Who Said It Would Be Easy??
I contributed a comment to the Nikkei Asian Review during this year’s World Economic Forum in Dalian. The link is here.
Time for realism about China’s prospects
Listening to many bemoan China’s recent market volatility and watching how its stock and currency actions have affected world markets, it would seem everyone believed reforming the country’s huge, lumbering and unbalanced economy would be easy.
How could it ever have been?
Changing from an economy centered on investment and low-cost labor manufacturing to a consumption-driven economy led by a strong middle class would be hard enough.
Dealing with a huge and imminent demographic challenge — a swiftly aging society and a rapidly slowing rate of population growth? That would be hard enough.
Adjusting a currency regime that has funded stunning domestic growth by keeping savings at home and controlling interest rates, but that needs change to become international and free-flowing? That would be hard enough.
Grappling with the bubbles of exuberant investment and debt that need to be managed down but not popped? That would be hard enough.
Coping with anemic growth, at best, in the key markets of the U.S. and Europe? That, too, would be hard enough.
Handling these and other challenges simultaneously? The only real surprise should be the shock over the volatility, the bumps and the missteps.
Sitting at the World Economic Forum in Dalian this week, it is fascinating watching and listening to both foreign investors and Chinese entrepreneurs wrestle with the “new normal” in China. The starry eyes of a few years ago are, in some cases, glassy with shock, but in others, clear with a new realism.
The Chinese success story of the past 30 years is responsible for the magnitude of the negative reactions to current problems. The world got used to the recurring “wow” factor from China’s economic reports, from journalists writing about amazing transformations, from corporate board visits that had chairmen issuing commands modeled after the Olympic motto, “faster, higher, stronger.”
The 2008 Beijing Olympics marked a high point of China’s emergence on the world stage, but the great and wonderful show had to be backed up by reality and could not go on forever.
China’s government has been clear about its desire for reform. It has also been clear about its commitment to let the markets drive more decisions. What it has not been clear about is its ability to tolerate uncertainty and volatility. That is what has spooked many.
Recent ham-fisted intervention in the stock market stand in stark contrast to the confident bureaucratic moves that charmed investors a decade earlier. A currency devaluation, unexpected and poorly explained, shook investors at a time when they wanted reassurance. The continuing and inexorable grind of the anti-corruption crackdown — though long needed and much welcomed — has slowed decision-making by frightened officials at a time when investors need to see resolve and decisiveness.
Courage and radicalism
Many of the those who for years said China’s double-digit growth was miraculous, then unsustainable, are the ones now filled with the deepest kind of pessimism that growth is, and will be, far below the government’s stated goal of 7%.
This is actually a time when realism is needed more than either optimism or pessimism.
Reforming still-huge and inefficient state-owned enterprises is necessary but is neither a simple nor a fast task. Merely changing structure will not cut it; simply merging some and selling off others will not do it either.
What’s needed is hard, gritty work affecting millions. And that will take time.
China’s workers need many new skills to deal with the changes coming in the economy. That will take time.
China’s bureaucrats need to learn and internalize whole new modes of governance. That, too, will take time.
And to unleash innovation, investment and creative experimentation in the economy? That will take not only time but courage and radicalism that will be extremely hard to reconcile with conservative imperatives that value social stability and control above all else.
For innovation to flourish and transform the new normal into something ultimately positive and productive requires a ground where fairness, transparency and the rule of law are givens and never in question. It needs a ground where information can flow freely, both domestically and internationally. It needs a government that trusts in thinkers who are outliers, knowing that true faith is repaid.
Who said this would be easy? It will not. Success is not guaranteed. Volatility will be a fact of life. Patience will not simply be a virtue but a necessity.
China’s new normal does contain the seeds of success, but only for those willing to stay the course, swallow incipient panic and place a long bet.
David Schlesinger is managing director of Tripod Advisors, which advises companies on Chinese political risk, media and technology issues. He is the former chairman of Thomson Reuters China.