China's economic luck unlikely to run out

Comments on Ilan Alon "Is China’s economic luck running out?" 30/09/2015

I would argue that the presence of corruption in China had rose rampantly by 2013 but has fallen since the current leadership took over in 2013. Obviously, President Xi’s anti-corruption campaign has captured some former corruption officials including some very high ranked ones.

The recent financial market turbulances reflect the inexperience and the lack of understanding of financial markets by the current leadership. It has been reported they encouraged people to buy into the market that propelled the Chinese financial markets to about 150% rise in a year. Of course, that kind of exuberance cannot last for ever and sooner or later the valuations would cause corrections: that was exactly what happened in the Chinese stock markets.

Is China’s economic luck running out? It is unlikely in the medium to longer run, even though in the short run, it seems every factor seems to work against China’s economic luck. The Chinese leadership cannot afford to let the economy to slow too much and for too long, as they work out successful strategies to have the Chinese economy back on track to the so called medium to high growth. The Chinese government was for some time reluctant to use fiscal stimulus, but has probably realised it has to use some sort of stimulus before its economic transformation into an innovative and service focused takes shape. It is understandable they were very cautious in using fiscal stimulus given the impact and consequences of the last huge stimulus following the GFC. But it will not be optimal to move from one extreme to another extreme.

Personally, I think the Chinese government should set a target of about 7.2% for the next two decades so it can double in ten years and double again by 2035. That would mirror what Japan did in its “income-doubling plan”.

It will not be easy, but it should be achievable if China can upgrade its economy to greater value-added in the international economic value chain. Of course, if it will help and make it easier should China be successful in taking advantages of the current digital technological and economic disruption and in becoming an innovative economy as its Premier has been calling for. But that will certainly take time. So in the short term, traditional policy tools have to be used. No economy can suddenly become from a traditional to an innovate economy over night. One has to be realistic.