It is a joke delivered somewhat mordantly, of course, as the Japanese thrive on a strong Chinese economy and also fear a strong China, much like many Australians.

China’s 6 per cent-plus growth in 2017 was dismissed in some quarters as a political show, the kind of increase in output that the central government demands in a political year.

The Communist Party held its once-every-five-years Congress in October, extending President Xi Jinping’s rule for another five years. At the National People’s Congress in March, the way was cleared for Xi to stay in office for good.

The idea of politically inspired growth in China is not crazy. In the past, growth has tracked the changing of the leadership in the party and government, with outgoing and incoming officials alike spending big to buttress stability, and their careers, at sensitive moments.

But the Chinese economy has changed in the past decade. The officials don’t need to spend as much anymore, as the people are doing it for them.

Consumption and services are finally taking over decisively as the main drivers of growth, something that the Chinese government has talked about at length but struggled through various crises to bring about.

In the short term, China is benefiting from rising wages and low household debt and inflation. Real incomes rose by 120 per cent in the past decade. Retail sales are growing, by 9 per cent in real terms last year, compared to 2.4 per cent in the US.

“While spending by Chinese consumers was equal to only 22 per cent of US retail sales in 2006, it was equal to 87 per cent of American consumer spending in 2016, and is likely to surpass US retail spending by the end of the decade,” according to Andy Rothman, of Matthews Asia.
 

Quiet optimism prevails

The trade tussle with the US won’t help either country but China is much less dependent on America, and exports, than it was a decade ago. Net exports made up less than 10 per cent of growth in 2017, a figure that is unlikely to increase significantly in coming years.

China’s plan to rebuild continental Asia, the Belt and Road Initiative, will only accentuate the mega-trend, of declining dependence on the US, and on East and Southeast Asia overall.

Some successful policy calls have helped as well. The signature policy of Xi’s chief economic adviser, Liu He, to take out excess capacity in the steel and coal industries, worked better than almost anyone expected. So too did an initiative to mop up excess housing.

As a result, the remaining state-owned heavy industries saw prices rise and the debt on their books fall; and property prices stabilised and then recovered, allowing for a new round of building starts.

The success of these policies was reflected in rising profits for Australian resource companies, and in turn, fatter tax receipts and a healthier budget in Canberra.

It is easy to find lots of problems in the Chinese economy. Debt is still piling up, albeit at a slower rate than in the past, and local officials still have every incentive to spend money, no matter what the centre says.

Air pollution returned to Beijing with a vengeance in recent weeks, a sign that some of the excess steel capacity the central government closed may be coming back on line.

Soon, the ruling Communist Party will face a problem that no amount of central planning can fix. The country’s population will start going off a demographic cliff in 2020, a result of the one-child policy.

Pension costs will rise rapidly and China’s huge pool of domestic savings, a magic pudding that has given policymakers in Beijing great flexibility in recent decades, will start to run down.

But otherwise, a quiet optimism prevails in Beijing. Perhaps this emerging consensus will morph into complacency and hubris. It is also hard to calibrate the impact of Xi’s power grab which has swept all his rivals aside.

For the moment, however, the chatter about China’s collapse seems far away.