Tuesday, 8 March 2016

China won't have a hard landing - because it is not a capitalist economy

By John Ross

Some US hedge funds, echoed by parts of the international media, are currently trotting out the perennially inaccurate myth that China's economy is about to suffer a "hard landing." This invariably incorrect prediction has been periodically repeated for decades since China launched economic reforms in 1978. The claim then was that by failing to privatize companies, not adopting what became known as "shock therapy" in Russia and Eastern Europe, China condemned itself to stagnation. Instead in 1978-2015, China experienced average annual 9.6 percent GDP growth - the fastest by a major economy in human history.
Making these claims particularly vocally has been Kyle Bass' Hayman Capital Management, who has been taking positions summarized by the Wall Street Journal, "Hayman Capital's portfolio is … expected to pay off if the yuan and Hong Kong dollar depreciate over the next three years - a bet with billions of dollars on the line, including borrowed money." "'… this is much larger than the [US] subprime crisis,' said Bass, who believes the yuan could fall as much as 40%." 
If Bass sticks to these positions, he will lose a fortune as analyzed below.
George Soros similarly recently claimed, "A [China] hard-landing is practically unavoidable." Soros has a disastrous record of investing in Russia and China - having lost approximately $1 billion in Russia's Svyazinvest telecommunications company.
Hedge fund managers speculating on RMB devaluation are self-evidently unreliable sources given that they have a financial interest in spreading "doom." Therefore, before showing the fundamental reason such views invariable turn out to be wrong, similar media errors can be noted. 
In 2002, Gordon Chang was promoted by the Western media as a "China expert" for writing a book The Coming Collapse of China which concluded, "A half-decade ago the leaders of the People's Republic had real choices. Today they do not... They have run out of time." Well over a decade later, China had not collapsed - but Chang has continued appearing on Bloomberg TV as a "China expert." 
In June 2002, The Economist produced a China supplement "A Dragon out of Puff" analyzing, "the economy still relies primarily on domestic engines of growth, which are sputtering. Growth … has relied heavily on massive government spending … the government's debt is rising fast … this is a financial crisis in the making … In the coming decade, therefore, China seems set to become more unstable." In fact, China then experienced the decade of the fastest growth ever by a major economy.
Such claims regarding a "China hard landing" are invariably false because they violate any serious sense of proportion. Take current claims on RMB devaluation, in January CNBC news claimed, "China is playing a dangerous game with its currency, moves that could send the global economy into recession. China's control-minded central bank allowed the biggest fall in the yuan in five months on Thursday."
In reality, the fall in the RMB's exchange rate against the dollar has been small compared to other major currencies. From January 2012 to March 2016, the dollar's trade weight rate soared 23 percent - the euro fell against the dollar by 18 percent, the yen by 24 percent, and RMB only 5 percent. From the RMB's peak dollar exchange rate in January 2014 to March 2016, the RMB fell against the dollar by 8 percent, the yen by 10 percent and the euro by 21 percent. 
Similar "intellectual shoddiness" was Bloomberg's recent claim China's economy was in a crisis paralleling Greece. "Chinese policy makers … have exhausted whatever magical powers they had been using to keep their economy aloft … the world … has had a few years to contemplate a Greek exit from the euro. But if the world's biggest trading nation suddenly hit a wall, it would be a catastrophe of a different order, wreaking havoc on economies near and far." Comparing Greece, whose economy shrank 26 percent in 2007-2014, with China whose economy expanded 81 percent in the same period, is bluntly ridiculous. 
The most fundamental reason claims that China will suffer a "hard landing" invariably turn out to be false is because they do not understand the consequences of the fact China is not a capitalist country. "Hard landings" occur in such economies because all major companies are privately owned and the state therefore has no ability to stop the investment collapses which cause "hard landings." 
During the post 2007 "Great Recession," US household consumption fell by 3 percent but private investment by 23 percent - the US "hard landing" was dominated by the investment decline.
Following 1990, Japan suffered a "hard landing" of a quarter century of less than 1 percent annual average GDP growth. However, in 1990-2013 Japan's household consumption rose by 31 percent. But Japan's fixed investment fell by 16 percent - the severity of Japan's stagnation therefore was exclusively due to its investment fall.
In contrast to the US and Japan's investment decline, creating true "hard landings," in 2007-14 China's fixed investment rose by 105 percent creating economic growth of 81 percent. This was possible because China possesses a large State sector which can be used to raise investment if the government needs to take anti-recessionary measures. Most fundamentally, China hasn't and doesn't suffer "hard landings" because it is a socialist not a capitalist economy.
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This article originally appeared, under the title 'China doomsayers misunderstand how socialist economies work' at Global Times.

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