Many people, including some Chinese scholars, have been pessimistic about China`s future since the global financial crisis broke out in 2008. In my view, many predictions about the Chinese economy over the past 20 years have been wrong, especially those theories forecasting the collapse of China.
Three rounds of predicting "China`s collapse"
The first round of predicting China`s collapse began in 1989 and can be called the "political collapse of China." After dramatic changes in Eastern Europe and the disintegration of the Soviet Union, many socialist countries fell in quick succession, and the entire Western hemisphere believed that China would be the next country to collapse. Though many of these countries failed to transition smoothly, China found its own path and realized a national revival. China`s nominal GDP increased 155 times between 1978 and 2013, and the country has become the world`s second largest economy.
The second round of predicting China`s collapse, or the "collapse of the Chinese economy," began with the 1997 Asian financial crisis. China experienced a sharp decrease in exports, insufficient domestic demand and a large-scale drop in economic growth. Speculative investments in Hong Kong by global financial giants also put the momentum of the Chinese economy at risk. But not only did China overcome the financial crisis, the Chinese mainland also helped Hong Kong get through the crisis and stabilized the Asian economy. The Chinese economy maintained an annual growth rate of 10.5 percent and an inflation rate of 3 percent from 2003 to 2012, and Chinese strength and constancy through the crisis improved the country`s relations with its Southeast Asian neighbors.
The third round of predicting China`s collapse, or the "collapse of Chinese society," began after the 2008 global financial crisis. During this period, the stock market devalued and the economic growth rate dropped sharply, causing significant overproduction in some industries. Chinese society also experienced unrest and insecurity; some people even threatened to bring down China via social media, and foreign media expected a so-called "Jasmine revolution" to break out in China. Nevertheless, China still managed to overcome the triple threat of international pressure, economic slowdown and social panic. By implementing a proactive fiscal policy, a moderately loose monetary policy and social support policies, China not only realized steady economic growth, but also contributed to the stabilization and recovery of the global economy.
Each round of theorizing about China`s collapse coincided with a slowdown in the Chinese economy. Though these theories are related to temporary setbacks and risk accumulation in the Chinese economy, they are primarily efforts by external forces to deny China`s prospects and to engender panic whenever China experiences short-term recession. China has managed to combat these collapse theories with 35 years of robust growth and development.
How to assess theories of "financial collapse in China"
As the Chinese economy slowed and risks amassed in 2012 and 2013, a new round of pessimistic predictions about the Chinese economy emerged, especially focused on the sluggish real estate market, local government debt and systemic financial problems.
The Chinese economy has recently slowed because the Chinese economic engine is in the process of adjusting its growth rate, rearranging its economic structure and processing the macroeconomic stimulus. As domestic labor costs have rapidly increased, as the demographic dividend has gradually dwindled, and as the cost of resources has risen, the growth of the Chinese economy has switched from a high speed to a medium speed. At the same time, China is transitioning to an intensive economic development mode that differs from its traditional resource- and energy-dependent development mode. Some industries are bound to experience decline, and unemployment is bound to increase as China adjusts its economic structure. The stimulus package introduced at the beginning of the financial crisis is also still being processed through the economic structure, and many of its negative effects, such as increasing local government debt, an increase in non-performing loans at banks, and excess production, are only now emerging. The Chinese economy may transition from long-term double digit growth to a growth rate of 7.5 percent or lower, so it may take time for people to adjust.
Some indexes for the performance of China`s financial and economic sectors are also declining, accelerating the spread of pessimistic expectations for the real estate market, local debt risks and the shadow banking system.
Led by shrinking investment growth and a sluggish real estate market, the heavy industrial sector and the lighter manufacturing sectors are slowing at the same time. The cooling real estate market is the major cause behind overwhelmingly pessimistic predictions for China`s economy in 2014.
Turning to debt risks, debt default poses a significant risk to the economy. By June, 2013, local debt had risen to 17.9 trillion yuan (US$ 2.9 trillion), accounting for 33 percent of the Gross Domestic Product (GDP). Over 10 trillion yuan of this local debt is related to local-government-backed investment units.
