What China can learn from the US economic recovery

The end of the Sino-US strategic and economic dialogue this year has left us with plenty to think about. The economic health of both countries, for one, is of great concern, and debate is fierce on where things stand and where they're headed.

China's economic data has cast a chill over the land of late, the summer heat notwithstanding. Both exports and imports unexpectedly declined in June, with import growth slowing considerably in the second quarter, according to the General Administration of Customs. Stripping out the cyclical Lunar New Year effect on such trade, the last time a double dip happened was in October 2009, when the global financial crisis was really biting.

The official purchasing managers' index also fell in June, to just a touch above the 50-point level that indicates growth, while HSBC's PSI survey fell to a nine-month low, underscoring the slowdown in manufacturing. Meanwhile, the producers' price index has been in decline for 16 straight months.

These numbers show that while China's overall economy remains stable, it is increasingly under pressure. In this context, Finance Minister Lou Jiwei's comment that China could endure a slowdown to 6.5 per cent growth was interesting.

This is not a time to lose our head or our confidence. China should be worried, but some straight thinking would show that hopes for a turnaround lie in structural reform.

America's experience proves this point. Just a few years ago, the US economy had seemed hopelessly depressed. After the body blow of a financial meltdown, the economic adjustments were many and painful. Yet, three years later, a recovery is clearly under way. Various economic indicators are picking up, with some even topping the pre-crisis figures.

The job numbers are particularly eye-catching: the economy added some 195,000 jobs in June, and this works out to an impressive average of nearly 200,000 new jobs every month for the past quarter. As a result, the unemployment rate is likely to fall below 7 per cent in a year, and the US Federal Reserve is waiting for the right moment to ease off its bond-buying stimulus.

Rising employment and a recovering housing market have once again made consumption an engine of growth in the US. And as financial uncertainties decreased, businesses have also become more willing to invest. In one forecast, the US economy is expected to grow by 2.5 per cent in the second half of the year, and by over 3 per cent next year.

The resurgence of the US economy offers China an opportunity - and a lesson. For many years, the US has been a driver of global growth. China - as a beneficiary of globalisation - would be wise to see the opportunities it now offers.

And what can China learn from the twists and turns of the US recovery? At the time the crisis hit, the government responded with monetary easing and fiscal measures in a bid to stabilise the financial system. As the downturn got worse, it turned to tax cuts and health care structure to stimulate demand. In the process, both the financial industry and real economy went through painful deleveraging. As one Fed official put it, after the financial shake-up and regulatory reform, the US financial system has never been healthier.

When the global storm hit, China was on the periphery, itself struggling with cyclical adjustments and the challenge of transforming its model of development. It rolled out a 4 trillion yuan (HK$5 trillion) stimulus package in response, which stabilised the economy but delayed the needed economic restructure. With the stimulus came an explosion of credit, and an accompanying surge in asset prices that were then beginning to taper off. No wonder the economy heated up.

Given their access to credit, state-owned enterprises took the opportunity to expand at the expense of the private sector, the growth driver of the real economy. Meanwhile, the government's invasive industrial planning and local governments' intervention combined to worsen the problem of excess capacity. These problems in the real economy are now showing up as financial risks.

Seen in this light, the problems now faced by the Chinese economy are part and parcel of the necessary pain of deleveraging. To solve them, China must not go back to the old model of investment-led growth.

China's new leadership understand this, thankfully, and have resisted reaching for a stimulus even as the growth rate slows. Premier Li Keqiang recently underlined the symbiotic relationship between growth and restructuring. Growth creates the conditions for restructuring, while restructuring in turn unleashes potential for economic growth, he said. We could not agree more.

The pain of reform is unavoidable; enduring it will test our leaders' resolve. It's also their duty, and the only way the full potential of China's economy can be realised.

This article is provided by Caixin Media, and the Chinese version of it was first published in Century Weekly magazine. www.caixin.com