Sat, Aug 29, 2015 - Page 9 News List

China’s economic transition will be complicated, and risky

A fragile global economy is not prepared to absorb an even greater influx of Chinese imports

By Eduardo Porter  /  NY Times News Service

Illustration: Tania Chou

Can China pull it off?

A couple of weeks ago, the IMF told the world that China was essentially doing all right. It is “transitioning to a new normal,” the IMF said in its regular economic assessment, toward “slower but safer and more sustainable growth.” The main risk, it said, was that the Chinese government’s push for economic reform might prove “insufficient.”

It seems this is a pretty big risk.

Financial markets were shaken by China’s decision to abruptly devalue its currency on Aug. 11, days ahead of the publication of the IMF report.

For all the IMF’s assurances that this was a minor adjustment after a sharp appreciation of the currency until then, a welcome step that “should allow market forces to have a greater role in setting the exchange rate,” investors seem to have taken it as an unsettling signal that the Chinese authorities are desperate.

“The stumbling economy desperately needs a weaker currency,” wrote Diana Choyleva of Lombard Street Research. “Is this the start of a more flexible currency regime or an old-style devaluation?”

Nobody believes China’s official statistics anyway. What if the country’s economy is slowing faster than anybody knows? Developing countries — already reeling from the collapse of China’s demand for their raw materials — could feel the screws tighten further. And if China resorted to further devaluations to bolster exports and work itself out of an economic morass, it would undercut growth worldwide.

On Tuesday, after a 22 percent drop in Shanghai’s main stock market over three days, the Chinese government unleashed a new volley of measures to try to stop the slide, including cutting interest rates and reducing the reserve requirement on banks to stimulate lending again. This added to a rash of less orthodox interventions over the last few weeks, from encouraging borrowing to buy stocks to pledging billions to state-controlled banks to lend to favored projects.

The aggressive actions by the Chinese authorities signal their growing concern over the country’s declining stock market and weakening economy. However, these sorts of moves are not quite what the IMF means when it calls on China to transition from a single-minded export machine into a more complex market economy powered by consumers.

And this brings up a deep, lingering mistrust about Chinese economic governance: There is scant evidence from history that an authoritarian, undemocratic regime like China’s could actually pull off the kind of transformation that it is being called on to make.

“On average, autocratic nations grow faster than democratic ones up to around where China is now, but successful cases democratize at around this level of income per capita,” said David Dollar, a former China expert at the World Bank and emissary to China at the US Department of the Treasury who is now at the Brookings Institution.

Here is how that sounds in Beijing: Further economic change will inevitably lead to political instability — not exactly the strongest incentive for government reform.

A totalitarian regime might be good at deploying capital and labor to deliver raw economic growth. Yet, autocracies are not good at fostering innovation and creativity, which rarely flourish where there is no freedom of thought or speech. While “make the economy grow and don’t have demonstrations” might have worked in the past, a bureaucratic command and control structure will have a hard time handling the more complex demands of citizens in countries that reach middle-income status.

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