What Obama Could Teach China
What a difference six years makes. China’s Premier Li Keqiang lands in Davos this week, leading the most high-level Chinese delegation to the annual Swiss retreat since 2009. Those meetings took place as the U.S. economy was crashing and threatening to bring down the global economy. By contrast, just weeks earlier, Chinese leaders had unleashed a bold, $586 billion stimulus package to shore up growth. Grateful policymakers hailed the move -- a rare bright spot amid the prevailing gloom.
This year, the positions are reversed. A Chinese slowdown is shaking confidence around the globe, while America's strengths are more evident than ever. Today's 7.7 percent plunge in Shanghai stocks -- the biggest since 2008 -- underscores how volatile conditions have grown on the mainland. Li had intended tomorrow’s speech on “The New Global Context” to reassure political and financial leaders that Beijing has matters under control. The job is getting harder by the day.
China could do worse than to study how the U.S. has recovered so quickly since 2009. President Barack Obama’s policies have drawn endless flak in Washington from both ends of the political spectrum. To the traditionally pragmatic Chinese, though, the results should be incontrovertible. With its strengthening dollar and 5.6 percent jobless rate, the U.S. is offsetting the increasing drag from China. Indeed, without the rebound in U.S. demand, the mainland economy itself would be worse off right now: In December, exports to the U.S. climbed 9.9 percent from a year earlier.
Economists can debate whether Obama’s own post-crisis stimulus package was big enough. What the U.S. has been able to do, though, is cleanse its excesses quickly and transparently. The purchase of distressed assets and equity from financial institutions, coupled with regulatory reforms like the Dodd-Frank Act to rein in Wall Street risk, reopened credit channels and facilitated growth. The U.S., says John Calverley, head of economic research at Standard Chartered Bank, “turned around once balance sheets were fixed. China needs to fix balance sheets."
For all the talk about a "new normal" and scrapping its debt-fueled, investment-led growth model, credit is still exploding in China: up about $20 trillion since 2008. Well-connected state-run enterprises are exploiting loopholes to borrow from the vast shadow-banking system at the expense of the private sector. With China’s property bubble beginning to burst, worrying cracks are starting to appear in the financial system. Non-performing loans grew to $11.7 billion in the third quarter alone.
Only when China truly clamps down on these excesses and creates mechanisms to rid balance sheets of bad assets can the economic healing begin. Instead, Li and his boss, Chinese President Xi Jinping, are delaying the surge in defaults everyone knows is coming. The travails of Kaisa Group, which could be the first Chinese real estate company to default on dollar-denominated bonds, have already generated global headlines. What should be even more worrying to the Davos set is that 62 percent of all U.S. dollar bond sales in the Asia-Pacific region ex Japan last year ($244.4 billion of the $392.5 billion total) were by Chinese companies.
At the same time, China needs to do something for which Obama has been pilloried: redistribute wealth. To spur the consumer spending needed to rebalance the economy, Beijing needs to enact tax cuts for the middle class, strengthen worker rights and build a proper social-safety net. Obama achieved this last goal with the Affordable Care Act. China could deploy some of its $3.8 trillion of currency reserves to improve access to health care and education. Instead, Li recently rolled out a $1.1 trillion stimulus bonanza -- nearly double the size of the 2009 package -- that will enrich Communist Party cronies more than average families, while adding to public debt.
Finally, China’s political leaders would be better off leaving the task of boosting growth to central bank Governor Zhou Xiaochuan. Just as Obama deferred economic-maintenance duties to the Fed, Beijing should entrust the People's Bank of China to fan growth without exacerbating the nation's liabilities. With the threat of deflation rising, China could use all the monetary assistance Zhou can provide to relieve stress on borrowers.
China doesn't send its premiers to Davos lightly. A 1992 visit to the conclave by Li Peng marked China's reemergence from the dark days of the 1989 Tiananmen Square crackdown. The next appearance was Premier Wen Jiabao’s 17 years later -- a far more exuberant moment for the rising power. This time around, U.S. officials are sure to hear more kudos than Li is. Rather than sulking, China’s premier should think hard about why.
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