25 Aug 2015
Sunset in the East?
Deciphering China’s decelerationTopics:
Illustration by Daniel Bejar
The Chinese economy seems to have finally hit the brakes. Thanks to stalling real estate and export markets, this year China reported first and second quarter growth rates of 7 percent—its lowest numbers in six years. We asked Professor William Kirby, historian and coauthor of Can China Lead? Reaching the Limits of Power and Growth, to answer alumni questions about what this trend might portend.
With property price slides precipitating previous financial crises in Japan and the United States, what is the likelihood of the ongoing collapse of Chinese property prices leading to an economic collapse?
—Bruce Johnstone (MBA 1966)
KIRBY: Unlikely. Prices have fallen considerably in secondary and tertiary cities but are firm in the first tier. Property is, of course, a speculative investment in China as elsewhere, but most homes and apartments are held without mortgage or with very little debt. Unlike in the United States, banks are also less on the line in real estate. We should always keep in mind that the Chinese property market was stagnant or worse (nonexistent) for 30 years after the People’s Republic of China took power in 1949, a time when the population doubled from 500 million to 1 billion. There was and is—in terms of quality of property—still some catch-up to do.
It’s said that China is in a better position than the developed world to elongate the business cycle using fiscal and monetary policy/stimulus. Are there any significant threats, in the medium term, to this government manipulation other than investor psychology?
—Jim Daley (MBA 1986)
KIRBY: Investor psychology probably is the biggest risk, but another is an overreliance on hard infrastructure investments (roads, rail, subways) as distinct from ever-increased investment in soft infrastructure (health care, education, pensions)—especially for rural people for whom none of this has ever been free or even widely available at a decent standard. To be clear, roads, railways, and the like have helped people physically move out of poverty and toward places of better employment. But China will not become a land without farmers or rural industries overnight, and those hundreds of millions of people will need to access the social safety net that allows them to consume if the domestic market is to continue to grow at current levels. Without it, they are simply too poor to consume.
Isn’t it likely that the domestic need and want for better health care, education, water, and other basics—all across the socioeconomic spectrum—will drive continued dramatic growth in China? Is it a question of how well the economy can retool to provide products and services in these markets?
—Timothy O'Sullivan (MBA 2001)
KIRBY: I agree completely. The challenge is huge, however, since good health care (anywhere) is costly, and at present it is largely only available in quality in larger cities. The basic insurance policies now enjoyed (for the first time!) in the Chinese countryside are a good first step, but they are woefully inadequate to meet needs. The poorest people still have to spend the most for inadequate health care and education.
With the announcement of lower interest rates on credit and higher deposit rates on savings, the Chinese government seems to be “hoping” that consumer and small-business debt will accelerate GDP growth (like Brazil did at the beginning of the century). Will this new measure take the Chinese consumer beyond tolerable levels of debt-to-income ratio?
—Robert Duque-Ribeiro (GMP 3, 2007)
KIRBY: I doubt it. The government does want business to take on more debt, but small businesses—and especially family businesses, the historically strongest and now again fastest-growing segment—are unlikely to go over this cliff. A substantial part of the reason is that their credit largely comes from nongovernment sources (high savings by relatives and partners, underground banks, informal networks) that collectively do not encourage excessive risk. To put it another way, the consumer, compared to debt-ridden state-owned enterprises or local governments, is the most sober actor in the Chinese economy.
Class of MBA 1966, Section E
Class of MBA 1986, Section F
Class of MBA 2001, Section J
Class of GMP 3