China’s Economy — still no solid signs of reform

FinalAnswersforRenDa–ChongyangInstitute    This spring, at the request of the Chongyang Institute of Finance at Renmin University, I wrote a few paragraphs on the Chinese economy in advance of the National People’s Congress.    As I head out to Shanghai and Beijing late this month, including an event with the Chongyang Institute, I thought I’d post my answers to their questions.  They were written for a Chinese audience and are a bit repetitive so here’s the summary (slightly updated):

—  China’s leaders have identified the reforms necessary for continued long-term growth:   rebalance to put more money in the hands of consumers and let markets play a greater role.

—  At present, growth of household disposable income is more important than GDP growth; indeed, with growing incomes Chinese families can live better even as the economy slows down.

— China’s decision to use market mechanisms more is also spot on; liberating energies of an educated population, of the new service industries, and of China’s growing army of creators is much more important than protecting existing behemoths and state enterprises.

—  Unfortunately, the numbers don’t show the reform yet.  The GDP continues to growth faster than household disposable income, through the first quarter of this year.   

—  China is borrowing more and investing more but growing less.  That’s not a good sign: there’s more going in, less coming out of the economy.

—  Also not a good sign is that economic stimulus, steel production, and financial markets are being managed by government intervention rather than subjecting them to more market discipline.

So, we watch, wait and anticipate the readjustment of the Chinese economy.    It hasn’t happened yet. The longer it is postponed, the more difficult and bumpy the transition will be.