RECENT DEVELOPMENTS HAVE raised concerns about how China’s economic performance might impact the global economy. Its economy is slowing again, financial stresses are happening more frequently and there is a rising risk of deflation. It is becoming clear that China has to effect a change in its economic model to address the root causes of its economic challenges. There are two key questions — will macroeconomic stability be preserved and will reforms really go ahead at the pace needed to complete the makeover in China’s economy?[…]
Policy responses are key
China has overcome some formidable challenges in the past primarily because its policymakers have been deft enough to formulate bold policy responses suited to China’s unique circumstances. Moreover, the Chinese authorities have huge fiscal resources, which they can use to pump-prime the economy. Their control of the large banks and state enterprises gives them more scope to use these institutions to manage risks — even in dire economic circumstances, runs on the big banks are unlikely because savers know the government will always stand by the banks they own. State enterprises can also be persuaded to step up investment spending should a slowdown in private-sector capital spending threaten economic growth.
Policymakers continue to demonstrate a firm grasp of the situation and are not averse to bold measures. For example, now that they have realised the risks from the huge expansion of credit and of poorly regulated shadow banking products, they are working vigorously to mitigate risks in these areas. We are less worried about the shadow banking sector because it looks like the authorities are selectively allowing some defaults in the lower-value shadow banking products while encouraging bailouts and delayed payments to help contain risks from the larger ones. Similarly, as companies struggle to repay debts, the authorities are encouraging rollovers and debt workouts so as to manage down the risks to the economy as a whole.
At the same time, policymakers are demonstrating firmness in pursuing economic reforms to shift China away from its previous low-wage, labour-intensive, investment-dependent model. Reforms in the capital account, financial sector, the treatment of rural migrants, and adjustments to minimum wages are all proceeding apace and will in time allow China’s economic model to transition to a more sustainable one.
Taking the political and financial trends into account, risks in China are at their highest level since the late-1980s. However, the capacity to manage risks and mitigate shocks has also improved, making a full-blown crisis less likely. The most likely outcome for the economy is where frequent episodes of financial stress are contained while growth slows but not precipitately. Reforms will continue but at a controlled pace. On the whole, China will see a difficult patch and may not provide as much a boost to Asian economies as before, but it will not crash as the most pessimistic observers have warned — so long as the political risks are contained.
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Manu Bhaskaran is Director of Centennial Group International and the Founding Director and Chief Executive Officer of Centennial Asia Advisors. Mr Bhaskaran is an expert on economic and political risk assessment and forecasting. Before joining the Centennial Group, he was Chief Economist for Asia of a leading international investment bank and managed its Singapore-based economic advisory group.
Mr. Bhaskaran is a well-regarded commentator on Asian financial and economic affairs, and has regular columns in business weeklies such as the Nikkei in Japan and the Edge in Singapore/Malaysia. He serves as Senior Adjunct Fellow, Institute of Policy Studies, Council Member of the Singapore Institute of International Affairs and Vice-President of the Economics Society of Singapore. Mr. Bhaskaran has a Master’s degree in Public Administration from the John F Kennedy School of Government at Harvard University and a Bachelor’s degree in economics from Cambridge University. He has also qualified as a Chartered Financial Analyst. He is based in Singapore.