Even the most bullish of China watchers must realize by now that their favourite economy is not up to the task of revitalizing flagging global growth. Weaker than expected expansion of 7.7 per cent in the first quarter signalled slower demand for energy and other resources, as well as the machinery and equipment imports that had helped spare Germany from the recession ravaging a large swath of the euro zone.
Still, the analysts who insist Beijing’s economic brain trust has been doing a terrific job of managing a soft landing toward slightly lower but higher-quality growth seemed vindicated last week when the latest trade data showed healthy export growth and even more impressive import gains in the first four months of the year.
Not so fast, said the eagle-eyed China trackers at Nomura, who detected some fun with numbers going on. The totals were distorted not by some government careerist but by Chinese traders’ efforts to evade capital controls, the Nomura analysts said in a report. The method: Simply issue fake invoices overstating the value of goods shipped and bring the extra cash home. It was easy to catch by looking at revenue from import duties, which plunged a stunning 28 per cent in the first quarter from a year earlier – a bigger quarterly drop than during the worst of the global slump.
“Some companies may have moved products between Hong Kong and China’s [tax-exempt] special trade zones to circumvent capital controls and move funds into China,” the Nomura economists wrote. “Such trade is free of import tariffs, so it pushes up imports and exports but not import duties.” Their conclusion: “[T]he strong trade growth is not indicative of a growth recovery.”
This only serves to illuminate one of the great myths about China’s policy makers and their ability to steer the economy through a tough transition from rapid, export-fuelled growth to more stable expansion based increasingly on domestic consumption.
The idea of an omnipotent central authority in China is “a misconception that goes back really to the 17th century, when people were talking about how China … had this wise emperor at the top who could command everything in the empire by saying he wanted something done,” says Mark DeWeaver, a U.S. economist and hedge-fund manager who studied and worked in China for a decade.
“The No. 1 misconception is that the Chinese leadership has some kind of absolute power, that they can dictate anything that they think is a good policy and that will be the policy. In fact, what’s pretty clear is that they can dictate any policy that local governments will support. But if they go against what [local officials] want, they don’t make progress.”
And the hardest task of all is to shift such a large economy to a thoroughly different model grounded in rationality and consumer choice.
“If you want productivity-led growth, that has to come from the bottom up, from individuals who spot things that can be improved. It requires local and specialized knowledge. You can’t make that kind of economic transition successfully through centralized planning or government directives,” says Mr. DeWeaver, co-founder of Quantrarian Capital Management in Silver Spring, Md., and author of an insightful book called Animal Spirits with Chinese Characteristics, which seeks to dispel some long-held notions of how China works.
The country’s remarkable growth story is rooted in a model “suited to a country that feels threatened by other more powerful countries and feels that it has to catch up with them for purposes of national security,” says Mr. DeWeaver, who began his finance career as a research analyst in China in 1991.
It works well when the goal is to ramp up steel or defence production. “But it isn’t a model that’s going to produce innovation. And it’s not a model that lends itself to transition from reliance on investment demand to reliance on consumer demand either.”
That’s because more of the national income pie would have to be directed toward households. “How are you going to get that in a system where that can so easily be blocked by vested interests?”
Another myth is that Chinese policy makers can intervene to keep the economy on a more even keel than their capitalist counterparts. “You would think that with the state controlling everything, you wouldn’t have booms and busts,” Mr. DeWeaver says. But his examination of Communist China’s economic ups and downs over the decades has led him to conclude that these investment cycles are unavoidable “no matter what kind of economic system human beings can devise for themselves.”