The New York Times has a good piece discussing how difficult it will be to loosen the grip of state-owned enterprises in China’s economy. Meanwhile, over at the Wall Street Journal‘s China Real Time Report, Bob Davis cites an unexpected argument for China’s continued growth. Both pieces are worth reading and have more to do with each other than they seem to at first glance.
The standard bearish position on China’s economy is this: as China’s capital stock grows and returns to investment diminish, inefficiencies and corruption in the country’s “state capitalist” system will threaten to tear the economy apart at its seams. In order to ensure a smooth transition to a low-growth model, China has to institute significant economic reforms, such as encouraging the growth of the private sector and domestic consumption. Unfortunately, these reforms are unlikely because of the way incentives are arranged in the Communist Party government. Therefore, China is “trapped”.
The WSJ piece points out why this day of reckoning may be a ways off. In the poorer, inland provinces, China’s capital stock is so minimal that the economy is still mired in an earlier stage of development, so there remains significant room for growth using the old state-capitalist investment model. The still-tremendous returns to investment, therefore, are likely to continue to mask inefficiencies for the foreseeable future. For all the talk of how China over-invests in infrastructure, any visit to rural Yunnan or Sichuan reveals just how much more work there is to be done.
China’s economy is often compared to the United States, but a better analogy might be the European Union. Provinces like Guangdong, Zhejiang, and Jiangsu are akin to France, Germany, and Britain*, but provinces like Guizhou and Gansu are more like Romania and Bulgaria. China is less a “single market” than a collection of fragmented region in which local political leaders play a major role. The gap between, say, France and Bulgaria is far wider than the gap between New York and Mississippi. But the gap between Guangdong and Yunnan is much wider than either. Overall, that fact is less a case for optimism than a belief that China’s problems won’t reach critical mass for a long time.
* Just to be clear, I don’t mean Guangdong, Zhejiang, and Jiangsu are as wealthy or developed as France, Germany, and Britain but rather that they represent an analogous role within the wider Chinese economy.
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