By
Patrick
Chovanec
:
On Friday, I was on Bloomberg TV talking about China's latest
economic data for October (at the time of my interview, only the
inflation figures had been announced), and some of the key
challenges facing China's ruling party as it begins its
once-in-a-decade leadership transition. I took a distinctly
contrarian view on the latest inflation numbers, arguing they do
not create room for monetary loosening to give the economy a quick
and easy boost, because the issue isn't just how much money is
sloshing around China's economy, but where that money is going. To
the extent that prices in certain key sectors like steel and coal -
and I would add real estate, despite the official statistics saying
otherwise - are falling, it reflects real overcapacity compared to
real demand, and the absence of real value being created. The PBOC
is right to resist pumping in more money and reflating bloated
investment sectors, which would only reinforce the imbalances in
China's economy and prevent the kind of adjustment China needs
towards more meaningful growth. You can
watch my interview here
.
I also discussed aspects of President Hu Jintao's big address to
the 18th Party Congress. Let me just highlight four key points of
the speech that caught my attention:
1) Hu promised to double China's 2010 GDP by 2020. That sounds
really impressive, but it actually equates to just 7% growth going
forward - and I'm assuming here that he meant double real, not just
nominal GDP, because otherwise the real growth rate would be even
lower. So really, he's lowering the bar in a pretty significant
way. Hu also set the goal of doubling per capita income by 2020.
The problem is, if GDP and per capita income both double, China
won't see any meaningful rebalancing towards consumption, because
household income won't grow as a portion of GDP - and again, that's
assuming he's talking about real income growth, because if income
only doubles in nominal terms, it will decline relative to real
GDP. To rebalance its economy China needs to grow income faster
than GDP - which could either mean faster growth in income, or
slower growth in GDP.
2) Hu spoke forcefully about how corruption seriously threatens
to undermine the Party's rule. I agree, and talked in my Bloomberg
interview about why it's so hard to deal with this problem. I
should also add that inflation - driving investment growth by
pumping more and more money into the economy - is one of the major
factors contributing to corruption, because it drives a widening
gap between those who have pricing power and those who don't, and
those who have access to credit and those who don't. Inflation
(from a big lending boom), and inflation-driven corruption, were
two of the main grievances that fueled the Tiananmen protests in
1989.
3) Hu also spoke of the need to "resolutely safeguard China's
maritime rights and interests" and called on China to become a
"maritime power." Given recent confrontations in the South China
Sea (with the Philippines and Vietnam) and the East China Sea (with
Japan and South Korea), as well as the launch of China's first
aircraft carrier, these lines surely caught the attention of
China's neighbors (as
this FT article suggest
s).
4) Hu also
appeared to push back
against reformers' calls to reduce the role of the state sector in
China's economy. Instead, he insisted China would "unswervingly"
adhere to "the basic economic system in which public ownership is
the mainstay and economic entities of diverse ownership develop
together," and said the party and government "should steadily
enhance the vitality of the state-owned sector of the economy and
its capacity to leverage and influence the economy." His stance
appeared to run contrary to the prescriptions in the World Bank
report issued earlier this year in conjunction with top Chinese
policy makers, which appeared to have the support of Hu's protegé,
Premier-in-waiting Li Keqiang, and had raised hopes that positive
reforms might take place after the leadership transition. We'll
have to wait to see what, if anything, the new rhetoric means for
actual policy.
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