The Real Difference in Opinion
This is a good thing, of course. If Chinese economists were nearly as oblivious to China’s problems as the China bulls claim they are, we would have reason to be truly worried about the country’s prospects. In the last two years as the bull argument has been pummeled into reality by the surge in debt, the persistent failure of consumption growth to close the gap with GDP growth, and the sharp slowdown in overall growth, the mood abroad has turned increasingly bearish, to the point that many people are speaking about a China collapse and the horrible implications this will have for the rest of the world.
It is important to note however that nothing has really changed substantially in the past few years. The problems China is facing today should have all been expected, but we shouldn’t be so quick either to expect an imminent collapse in the Chinese economy or, even as China continues to slow sharply, an awful impact on the rest of the world.
The former bulls are using this shift in global sentiment to shift the goalposts somewhat. They now claim that the fundamental disagreement between China bulls and China skeptics is that the skeptics have been predicting an imminent collapse in the Chinese economy for several years – which of course has not happened – and that they are demanding that Beijing take policy steps which will force an adjustment in the Chinese economy such that consumption will immediately surge and investment immediately drop to “acceptable “ levels.
But the serious debate has not been about whether or not China’s collapse is imminent. The disagreement was whether or not investment misallocation and the repression of household income growth were fundamental to the Chinese growth model. The bulls argued that they were not, and that while poor investment decisions and low consumption growth could indeed exist, these could be addressed administratively within the model and did not require radical reforms that would essentially result in an abandoning of the growth model.
The skeptics argued that these were indeed fundamental to the model, and that worsening imbalances and an unsustainable rise in debt would be the inevitable and automatic outcome of maintaining current policies. For the bulls, although only after it became clear that debt was indeed growing too fast, debt problems are specific and localized problems created by irresponsible behavior on the part of individual actors, and they can be addressed by administrative measures on the part of the regulators. The skeptics, however, disagree. It doesn’t matter how strongly the regulators clamp down on one sector or the other, high growth rates – the skeptics argue – necessarily mean that debt is rising at an unsustainable pace no matter how vigilant the regulators. Our conclusion was that unless the investment-driven growth model were abandoned, it would lead inexorably to a debt crisis.
The heart of the bull argument until one or two years ago was that a radical adjustment was not necessary. The skeptics argued that it was, and, against the fervent advice of the bulls, they warned that the longer it took to implement the necessary adjustments the more difficult it would be. It is precisely the disagreement over whether or not major structural adjustments were even necessary that separated the skeptics from the bulls.
I wish this were just about bragging rights, but it is not. The bulls have been forced to recognize the inevitable consequences of the existing growth model, although some have resisted longer than others, but many of them still don’t get it. They don’t seem to understand that what is needed is not implementation of the “right” administrative strategies to fix the problems of debt, investment and consumption, and they mistakenly believe that China has plenty of time to implement these strategies.
Most dangerously of all, the bulls think that China can fix its problems while growing at 7% or 7.5% – which is better than the 8% they used to think is the minimum acceptable, although worse then the 6% they will undoubtedly cite next year as the minimal acceptable growth rate. But these growth rates, the skeptics argue, are impossible. In order that Beijing get its arms around credit growth and reduce the extent of wasted investment, GDP growth rates – the skeptics argue – must drop considerably, although since rebalancing means that household income must grow faster than GDP, it will not be nearly as painful as the bulls think it will be.
The issue about how much China’s GDP growth must slow in order to accommodate the necessary adjustment is probably the key difference between the bulls and the skeptics. Contrary to the new argument put forward by the old bulls, the problems of debt, investment and consumption in China are not new and unexpected, they are not just the normal growing pains associated with rapid growth in an otherwise healthy developing economy, they are not simply individual problems caused by irresponsible behavior, and they cannot be addressed except with far more radical changes than the bulls acknowledge.