In the seasonal lull engendered by the summer, Chinese GDP is low on the agenda. A year ago, the news cycle was being taken up with the A-share market crash and the instability being created around it. Currently, the China-watching community is enamored with matters of outbound investment, whether successful – for instance the numerous interjections into the soccer market – or not as with the U.K.’s Hinkley Point project. However, it is perhaps an opportune time to examine how the world of China-watchers currently lies. The industry has grown steadily in the last two decades to the point where there is arguably some real English language expertise around – something which could not be said even in the early years of Hu Jintao’s administration.
Broadly speaking, there are two main sources of economic opinion: those connected to institutional investors (asset managers and hedge funds), and those in the world of public policy and academia. Each has their own agenda, of course, but both serve different uses.
Any survey would begin with Michael Pettis, who has perhaps been the most high-profile China specialist of recent years. A former trader at Bear Stearns, Pettis is currently a finance professor at Peking University’s Guanghua School of Management and largely speaks from that platform – rather giving the lie to the idea that domestic Chinese discourse is monolithically controlled. Regularly featured in the press and various podcasts, Pettis’ chief concern is that of debt in China, though as he is keen to point out, his concern is not that of a debt crisis and financial shock, but rather the gradual zombification of the corporate sector through misallocated capital. In other words, the “Japanese model.”Enjoying this article? Click here to subscribe for full access. Just $5 a month.
Much more assertive bearishness comes from Christopher Balding, another academic at Peking University. His blog focuses principally on the unreliability of Chinese statistics, a perennial source of contention for all those analyzing growth and business opportunity. Balding’s opinions are interesting since they tend to be bottom-up, derived first and foremost from matters that arise from raw data. Earlier this year, his detailed investigations led to a suggestion that China had no trade surplus, for instance; and he has long maintained that GDP numbers are false. Yet his main problem is that he spends as much of his time defending (and indeed apologizing for) his previous errors as he does developing his principal themes.
In contrast to these are a number of research-driven buy-side firms, whose audience is principally financial investors looking at the region from the outside. This on the one hand produces astute analysis, since the company’s bottom line will depend on its reputation; but on the other it also means a relatively narrower focus on sectors and especially outcomes, particularly in terms of private sector profits. Nonetheless several of these groups are outstanding in the quality of their thinking, led by Dragonomics (now owned by Gavekal) and Capital Economics.
Arthur Kroeber’s views can, like Pettis’, be found on a number of podcasts, including Sinica and the China Money pod. Reasonably balanced, he has been pretty strong on the reforms needed for China to preserve reasonable growth rates – and like Pettis, he sees the dangers of Japan-style stagnation if the economy continues without such change. The Dragonomics founder also has a more granular view on the actual degree of centralization and hence the more nuanced and targeted reforms that are needed, particularly around the matter of SOEs and productivity as well as housing values. Having said that, the Dragonomics house view is sanguine on the question of hard landings due to peculiarities of the Chinese economy including the comparative lack of leverage in the housing sector. They also picked up on an interesting point this year about the actual nature of corporate leverage, which indicates that the conventional wisdom on debt may be wide of the mark.
Even more bullish is Andy Rothman at Matthews Asia, a specialist Asia fund manager. Rothman has tackled a number of recent Western media bug-bears such as last year’s stock market crash and the perennial issue of GDP figures, and conveys a robust view on the underlying strengths of the Chinese economy. Rothman is not convinced of a hard landing scenario, and sees substantial progress in domestic economic reforms as well as Chinese domestic innovation. The central thesis here is one which is both obvious yet simultaneously undersold: namely that the era of general growth as given way to a period where specific sectors will benefit whilst others fall behind, in other words, that there are enormous growth opportunities for investors but that increased due diligence is required as the risks are larger.
The issue of statistics takes up a vast amount of column space, of course. Daniel Rosen, for instance, whose writings are mostly (like the AEI’s Derek Scissors) taken up with the issue of Chinese outbound investment, recently issued a paper discussing the fact that traditional measures may be significantly understating the size of the Chinese economy. But for most analysts, it is the broader story of the economy which dominates thoughts. Relative bulls such as Stephen Roach see many fears as overblown, seeing strong fundamentals in measures such as job creation which back up the official growth numbers. David Dollar considers that many of the signs of slowdown are natural symptoms of necessary reforms beginning finally to function as they should. Yukon Huang, amongst others, questions both the focus on consumption as a driver of GDP, as well as the concerns about debt levels.
The Sinosceptics also range in their views. Gordon Chang, (in)famous for his 2001 book The Coming Collapse of China still occasionally rears his head to talk about the specter of rapid disintegration of the whole Chinese edifice. His most frenzied successor is Dr. Jim Walker of Asianomics, who has for several years been insisting that Chinese growth is lower than reported – though this year he has been positing that “The wheels don’t seem to be coming off … I was more worried about China four years ago than I am today.” However, more insightful comments come from the analytical work not only of Pettis and Balding, but of more circumspect writers such as Nicholas Lardy at the Peterson Institute, who sees Xi Jinping’s SOE reform as heading down the wrong path and / or failing completely. Patrick Chovanec, too, sees policies such as RMB devaluation to be short cuts which are not tackling serious underlying problems. The broad thrust here is that rebalancing is simply not happening, given the Communist Party’s reluctance to rock the boat in a difficult economic environment and failure to make enough hay whilst the sun shone in the 2000s.
As China’s development path continues, we can expect this group to both grow as well as intensify in their opinions. Although one can often accuse commentators of “talking their book,” by and large this community is attempting to guestimate to the best of their abilities, using copious raw sources, data and empirical evidence. The fact that there is no agreement should perhaps be seen as a cause of celebration rather than frustration, and that this is one more way in which the China story is reaching some sort of normality.
Websites and resources mentioned in this post (some is paid content only):
- Michael Pettis (http://blog.mpettis.com/)
- Christopher Balding (http://www.baldingsworld.com/)
- Arthur Kroeber, Gavekal-Dragonomics (http://research.gavekal.com/author/arthur-kroeber)
- Stephen Roach, in Project Syndicate (https://www.project-syndicate.org/columnist/stephen-s–roach)
- Andy Rothman, Sinology for Matthews Asia (http://us.matthewsasia.com/perspectives-on-asia/default.fs)
- Daniel Rosen, Rhodium Group (http://rhg.com/people/daniel-h-rosen)
- David Dollar, Brookings Institute (https://www.brookings.edu/experts/david-dollar/)
- Yukon Huang, Carnegie Institute (http://carnegieendowment.org/experts/533)
- Patrick Chovanec, in Foreign Policy (http://foreignpolicy.com/author/patrick-chovanec/)
- Gordon Chang (http://www.gordonchang.com/article.htm)
- Nicholas Lardy, Peterson Institute (https://piie.com/experts/senior-research-staff/nicholas-r-lardy)
- Derek Scissors, China Global Investment Tracker for the American Enterprise Institute (https://www.aei.org/china-global-investment-tracker/)
Andong Peng is a former public policy researcher at Tsinghua University, and currently works on UK-China trade relations.