Curb your enthusiasm

A counter window in a bank in Nanjing, Jiangsu Province.

 By Cong Mu

After two years of study and four years working in airline marketing in Singapore, Valerie Jia decided to return to China in July.

"There is a big difference from Singapore," said Jia, 28, now a '09 MBA student at the Shanghai-based China Europe International Business School (CEIBS). "Every day is new and exciting, full of new opportunities," she added, hopeful that the private sector will become an increasingly significant force for China's economy.

Despite the optimism of people such as Jia and China's 8.9 percent growth rate for the third quarter, the current economic recession is far from over yet, Chinese policymakers and Nobel laureates told a Global Management Forum held during the CEIBS' 15th anniversary last weekend in Shanghai.

Moreover, in order to achieve the country's long-range target of becoming high-income society, China has to take on a strenuous task of shifting growth model when global aggregate demand driven by American consumption is shrinking, some of the leading economists said.

Diminishing demand

"Both China and the US have benefited greatly from their trade relationship over the past decades, raising their people's income and living standards in the respective countries," Joseph Stiglitz, 2001 Nobel Laureate for economics, told the forum. Stiglitz was also appointed by the UN in October 2008 to lead an international panel of experts to study the causes of the current financial crisis and how to overcome it.

But the old model where China could produce whatever it wanted and the US, now its second largest trading partner, would buy most of it is broken, because Americans are starting to spend less and save more following the credit meltdown, Stiglitz said.

Over the past 30 years, developing countries have used their hard-earned trade surpluses to finance US consumers who should have saved but have lived beyond their means, he and other economists at the forum pointed out.

Though many US households have finally turned to thrift, their rising saving rate will still create a shortfall of $1 trillion on global aggregate demand, Michael Spence, another Nobel laureate, estimated, though in the short run, this decrease will be muted by fiscal stimulus and deficits in many countries.

  
Mike Spence (left), Joseph Stiglitz (middle) and Chen Deming. Photos: CFP

In China, the recently ended Canton Fair, considered as a barometer for Chinese exports, reported Wednesday that the event saw a trade volume of $30.5 billion, down 3.4 percent from the same period last year.

Goldman Sachs also forecasted that Chinese exports in 2009 will go down 9.9 percent year-on-year.

The investment bank's chief economist, Jim O'Neil, said Monday in Beijing, "What's changed in China is that having 12 percent of GDP as exports just to the US, which is what it got to in 2007, is finished."

Dangerous complacency

There are optimists who point out that China's auto and home sales have kept rising, and investment has also picked up speed. Even the US economy registered a beat-the-expectation growth rate of 3.5 percent in the third quarter, the first time in a year, according to the US Commerce Department October 29.

Economists at some brokerage houses believed that the Chinese recovery is broad-based and V-shaped, like a "Bolt," as Goldman's O'Neil said.

But though it may have bottomed, the bottom may be very wide, bumpy and tortuous, Chinese Commerce Minister Chen Deming cautioned the forum.

Goldman's economists believe that although the export sector is a lackluster, Chinese domestic consumption can replace the American one and will be strong enough to keep driving the economy growing for several decades.

"We conclude that China has moved out the crisis situation," Tao Dong of Credit Suisse wrote in a report.

Not yet and far from it, according to Stiglitz.

He called the growth in the US a "glimmer," as one out of six Americans still cannot find a full-time job, and he does not believe China should start consuming the way the US does. "Our planet can't sustain that."

"The real risk at this point is that complacency has begun to set in because things are better than they were, but they're still not good enough," Stiglitz warned.

A World Bank (WB) report released Wednesday said consumption in China may feel some headwind in 2010, because the subdued labor market may continue to put pressure on nominal income and the purchasing power boosted by negative inflation this year will change because inflation is likely to turn positive again.

Making a transition

China is transitioning from a middle income country to a high income society, and its export-related sectors that have fuelled the nation's astonishing growth since the 1980s are starting to die off because they are not internationally competitive, some of the top-notch economists said.

Countries with a gross national income (GNI) per capita under $976 are classified as low-income and above $11,905 as high-income, according to the WB's 2008 criteria. The in-between group is middle-income. Chinese GNI per capita in 2008 was $2,940.

Many developing countries and areas attempted this transition in the 80s, but for various reasons, only South Korea and Taiwan succeeded, Spence said.

The best lesson from South Korea, according to Spence, is that the government wasn't afraid to allow the die-off happen and let the private sector, such as venture capitalists and entrepre-neurs, take over the innovative work, so that a new economic structure could emerge.

Spence suggested that the Chinese government can maintain a constant pressure on the economy to make the structural adjustments by properly managing the exchange rate. If, however, it is used to take that pressure off, then the economy will be locked in labor-intensive activities on the export side and people won't get rich, he said.

The incomes will eventually stall, as evidenced by those failed economies, Spence added.

One important factor to stimulate the change is that the financial system needs to recycle the savings, currently 51 percent of the GDP, to innovative and productive areas, such as human capital, R&D and branding, so that the economy can upgrade to value-added ends of the supply chain, he said.

China has already let the transformation begin and will very likely accomplish it because the economy has displayed the capacity for structural change, the flexibility in multiple markets and the willingness to invest at high rates, Spence said.

"So I guess I would bet on China in this," he added.

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