Monday, June 24, 2013

China's real threat: No reform - Arthur Kroeber

Arthur Kroeber
Arthur Kroeber
Despite adverse winds, China's economy is not really into deep trouble, writes economist Arthur Kroeber in ChinaFile. The only real threat is when the new government lacks the stomach to push ahead with needed reforms.

+Arthur Kroeber:
If the economy slows and local stock markets continue to tumble, doesn’t this mean the renminbi will also weaken sharply? Not necessarily. Beijing has a long-term policy interest in increasing the international use of the RMB, which can only occur if the currency earns a reputation as a reliable store of value in good times and bad. Allowing a sharp devaluation now runs against this interest, and also would be a sharp break from a long-established policy of not resorting to devaluation to stimulate growth, even at moments of severe stress (as in 1997-98 and 2008-09). So while our call on China growth has been marked down, our call on the RMB has not. 
From a broader perspective, the biggest China risk is not that the country suffers a year or two of sharply below-trend growth. If that slowdown reflects more rational credit allocation and the early, painful stages of productivity-enhancing reforms, it will be healthy medicine. And even a much slower China will still be growing faster than all developed markets and most emerging ones. 
The real risk is rather that the new government will show a lack of nerve or muscle and fail to push through financial sector liberalization, deregulation of markets to favor private firms, and fiscal reforms to curtail local governments’ ability to prop up failing firms, overspend on infrastructure, and inflate property bubbles. The old government wasted the last three years of its term doing none of these things despite the obvious need. The new leaders are talking a better game, but they have a year at most to articulate a clear reform program, begin implementation (liberalizing interest rates and freeing electricity prices would be a good start), and ruthlessly removing senior officials who stand in the way. If they fail to deliver, then the short-term slowdown could become a long and dismal decline.
More in ChinaFile.

Arthur Kroeber is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers' request form.

China Weekly Hangout

One of the very real dangers threatening China and its citizens is the rampant pollution. In the +China Weekly Hangout of January 24 +Richard Brubaker of AllRoadsLeadtoChina and CEIBS explained his take on the rampant pollution in China. Is it getting worse, and what can be done? Moderator: +Fons Tuinstra of the China Speakers Bureau.

The upcoming cyber war is the subject of the +China Weekly Hangout on Thursday 27 June. The revelations by Edward Snowden showed that the US is preparing a military shake-out, as both China, Russia and other countries are building up their cyber war capacities too. Joining us are former security consultant +Mathew Hoover and media en communication lecturer +Paul Fox of the Hong Kong University. Moderation by +Fons Tuinstra, president of the China Speakers Bureau.
For an overview of all hangouts, you can go to this page.
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