Shadow banking poses another risk to China`s economy, as demonstrated by the "money shortage" caused by dysfunctional relations between the financial system and the real economy. Shadow banking accounts for about one quarter of the country`s outstanding loans, and the proportion of shadow banking credits and loans increased from 20 percent of the total credits and loans in 2008 to 40 percent in June 2013. Widely-circulated rumors allege that shadow banking will become China`s Lehman Brothers when people start withdrawing their money.
The intricacy of international economies has also exacerbated the downward trend in China`s economy. After the outbreak of the global financial crisis, many developed countries and regions adopted quantitative easing (QE) policies which caused competition for currency devaluation and mass fluctuation in international exchange rates.
At that time, a large amount of hot money flowed into Chinese market, particularly into the real estate market, raising asset prices and increasing fluidity risks. However, the United States` recent retreat from QE has caused the outflow of the capital from China, which has also increased national financial risks.
In the meantime, the United States has been mapping out international trade systems which exclude China. The Trans-Pacific Partnership (TPP) intends to constrain China with economic measures, while the Transatlantic Trade and Investment Partnership (TTIP), regarded as the economic equivalent of NATO, enhances the United States` leading role by strengthening cooperation with European countries.
The effects of these two pacts on international trading will surely impact China`s export economy. The trade policies adopted by the United States have escalated competition and conflict in Sino-U.S. trade relations. Problems between the two countries over the exchange rate of the Yuan and cyber security have exerted great pressure on China`s economic growth.
Counteracting the downward pressure of China`s economy
Reform, which is a driving force behind sustainable economic growth in the long term, can help reap greater dividends from China`s development. The central government stressed deepening comprehensive reform of economic institutions in the Central Economic Working Conference in 2012, outlining an overall plan and specifying methods and timetables.
In 2013, the country carried out financial reforms focused on interest rates and capital market. It also plans to accelerate the reform of fiscal and tax policies. Those measures will improve capital supply by marketizing factor prices distorted by unreasonable interest and exchange rates, pushing forward the development of capital markets, opening financial accounts and expanding the internationalization of Yuan. Meanwhile, the budget system is expected to be improved through fiscal and tax reform, so that financial power of the government and its power to perform their responsibilities can become independent of each other.
Innovation is another key element behind strategic economic restructuring and the remodeling of economic development. Science and technology play increasingly important roles in promoting economic and social development throughout the world. As Chinese President Xi Jinping noted at the 9th Plenary Study Conference of the Political Bureau of the Central Committee of the Communist Party of China (CPC), China needs to devote more financial resources to the innovation sector in order to build talent pools and support innovative industries, thereby enhancing the competitiveness and importance of China`s economy in the global industrial chain.
New Urbanization also provides China with an opportunity to transfer 300 million rural people to cities. This process promises to unleash big economic potential in the form of huge domestic demand, which is regarded the engine of the economic development.
Finally, opening up policies will definitely stimulate economic growth and development. China`s opening up strategies have generally taken three forms: "opening up driven by policies," "institutional opening up," and the current "overall constructive open economy." The Free Trade Zone (FTZ) marks the last stage of overall opening up.
FTZs, which were proposed in 2012, are part of a plan to balance bilateral, multilateral, regional and subregional cooperation. The establishment of the Shanghai FTZ is the first concrete step. This FTZ, which has adopting the Negative List management mode, increases investment access, trade in services and financial programs.
Further plans to develop FTZs in the northwestern, southeastern, and central China will reconfigure the national economic layout to better face the challenges presented by the TTP and TTIP.
So despite the proliferation of collapse theories, the Chinese economy will embrace another era of reinvigoration rather than fall into an abyss as the country prepares for sustained high-quality long-terms growth. China`s economy shall rise again, just like the legendary rebirth of a phoenix.
(The writer is Vice Dean of the Chongyang Institute for Financial Studies, Renmin University of China.The article was translated by Zhang Lulu and Wu Jin. Its original version was published in Chinese. 欢迎关注人大重阳新浪微博：@人大重阳，微信公众号：rdcy2013)
Key Words： 中国崩溃论 经济发展 人大重阳 王文