Carry on China
May 10th, 2011
In March China published her 12th 5 Year Plan. The word “Plan” has been adjusted to guidelines to take into account the growing role of the private sector in economic growth, yet Plan it is. In this one party state the senior officials still have plenty of leverage over everything from the conduct of the banks to what appears on the internet. We should take this Plan seriously, just as China took previous Plans seriously.
Unlike a lot of government planning in the West, China has in recent years surprised her planners by growing more quickly than they predicted. This Plan wishes to keep the resident population down below 1.4 billion. That is still a huge number of people, almost twice as many as the USA and the EU combined. It states a clear intention to divert more of China’s rising output into individual consumption. The aim is to raise livings standards and wages rapidly. The world’s largest potential market will for the next five years be out to convert potential into reality. The aim is 7% per annum growth, a very rapid rate by western standards but considerably slower than China achieved over the last Plan period. As living standards are still low compared to the USA, this is all quite possible to do.
In recent months there have been plenty of western sceptics about China’s prospects. Some have argued that political upsets will bring growth to a halt. Instead, the revolutions have swept across the Middle East, not across the Chinese landscape. The Chinese leadership so far have found the right balance between governing their citizens, and offering them sufficient economic freedom and higher living standards to keep the system pressing ahead. Others have argued that China will have to bring her economic progress grinding to a halt because her inflation rate is too high. It is true that China has raised interest rates to 6.3% and has called for substantial new special deposits from the banks, but none of this has slowed the economy too far as yet. The official Chinese inflation rate is around the same as the UK’s. The authorities are concerned about food and house prices, and are undertaking special interventions to tackle both issues. There is the chance they will succeed in slowing the economy enough to curb over rapid inflation, whilst not cooling it so much that it brings the whole thing to a halt.
It is true there are risks in all this. There are obvious imperfections in the Chinese economic and political model, which critics will keep exposing. There are, however, two sobering thoughts to set on the other side. So far in recent years this model has transformed a backward China into the workshop of the world. It has delivered rapid urbanisation, big increases in living standards for those gaining the new jobs, and propelled China to becoming the second largest economy on the planet. Why should this suddenly stop now? The second is that China is now such an important force within world markets, that if China did go wrong, it would do considerable damage to the West at the same time. If China was unable to boost living standards as planned, the successful exporting industries of Germany and Japan would lose crucial markets. If China slipped back so will world demand for commodities and raw materials. If China catches a cold, her suppliers could catch pneumonia.
In the long 1950 to 1990 period Japan made rapid progress, raising living standards, building world class exporting industries, and moving from low to higher value added products and services. It was only when she reached the USA’s living standards and had extended her borrowing to very high levels that the phenomenal rise ended. Japan had many critics throughout the glory years. Many western investors refused to believe the story, or bought very modest positions in Japan. They missed out on a great investment. They might have been right to point out that sometimes Japan had too much inflation, or that Japan did not change her government in a Western like way even though having multi party elections. None of that mattered to the Stock market. Japan outgrew the West, and those who backed her usually made good money.
As published in Investment Week
