Tuesday, April 28, 2009

"The Color of China"

A tad long but still a very insightful exchange on China's prospects between Minxin Pei and Jonathan Anderson in the March 09 issue of the National Interest.
Pei argues for looming stagnation citing a number of issues such as China's ageing population, the resulting decrease in savings, increasing social costs, rising environmental problems and inequality.
Anderson on the other hand has a more optimistic view. In his case for Beijing's exceptionalism he first sums up the country's achievement: "in strict macroeconomic terms, so far China is unambiguously the most successful emerging economy of the postwar era. And at the current pace of development, China’s “rise” is not some hazy prospect shimmering on the distant horizon, but a concrete reality only twenty years down the road." He notes that roughly a third of Chinese growth came from factor productivity and that the corporate sector (SOE or purely private) has shown increasing margins in the past 15 years. This bodes well for savings and investments going forward. He explains that there is not much "state" left in SOEs as many sectors are truly competitive in spite of state ownerhips (many automakers, airlines, utilities, telcos etc.). Overall SOEs which still represent ca 25% of GDP are as exposed to market forces as kleiretsu in Japan and chaebol in Korea were if not more. Hence worries about missallocation of capital by an inefficient State are overstated. As for ageing Anderson notes that China has 73m underemployed people in the countryside which will help alleviate the issue.
His conclusion: "The bottom line is that China has seen considerable structural and largely market-driven changes that are already fundamentally altering the rural income balance, and should go a long way toward addressing the economic problems leading to the recent unrest. This year and the next will be tough, to be sure, as weak export markets and, especially, falling construction demand take a toll on migrant employment—but as I argued above, these are cyclical issues that are unlikely to prevent a return to trend growth in the near future and over the long term."

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