China charge

By Donal Curtin

Thursday 1st July 2004

It's boom time in China, and people are worried.

It may seem an odd reaction, and perhaps the financial market analysts, in particular, are too fond of seeing the small cloud on the horizon rather than the blue skies overhead. All the same, people have observed that the Chinese authorities themselves appear concerned about the fevered pace of activity (even if their efforts to rein it in have not, thus far, amounted to a hill of beans) and have started to worry about its sustainability.

Some analysts even reckon that the China of 2004 is no different to the Thailand of 1998 - a frenzy of speculative office-tower building sustained by crony capitalism and feckless bank lending - except very much larger in terms of the size of its ultimate meltdown.

Worries about China's prospects have been among the factors (with soaring oil prices, the imminence of high US interest rates, and the political situation in Iraq and the wider Middle East) leading to the current cycle of weakening world share prices.

First, some facts - although not very solid ones, since Chinese statistics are distinctly rubbery. At one time they were routinely padded by the authorities to make things appear better than they were, and even if the apparatchiks aren't tampering with them as much these days, the underlying numbers are still on the imprecise side. Even so, it's clear there's a boom on.

In the March quarter, China's economy was up 9.8% on a year earlier, and some have argued that based on the things generally correlated with GNP that the real number could be even larger. Industrial production, for example, is up nearly 20% for the past year. China's imports of goods in March and April were running at an amazing 43% up (in US dollar terms) on a year earlier: if recent numbers are kept up, China will import some $US600 billion of goods this year.

New Zealand hasn't seen all that much of China's booming demand feeding through to our exports of goods and services, however. With China's overall imports soaring, you'd think that our exports to China would be flourishing: not so. In the year to March, our merchandise exports to China actually fell by 4.3% (from $1.52 billion the year before to $1.46 billion in the latest year). True, it wasn't a wonderful year for New Zealand exports as a whole, what with some key commodity prices under pressure and a strong Kiwi dollar for most of that time - the value of our merchandise exports overall dropped by 5.4% - but it's still a rather bizarre outcome.

It's not that much better on the tourism front, either. Overseas visitor arrival numbers for the year to April showed that overall numbers were up 6.2%, but arrivals from China were down 14.5%. Again there are probably special factors involved (the English language school market being one of them), and the month of April itself showed numbers much more like what you'd have expected (up 54% on a year ago). But still, you don't get the feeling that we're seeing all the business we should.

Returning to the sustainability theme, in my view the folks who are worried whether the high rate of Chinese growth can be maintained have got the wrong end of the stick, and for two reasons. The first is that there isn't the corroborating evidence that you might expect to find if there was a genuine asset pricing or overheating "bubble" underway. Inflation is low (3% or so); share prices haven't been soaring into the stratosphere; the country's running a current account surplus, so one can hardly argue there's been a disproportionate domestic spending splurge; and foreign exchange reserves are high ($US440 billion, enough to buy 22 Telecom New Zealands), so there's money in the kitty if needed in a crisis. Could there be localised problems in some asset or property sectors? Sure. Is there an overall macroeconomic problem brewing? It doesn't look like it.

The second reason is that there's a better model than "Thailand 1998" for understanding where China is at, and it's Rostow's "stages of economic growth". Rostow believed countries go through a sequence of stages: traditional society, the pre-conditions for take-off, the take-off itself, the drive to maturity, and the age of high mass consumption. His core idea - that you reach a threshold take-off point where it "all comes together" and growth accelerates - fits both the "Asian tigers" before it, as well as today's China. His description of the sort of things you'd expect to see at each stage has also held up rather well: in the "drive to maturity" stage, which is where I'd place the China of today, you get output growing markedly faster than the population, you get participation in international trade, and because you now have considerable flexibility (because more technologies have been mastered) over what you choose to produce next, you get a degree of specialisation developing.

In sum, there's good reason to believe that there are perhaps decades ahead of relatively rapid Chinese economic growth as it "drives to maturity", and it's highly encouraging too that India is showing all the signs of having reached its own "take-off" platform. It would be nice to think, with these two giant economies humming along, that we'll manage to do better than the 0.15% share we've currently got of China's import spending.

Comments from our readers

No comments yet