Western forecasts misread China’s economy

by Morgan.J / 10 November, 2012
David Mahon says the West's continual denial about its own economies is behind the false picture.
David Mahon


In the 28 years he has lived in Beijing, former Aucklander David Mahon has heard plenty of foreign pundits predicting a catastrophic and bloody end to China’s modern economic revolution. He has always dismissed them – and continues to. “To bet against China at this stage shows a tremendous lack of understanding of economic history, social history and global economics.”

Mahon, an asset manager and business adviser, has long been a bridge between Western companies and the opaque and complex Chinese marketplace; he notes with approval that interest in China from New Zealand companies is growing. The issues facing China must be kept in proportion, he argues. Yes, he says, growth has slowed, but China is far from recession. Yes, it is affected by the crisis in its European and US export markets, but Western commentators have long overstated China’s reliance on export earnings.

The key driver of China’s economic growth over the next 20 years will be urbanisation, he predicts. “The majority of Chinese people don’t lead an urban life, and at least half of those will do so over the next two-and-a-half decades … Rural-urban relocation, the consumption that comes with that and the development of suburbs, not just in the coastal cities but in the major cities in the provinces, will provide solid internal drivers of growth.” Fears of a dramatic collapse of property values, unstable capital markets and a possible “hard landing” for the economy are unfounded, he says.

“The general perception that the Chinese economy is weak is simply wrong … If you took Western economic forecasts for China over the past 15 years, most of the major assessors – investment banks, in particular – have made the wrong calls. Eighty per cent of all forecasts in 2008 and 2009 totally misread how China would fare during the global financial crisis. To even use the term ‘hard landing’ in an economy that is still largely domestic demand-driven, and where the Government still has huge reserves of cash, just doesn’t make sense. “It comes from a prevailing view by Western assessors, and particular Western journalists, that there must be something wrong with this picture – that China cannot have evolved as well as it has, that China cannot be as strong as it is. And it comes from a continued denial about the state of Western economies, which is dire.”

POTENTIAL FOR UNREST BREWS


Nevertheless, Mahon says some serious strains are posing social and political risks. “Chinese people’s capacity for endurance is a remarkable quality that has served the country well over the centuries,” he wrote in the latest edition of his quarterly newsletter, “China Watch”. “In recent generations it has carried a beleaguered population through wars, revolutions, famines, natural disasters and the shocks of economic and social reform. Poorer Chinese, who make up the majority, are nevertheless beginning to feel that this capacity for endurance is now being taken for granted and even abused by the Government. As each year passes, it is clear that the party is getting further out of touch with its own grass roots.” He interprets the tough action taken against Bo Xilai as a signal that the party will not tolerate attempts by ambitious individuals to form factions outside its normal structure, “as Bo did … That really stuck in the craw of the party. He had run in Chongqing an independent fiefdom and a Cultural Revolution-type programme.

“He was sent there to clean up the gangs, and he used that as a mandate to take on anyone who opposed him politically. His fellow leaders used that to hijack the assets of private business people, and there were people executed for commercial purposes.” Whether or not Neil Heywood was murdered by Bo’s wife – and Mahon has some doubts about the evidence – the scandal “provided the perfect opportunity for the Government to crack down on him”. The rise of social media, including Weibo, has opened up a new phase of transparency in Chinese society, in which word of high-level corruption can spread rapidly. “That has brought about a situation in which – not now, not this year or next year – there is brewing the potential for unrest because it is now known that those related to the senior leadership, like Bo Xilai, are corrupt. And that’s at the expense of people who know they are not going to get a lot richer, and that the gap between rich and poor has become starker and more obvious than it used to be.

“In the past [the wealth gap] was between those in the coastal cities and those in the internal and western areas, but they weren’t living next door to one another. Now there is a sense that society is unjust, and that there needs to be greater accountability in the senior leadership. “Unless that is dealt with and unless that corruption at the senior level is broken, then the grass roots are going to react, and we have the potential seeds of that reaction at the moment. We should not play that up too much, but it would also be wrong not to identify it.” Mahon believes the party has the will to stamp out graft, and the incoming leader, Xi, appears to have a “clean past” and good anti-corruption credentials. “There is a saying in China that you kill the chickens to frighten the monkeys. That’s what the Bo case is about … To some extent it will succeed, but I think they will have to go further and deeper.”

The resilience and adaptability of the Communist Party should not be underestimated, he argues. “The party is very good at surviving and if that means cracking down on itself it will.” As China prepares to hand power to its next generation of leaders, Mahon believes those who support social and economic reform are in the ascendancy. But the coming years will be “bumpier” than they have been. “Governing China becomes more complex for each new generation of leaders. China will require deft and decisive leadership over the next 10 years in order to accommodate the changing aspirations and increased demands of the Chinese middle class, as they call for greater transparency and accountability.”
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