In this series, Rudyard Griffiths, chair of the Munk Debates, Canada's leading public-affairs forum, discusses issues and trends just over the horizon with renowned analysts and policy-makers.
Why do you think anxiety about China's economy is overblown?
I don't think steep losses on Chinese stock markets are spilling over into the real economy, and ultimately that's going to keep the growth story intact. Their economy is still expanding at a 6-to-7-per-cent annual rate, a number most economies in the slow-growth world we live in would die for. Far more important is the change in the mix of their economy. Yes, the industrial sector is slowing. But these declines are more than offset by significant increases in their services sector, now the largest in the economy, growing faster than manufacturing and construction combined.
Are you concerned about China's ability to fully transition?
The world is littered with economies that clung to the notion that what boosted them in the early stages of development will work as they get wealthier. This almost always turns out to be wrong. Shifting to a domestic-consumption-based growth model, and focusing on indigenous innovation, is one of their biggest challenges and the best means to avoid the so-called "middle income" trap. I think they've got a good chance. Nothing is guaranteed, and it's exceedingly difficult to do, but this is really the core of China's strategic focus right now.
Yet the Chinese keep saving.
The government's strategy is to put in place policies that generate more income, and they're doing this through services-led employment growth and moving workers from the countryside to the city. Rural-to-urban migration levers up the real wages by a factor of three. You are correct that household saving right now in China is close to 30 per cent of income for urban workers, and it's continued to rise in recent years. The main reason for this is financial insecurity; not being able to afford retirement and health care. Add into the mix fewer and fewer working-age individuals to support their families and it's clear why China remains a nation of savers. This is why, in the last couple of years, the government has started to address this social-safety-net issue head-on. They have enacted a number of reforms that I think could move the needle on the savings rate. It remains to be seen, however, if government will have to continue the push for social-service reform.
What signs will you look for that the situation is deteriorating?
The key thing is job growth. When China gets into trouble, it will do everything and anything to avoid an outbreak of unemployment that could portend social instability. So far, the job numbers are actually holding up quite well, which is another very powerful sign that the economic doomsters have really got China wrong. Last year, urban employment expanded by 11 million jobs in China to about a million more than the government was targeting and an acceleration from the pace in 2014. But, if these numbers were to slip, that would be worrisome. I think the government would pull out all stops to restimulate the economy. The fact that the government has not taken major stimulus actions right now, I think, is also consistent with a notion that they do not believe the economy is in as dire shape as those on the outside looking in.
Are we ignoring other risks?
To me, the far bigger risk is what we now see as a result of the U.S. Federal Reserve starting to withdraw the extraordinary stimulus that was put in place after 2008. I have been very worried about this prolonged injection of liquidity. What was designed to arrest a financial crisis has become a tool to foster a broad-based recovery. This was a big mistake. It makes assets trade unrealistically high relative to their earnings. Now, as economic activity slows, these artificially high valuations start to get challenged, and rightly so, by investors. Then, of course, the central banks panic because they believe that their job now is to provide not just support for the real economy but support for inflated asset markets. I think this is a huge strategic error.
What advice do you have?
These are difficult, treacherous times, and financial markets are displaying an extraordinary amount of volatility. I think a prudent strategy is to stay very cautious and not take an awful lot of risk in your individual portfolios until there's a clearer sense of where the underlying economic fundamentals are heading, and what, if anything, central banks are going to do.