Out with the 'China cult'

PUBLISHED : Wednesday, 18 July, 2012, 12:00am
UPDATED : Wednesday, 18 July, 2012, 12:00am


China deserves congratulations: such a sprawling complicated country managed to publish its growth numbers for the second quarter on Friday, a mere 13 days after the end of the quarter. It's a performance on par with tiny sophisticated Singapore and far ahead of the pack of older, richer countries - such as the US, Japan or Germany - which have yet to reveal their economic performances.

Cheers all round then, especially when the numbers showed 7.6 per cent growth, a slowdown but with prospects that the trough has been reached. Most mainstream economists are forecasting growth of 8 to 8.3 per cent for China this year. Just to make sure, the government is already massaging growth.

But nagging doubts remain about whether China's number crunching is too perfect for its own good. WikiLeaks drew attention to it with the publication of a message that Vice-Premier Li Keqiang told US officials in 2007, that China's gross domestic product figures were 'man-made' and 'for reference only'. Li, remember, is all set to take over from Wen Jiabao as premier.

Despite claims by China's top statisticians that their numbers have been checked to see they do add up, several points of inconsistency arise.

Electricity usage, which Li has cited as a more reliable figure than GDP, is flat; housing starts continue to collapse; retail figures do not point in a clear direction; moreover, the GDP deflator implied from the difference between nominal and real rates of GDP growth suggests that China is on track towards deflation. All these factors lead some to suggest growth may be more like 7 to 7.3 per cent.

In the context of China's economy in the 21st century, whether growth was really 7.6 or only 7 per cent amounts to something more than a quibble - though government efforts to achieve the magical 8 per cent by pumping in more investment risk making underlying problems worse.

In the lead-up to the changing of the political guard, it is probably too much to expect a burst of honesty from the rulers, still less that they will tackle the massive issues.

These include the structure of the economy and the balance between investment, trade and consumption, quality of life, as well as social and environmental issues that will affect not only China but also the world.

Closely inter-wrapped with the economic and social issues are burning political questions, including political and economic freedoms, the roles of the state and private enterprise, and what role China wants to play in the world. The question of China's vision of itself and role as a global player is important, not least because it will determine what amount of government spending and attention goes to 'defence'.

Hong Kong-based entrepreneur Also Sprach Analyst, a blogger with a good eye for economic reality and a keen sense of BS, praised China's very real achievements last week: 'It used to be that Hongkongers would go to China to purchase really cheap stuff. Now, it is the mainland Chinese who come to Hong Kong to buy really expensive stuff [in his italics] ... Today, it is almost as if this city would have died if the Chinese economy did not grow as it did.

'For 30 years or more, the Chinese economy has defied 'gravity', has never been in recession, and has lifted enormous numbers of people out of poverty ... Before the story of 'China as the forthcoming greatest economic power', many held the impression that Chinese companies were either not well run, or were run by crooks, who cooked their books and/or produced very inferior products simply to rip people off.

'These are the problems of China's past. But if they sound familiar to you, that's because they are what increasing numbers of people are talking about now. China is still full of businessmen who make crap products that are dangerous for human consumption. Corruption is as serious as it was, if not more so. You still have to bribe officials ... and government officials cannot have a successful career without being corrupt.

'The only difference ... is that people ignore it now, because the extraordinary bull market and the seemingly unstoppable economic growth has created a China cult.'

The China cult is still strong. Former US diplomat Andy Rothman, who is China strategist for CLSA, self-proclaimed 'Asia's independent voice', issued a report in May that tried to 'debunk 16 commonly held misconceptions about China'.

According to Rothman, almost everything in China's economic garden is coming up roses: the country is not export-driven; it is the 'world's best consumption story with an entrepreneur-driven economy'; a banking crisis is unlikely in the near term; growth will be 8.5 per cent; local government debt is not a time bomb; there is no property bubble or 'shadow' bank; the yuan is not grossly undervalued; manufacturing is still competitive; and the only real worry is the rule of law.

Rothman's optimism has been debunked. The World Bank produced a report earlier this year in conjunction with the State Council's Development Research Centre, in which Li is closely involved, suggesting the need for major restructuring reforms if China is to fulfil its economic potential as well as the hopes and dreams of its 1.3 billion people.

Now that the country is entering a phoney political period where little gets done, it will take a brave leader to assert himself and tackle the economic issues.