Well, everyone needs a change sometimes.
We’ve written about so much bearish questioning on China that it wouldn’t be fair to ignore a couple of more upbeat comments from economists who are not the usual China bulls.
First, Michael Pettis in Tuesday’s FT:
But while there should be little doubt that China has a very difficult economic adjustment ahead – with Beijing policymakers increasingly aware of the challenge – today’s panic may be no more justified than yesterday’s euphoria. If the adjustment is well managed the Chinese financial system will not collapse and the social cost will be minimal. It will, however, require Beijing to become serious about transferring wealth from the state to the household sector.
This is of course the massive imbalance in the share of consumption compared with investment, as a proportion of GDP, which Pettis has often pointed out.
But will China’s banks collapse? No. Beijing effectively guarantees the profitability and stability of the banking system by socialising credit risk and enforcing a high spread between the lending and deposit rates. As long as the government is credible, the banks will be solvent.
There are a couple of ways to re-balance the investment/consumption ratio, he says: the Japanese way, which is to take on lots of government debt, or more direct means of transferring wealth to households, such as through privatisations.
As Pettis writes, two years ago hardly anyone would have predicted China’s growth rate could fall below 8 per cent. Today, it’s becoming difficult to find pundits who don’t voice doubts about the outlook.
One of those who was expressing scepticism two years ago is Arthur Kroeber of Gavekal’s Dragonomics, who pointed out signs of overheating due to the stimulus, and later levelled the “Greenspan put” label at Wen Jiabao.
Now, Sinocism has a presentation by Kroeber — admittedly, from September — in which he describes why he is not worried.
Kroeber doesn’t seem to hold with Pettis’ argument that the investment/GDP ratio is too high, and consumption’s share of GDP is much too low. Kroeber says China’s per-capita capital stock is only half that of developed countries, and that there is no evidence that China is overbuilt, or that its investment, is “wasteful or inefficient” in aggregate.
The increase in China’s capital-output ratio since 1980 is also a normal sign of capital deepening, and much smaller than the increase in other Asian countries.
Okay, so Kroeber uses capital-output ratio, which is based on capital stock (of which he says China, at 2.4, is “boringly middle of the road” as most countries are between 2 and 3). This is a different measurement to that favoured by Pettis; Kroeber has a few other ways of looking at the data too, such as looking at the per capita consumption growth rate. He also says that, on a per capita GDP basis, China is approaching the lower end of the spectrum in which a slowdown is possible — but that range is a very broad one, with little to be extrapolated from the paths of other Asian nations.
To be fair, neither Pettis nor Kroeber have been perma-uber-bears on China anyway (few are willing to go that far, given the paucity of reliable Chinese data and the unprecedented nature of the country’s expansion). Pettis has previously asserted that China’s massive imbalance could be managed, and Kroeber has told Marc Faber he has no idea how big China is.
But it’s interesting that although they differ so much on the subject of imbalance, both can see a way to a non-hard landing for China.
[On an unrelated note, while on the Sinocism blog we noticed this post about the Rmb2m wedding cake. That's $315,000 worth of sugar swans, right there. If there was ever a place to call a top...]
Related links:
Not liking those odds of a Chinese hard landing – FT Alphaville
China still deciding when and how to land – FT Alphaville
If (when) China slows – FT Alphaville