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| Arthur Kroeber |
Knowledge CKGSB:
Q. Do you think China is moving in the right direction with those adjustments?
A. It’s unclear. You look at certain metrics and you can see that the private sector share of almost every economic indicator continues to grow, but it is growing at a much slower rate than it was five or six years ago. So the impetus toward a more market-driven, more private sector economy seems to have weakened. And at the top level of policy you see President Xi Jinping has basically outlined a vision of economic growth that is very heavily reliant on a big role for the state-owned enterprises. There is an emphasis on consolidating SOEs so that they are even bigger. There doesn’t seem to be a lot of appetite in the government at the moment for large-scale deregulation to reduce the state role in any given sector. So we are getting mixed signals, but I think one of the signals we are getting is that there is a very strong desire to keep a very large state role in the economy, and in my opinion that does create a real problem. That’s a real obstacle to China making the move to a more efficiency-driven economy.
Q. How would you place your bets on the future?
A. [After a few years] the problem [will be] you are left with an economy that is still highly reliant on credit, where the quality of that credit has deteriorated and lead to a lot more bad loans in the banks, and you have a need to have a significant correction to the property market because it has just been allowed to go too fast for too long. And I think at that point, you really get down to the question of, is the government really going to make the structural changes in the economy necessary to reduce reliance on investment, focus more on consumption, get more market forces to reduce the role of the state, to have a more private-oriented economy? If the answer to that question is yes, then I think that what you likely have is a much more volatile and complicated period from 2018-2020. If they try to execute some of these reforms you may have some real hits to growth, because a lot of these reforms will, in the short run, reduce economic activity.
But at the end of the day, if all of that is done successfully, you could wake up in the early 2020s and the economy could be growing in a healthy way, without a huge increase in credit, at maybe 5% a year. That’s the good scenario, and I think that is about the best we can anticipate.
So then let’s assume that they don’t do those reforms because they are too difficult or too complicated or they don’t really want to do them—what happens then? I think there are two possible outcomes. One is that you have a buildup of pressures in the financial system and it just blows up in some kind of crisis. That’s what a lot people in the hedgefund community and the financial industry in general tend to worry about—that this steady increase in the debt level in the economy ultimately will lead to some kind of crisis moment. And I think that’s possible, we can’t discount it. But I actually think that’s less likely than another bad scenario.
That scenario is that the government has enough resources to anticipate a financial crisis and stop it from happening, but the way they do that is essentially the way that Japan did it in the 1990s, which is that they throw more and more money into more and more infrastructure projects, which keeps the economy ticking over, and prevents the necessity for people to recognize bad loans and restructure.
But because the productivity of this capital is falling you just get into slower and slower growth all the time, and where you wind up at the end of the day is that the economy is barely growing at all, and is piling up higher and higher levels of debt. And you get there without an obvious crisis, but you end up with a high-debt, low-growth stagnation scenario. It may seem weird to talk about that in China today because it’s a pretty vibrant economy still, and growing pretty fast. But you know, if we don’t see a major change in the economic policy direction, I think that’s basically where we wind up seven or eight years from now. And as Japan’s experience has shown, once you get into that trap, it is very difficult to get out of it. And it is particularly difficult to get out of it if you have a rapidly aging population, which China will have worse than Japan.
Right now, China looks like Japan in 1980—a lot of workers, not that many retirees, but 20 years from now China will basically look like Japan today. Very few workers, and a lot of retirees. It’s hard to get growth from that dynamic. So I tend to think that if you have a bad outcome in China, it will be expressed not through a blowup or crisis or something exciting happening, but a long, slow slide into stagnation.Much more in Knowledge CKGSB.
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.
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