As China's first full year of rebalancing draws to close, how has President Xi Jinping done? Reasonably well, it seems. Growth appears to be moderating gently, stocks continue to soar and most economists still foresee a soft landing rather than market-shaking meltdown for the world’s second-largest economy.
Next year, however, Xi's team will have to get to the hard stuff: taming an opaque, unwieldy financial system. My question isn’t so much whether China will or won’t crash. It’s whether the rest of Asia is ready for the possibility of 5 percent or even 4 percent Chinese growth, as predicted by pundits like Larry Summers and Marc Faber. It’s almost certainly not.
Historically, hedge funds betting against China haven't done very well. This week, in fact, the government is expected to revise 2013 GDP figures upward by as much as $275 billion, which on paper should help meet its target of 7.5 percent growth for the year.
For anyone who thinks China is operating even close to that number, though, I have two words: iron ore. Even more than the precipitous drop in oil, the halving of prices for these pivotal rocks and minerals -- as well as a 44 percent plunge in oil and tumble in coal and other commodities -- suggests that China may be braking rapidly.
It’s important to remember that however large, China’s economy is no more developed than South Korea's was when it imploded in 1997. The Chinese financial system is less evolved than that of the Philippines and less open than Indonesia's. Beijing’s $3.9 trillion of currency reserves are useful when market turmoil hits, as has happened in emerging markets this week. But that stash is dwarfed by the $19 trillion in credit extended by the banking system since the 2008 Lehman crisis, according to Charlene Chu of Autonomous Research Asia. And remember: China's vast and opaque shadow-banking system obscures Beijing's true liabilities.
Many policymakers appear to believe the worst is over. In the past year, they stress, Chinese leaders have taken bold steps to shift growth away from excessive investment and exports towards consumption and services. But it's a fantasy to think 10 percent growth will soon return -- or even 7.5 percent.
"With China intent on continuing reform to generate quality growth at a lower level, the rest of Asia cannot expect any help in terms of overall demand," says Simon Grose-Hodge, head of South Asia investment strategy at LGT Group in Singapore.
That means China’s neighbors can no longer put off the task of rebalancing their own economies -- away from dependence on China’s. They, too, need to develop vibrant, diversified domestic economies that are driven more by services and innovation than exports.
The to-do list is long. Despite a flurry of bilateral trade negotiations and talk of a more unified market in Southeast Asia, trade barriers within the region are still far too high. Governments need to do more to support non-resource industries like manufacturing, technology and the sciences to make their economies more competitive and nimble. That includes offering incentives to small-to-mid-size companies to innovate and enter new markets. Lowering taxes on regionally-made goods would help boost consumption.
Above all, nations need to draw up contingency plans for China-related market turmoil. This may not come to pass. Chinese wages and salaries are expected to grow 6.5 percent in the current quarter, while productivity is seen growing 4.1 percent (numbers of which policymakers from Washington to Tokyo can only dream). Even as China ratchets down growth, it’s thus continuing to produce legions of new consumers.
But several years of painful and unpredictable restructuring lies ahead. No matter how skillful Xi is, there's a decent chance the whole thing will go haywire. And just as Asia once used to rise and fall with U.S. consumers, the region would be devastated by a sudden and deep Chinese slowdown. Nations would be in a much stronger position if they started bracing for the worst now.
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