News Xina 18

The Belgian sinologist Pierre Ryckmans, aka Simon Leys, recently died in Sydney. He lived in Mao’s China, and was one of the first intellectuals to relentlessly criticise the Cultural Revolution, for which he was scorned by the entire enlightened French left. His China is that which survived the destruction of the Revolution. Leys is not only the best addition but also the best company for those who go to China on business and are taken here and there without much of a chance to glimpse not the real China, because today’s China after almost forty years of reform is also real, but rather the China in which the vast majority of Chinese still live.

Allow me to dwell for a moment upon the China that we all see. It is at a decisive point in its evolution, as it almost always is. It must sustain its growth rate, not the 11% of recent years but more like 7%, the rate deemed necessary to meet people’s hope of attaining a decent standard of living. However, this growth must be underpinned by other foundations. Domestic demand should gradually replace the export sector as the mainstay of aggregate demand, and, within domestic demand, private consumption should prevail over public investment. Why? Because dependence on external demand, which is too random, must be reduced; because too much public investment inevitably leads to resources being misallocated in unnecessary investments; and because, after all, the purpose of economic activity is consumption rather than investment.

It is difficult to exaggerate the difficulties that lie behind such a simple statement. Indeed, it is easier to describe them. In a country with a communist past like China’s, the real issues are always political in nature, and boil down to how to stay in power. Therefore, renouncing the leading role of public investment, one of the levers of commanding the regime, is tantamount to renouncing control of the economy. There is little doubt that this is the line taken by current leaders, but we should not expect it to be devoid of some zigzagging.

The authorities’ response to the crisis that shook the global economy is evidence of this. Just in case, they have endeavoured to sustain growth, as per usual, through a lax monetary policy and a new programme of major investments. The monetary policy has fuelled real estate bubbles in various parts of the economy, naturally with abundant use of credit. As with all bubbles, people talk about a soft landing, without really believing in it. The end of the real estate bubble is being hidden by a bubble in the stock market. Everyone is hoping to get out of the bubble before it bursts, and a mass of phantom assets are circulating from one side to the other.

The way out of a bubble is through a period of slower growth, which cannot be postponed indefinitely. The current situation has a negative impact on income distribution. And despite what the visitor to Beijing or Shanghai sees, despite the great progress made in the last thirty years, China is still, to our eyes, a poor country: the middle class has an income of around $7,000 - three times lower than ours. Bubbles are too costly an entertainment for a poor country.

Alfred Pastor
Lecturer at IESE Business School