CHINA'S ECONOMY
What Everyone Needs to Know
Arthur R Kroeber
Oxford University Press; 319 pages; $16.95
In 1990, the per capita incomes of the world's two most populous countries were level. Since then, India has watched with growing interest how its larger neighbour - with which it has fought an unforgettable war - pulled away with a double-digit growth rate to become the world's largest economy in purchasing power parity terms, the largest manufacturing and trading nation, and second-largest global investor. As we grappled with our own economic reforms process in a raucous democracy, it was all too easy for us to credit China's authoritarian regime with a "grand strategy" that undercut its comparator economies to take over the world's markets.
Arthur R Kroeber, founder of the respected Gavekal Dragonomics and editor of the China Economic Quarterly, provides a detailed and masterful analysis of how China succeeded in his book China's Economy: What Everyone Needs to Know. From his ringside view in Beijing through the rapid growth and slowdown of the Chinese economy, he traces historical perspectives on a range of Chinese economic issues of global concern today.
"China's economic story," Mr Kroeber points out, "was created by fierce battles between rival groups, decisions taken under emergency conditions with imperfect information, the belated and partial rectification of past errors, and the constant swirl of a billion people seeking personal advantage." It was, he contends, hardly a master plan of "wise officials with an exact knowledge of the consequences of all their actions." This is exactly what I realised during the two years I lived in Beijing - the vibrant entrepreneurial culture and sheer number of economic players quickly dispelled my preconceived notions about a grand central plan.
The book covers the reform of the agriculture system from communes to family farms that created the surpluses necessary for industrial production. In the industrial sector, it points out that although there was no grand strategy, the movement to selected export industries was facilitated by special policies for foreign firms and the fast movement on infrastructure creation. The housing boom from urban housing reforms played a major role in China's rapid GDP growth from 2000 onwards.
The chapters on the financial sector, demographics, SOEs (state-owned enterprises), and energy and environment analyse the developments in these sectors and how China has addressed the challenges. For instance, SOE assets and revenues still account for 145 per cent and 26 per cent of GDP, respectively, and the current government seems to be reluctant on further reforms to reduce their economic dominance. Foreign firms still play a large role with three-quarters of high-tech exports but this share is coming down as private Chinese firms gain market share.
Mr Kroeber tries to quell global misgivings about China's economic "cheating". He feels that its unprecedented export growth owes little to manipulation of the exchange rate, artificially low interest rates, subsidies, and repressed energy prices and wage costs. Instead, he credits fortuitous circumstances such as rapidly growing neighbours and an advanced port and financial system in Hong Kong. Even if individually these factors may have had an insignificant impact, readers may counter that their combination helped China's exports gain a competitive advantage that few other emerging economies have enjoyed. It is noteworthy, however, that China became WTO compliant in 2006, the yuan appreciated after 2010, and wage costs have risen, yet the country continues to gain export share.
Since 2012, the Chinese economic juggernaut has slowed down, reaching 6.9 per cent GDP growth rate in 2015 as part of what the government terms "the new normal". As a result of the fiscal stimulus, the debt-to-GDP ratio has soared to 250 per cent, and overcapacities in steel and other industries are huge. A stock market correction in August 2015 and volatility in January 2016 have shaken the world.
As Mr Kroeber mentions in interviews, there are two strands of thought on where the Chinese economy is headed. The optimistic version is that China has sufficient stocks of foreign reserves and household deposits to underpin the current imbalances. The pessimists fear that China may be prone to "implosion" due to rapid and unchecked growth in the debt-to-GDP ratio. The book firmly debunks the pessimistic view, noting that "triggers" are missing. The author, however, expresses misgivings about the increasing role of the state and low innovation capability.
The book adds immensely to understanding the forces that shaped China's growth journey. It concludes that China's economic growth has contributed to its political influence but that it is unlikely to supplant the US as the dominant global power. India is the only Asian economy which can grow faster than China but does not enjoy a consensus on reforms, due to which it is ceding ground in South Asia to China.
It is worth keeping in mind that even with a 6.5 per cent pace of growth, the $11-trillion Chinese economy will continue to be the largest contributor to global growth and is on track to overtake the US economy. For India, whose exports to China have declined by half in the last few years, China's slowdown and rising cost structures represent an opportunity to increase its economic footprint, and it must strategically leverage the areas of potential in trade and investments.
The reviewer is principal consultant, CII, and author of several business books. Views are personal
