Searching for Xiaokang
Economists predict slower, more sustainable growth
By Corrie Dosh  ·  2016-01-18  ·   Source: | NO. 3 JANUARY 21, 2016

Justin Yifu Lin, Honorary Dean at Peking University’s National School of Development, delivers a speech at the annual Forecast of China’s Economy held by the National Committee on U.S.-China Relations in New York City on January 7 (DING YING)

As China's stock market plunged for a second time in a week, fueled by a weakening yuan, leading economists gathered in New York January 7 to rally hope that the country's reforms have not stalled and that the deceleration in the economic growth represents a small bout of growing pains. With the success of an expanding set of free trade zones in Shanghai and other cities, China's economy will continue to grow by 6.5 percent in 2016, according to delegates to the annual Forecast of China's Economy held by the National Committee on U.S.-China Relations (NCUSCR).

"Certainly, China aspires to be a high-income country and to be one it has to continue further reform to reduce income disparities and contain corruption, in order to get rid of the legacy of this dual-track transition," said keynote speaker Justin Yifu Lin, Honorary Dean at the Peking University's National School of Development and a former World Bank chief economist.

China's growth has been decelerating over the past six years, Lin said, fueling fears that the three decades of breakneck expansion have come to an end. Viewing the country's economy in the context of global economic cycles, however, shows that the slowdown is mainly due to external pressures, rather than internal weakness, he said.

"Some people are pessimistic about the growth prospects in China because they think the deceleration is mainly due to internal, structural growth model issues. I think China is a transition economy. Certainly China has structural, internal problems. However, the deceleration since 2010 is mainly due to external and cyclical issues. All other emerging market economies are experiencing similar deceleration since the first quarter of 2010 and, if anything, their deceleration was even sharper," Lin said.

The economist remained confident in China's economic prospects over the coming decade, forecasting a growth rate of between 6.5 percent and 7 percent in the next five to 10 years.

Though GDP growth is slowing, other economic indicators have remained steady, said Lu Feng, Director of the China Macroeconomic Research Center at Peking University. Income growth continues and employment is growing. The service sector is expanding and consumption is stable. The strategy for growth can be seen as building a "xiaokang  society--a term used by generations of Chinese leaders defined as a moderately prosperous society in which its wealth should be broadly distributed among the population.

"How to achieve xiaokang ? There are five core tasks: innovation, harmonization, green strategy, opening up, and, sharing with the future," Lu said. As the country continues to develop, priority will be giving to supply-side structural reforms this year with focus on dealing with overcapacity, reducing inventory in the housing sector and reducing income disparity, he added.

Stephen Orlins, President of the National Committee on U.S.-China Relations, and other Chinese economists at the committee’s annual event (DING YING)

Global integration 

If anything, China's recent troubles in its stock market shows just how interconnected the country has become to global finance. China's suspension of trading due to rapid selloffs sent world markets tumbling with a 1-percent stock market slide on Wall Street and a 2-percent slump in European markets during the first trading week of 2016. China's new "circuit breaker" mechanism meant to limit selling seems to have backfired, spooking investors when it was implemented during that week's downturn. Market regulators abruptly pulled the circuit breaker in an attempt to stop the slide and calm investors.

Even after the first week's selloffs, the market is still up 42 percent over the past three years and is the best performing market in the world, said Junheng Li, founder of JL Warren Capital in New York.

China's stock market also cannot be used as a bellwether for the country's economy, say economists.

"Do not blame China's economy for trashing the world's equity markets," reported High Frequency Economics, based in New York. "We blame skittish investors, not a poorly performing economy. For all its faults and flaws, China's economy is doing more than its fair share to absorb the excess productive capacity in the world's commodity markets."

The Chinese stock market and the Chinese economy have "been on separate tracks," said Stephen Orlins, NCUSCR President and host of the annual forecast. "For years, as the economy raced along, the Chinese stock market didn't go up. Then, as growth has somewhat decreased, the market soared."

Chinese leaders have approached economic growth as cautiously as crossing a rushing river on stones, Orlins said. As some of the stones are slippery, some steps will need to be backtracked and a new path sought. Corrections are unavoidable, he said.

Betting on the basket 

The devaluation of the yuan has raised more serious worries on the state of the Chinese economy.

Investors are closely monitoring the yuan after the People's Bank of China published a reference rate for the yuan against a trade-weighted basket of 13 currencies instead of the dollar on January 4.

Staying tied to the dollar meant China's currency has become very strong against everyone except for the United States, its biggest trading partner. If done slowly and gradually, using a basket approach will be a more rational way for China to adjust to economic trends, said delegates.

Global markets panicked over the devaluing of the yuan during the first week of the year, fearing a currency war. Investors were worried that the move signaled a faster economic slowdown than expected. Those fears may be unfounded, say analysts.

The yuan may have been overvalued and the readjustment is a "structured and necessary part of China's transition from an export-led economy to a more consumer and services-driven one," said Nigel Green, CEO of the deVere Group, in a statement.

Confidence remains 

With all the negative press the Chinese economy has generated at the beginning of 2016, investors may be thinking that China is no longer the powerhouse of growth that it once was, but economists at the NCUSCR forecast remained upbeat.

Emerging sectors such as Internet finance, technology and the service industry and positive policy changes such as the success of the free trade zones will expand and replace the manufacturing base that has fueled China's rise.

The depreciation of the yuan, stock market "circuit breakers," and decrease in reserves simply show that Chinese authorities have many tools to protect the transitioning economy against external pressures, panelists said. What remains is that the Chinese dream is still strong and that China is still a good option for investors.

"Fundamentally, the capital will come back to China's economy and will continue to grow strongly. Fundamentally, the gross product is one of the best in the world," said Lin.

(Reporting from New York City )

The author is a contributing writer to Beijing Review , living in New York City 

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