Linda Yueh on the fortunes of the Chinese economy

The European monetary union reaches 20 years old this year, it's teen years marked by pressure from nationalist politics and growing Euroscepticism – most obviously witnessed in Brexit. Against this backdrop, some countries, such as Italy – soon to sign a Memorandum of Understanding with China – have been exploring life, albeit tentatively, outside the Eurozone.

Swiss Re Institute's annual conference in collaboration with the European Economic Advisory Group (EEAG), "A fragmenting Europe and the rise of China: Will all roads lead to Beijing?" brought experts from both organizations together, to launch the EEAG's 2019 report and discuss the impact of China's increasing investment in Europe.

Linda Yueh, the Oxford University and London Business School economist, asked "Can China grow rich?" in her presentation to the conference. Here, the author of The Great Economists: How Their Ideas Can Help Us Today, gives us her insights into China's complex economy.

What has China done right in its exceptional growth over recent decades?

Getting the balance right between introducing market-oriented reforms and maintaining social stability. In 1979 when China began to reform its centrally planned economy, it gradually introduced incentives that increased output which led to the development of the private sector. Because reforms were implemented slowly and the state-owned sector wasn’t rapidly dismantled like in the former Soviet Union, China didn’t suffer from mass unemployment. The other aspect to note is that China allowed experimentation so that it didn’t dictate all of the reforms from the centre. Regions could try different policies and the successful ones got rolled out while the unsuccessful ones didn’t have nation-wide impact. For China to continue to grow well, it will still need to get that balance right between incentivising economic activity and control by the central government. As innovation becomes more important in its economic growth, that balance may become even more critical.

Should we consider a recent slowing of the growth rate as the consolidation of a mature market? Or is it something to make policy makers nervous, and should it be countered?

The recent slowdown in growth is in part cyclical and in part structural. Global economic growth is slowing this year after growth peaked in the US last year at over 3% and some European countries like Italy and Germany were in recession or stagnating at the end of 2018. So, part of China’s slowdown is cyclical which is worsened by the US-China trade war. The other part is structural. As China approaches upper middle income level, economic growth will slow. But it’s difficult to distinguish between the two and Chinese policymakers are nervous because it is being exacerbated by trade tensions. That’s why the Chinese government has announced a large fiscal stimulus, equivalent to some 1% of GDP, centred on tax cuts to ease the cost pressures on producers and boost consumption. The danger is if the government continues to ease credit which goes to inefficient uses as that could worsen the debt issue in the economy.

As the Chinese economy matures, how will its political system respond? Will future politics be more or less open?

There are worrying signs the political system isn’t becoming more open to accompany an emerging middle class. China has implemented a large number of legal reforms to protect property rights and contracting security that has given reassurance to people and firms. That was in lieu of political reform. But whether that is sufficient going forward especially as the judiciary isn’t independent of the government is unknown.

China is spreading its influence westwards with its Belt and Road Initiative, right the way into Europe. Is this a strategic threat for Europe, or a significant opportunity?

It’s mostly an opportunity but the Belt and Road Initiative also poses strategic challenges to Europe. Funds for infrastructure are needed in Europe as it is in emerging economies but how such investment is undertaken matters. That’s where the opportunity to work with China on major projects arises. The challenge comes from the soft power aspects of the Belt and Road Initiative. As China’s influence spreads, there are countries may turn toward its economic and political system and away from the EU, which has been a promoter of values such as democracy and market liberalisation. 

How has China's recent prosperity changed the face of its society? What expectations do people have of their state?

Like other countries that had become middle income, people expect their property to be secure and for their governments to continue to deliver prosperity. The challenge will be whether a society that has become accustomed to their incomes growing at double digits will readily adjust to a slower pace of growth. But, if the quality of that growth is better, i.e., it’s more environmentally conscious and based on more balanced drivers than investing in ghost cities, then it may be more acceptable than before even if the pace is slower.

China is becoming older. How will the country cope with an ageing society? Will an end to the one-child policy make any difference?

So far the reforms to the one child policy haven’t produced a dramatic improvement in China’s fertility rate, which is consistent with the evidence across countries that as societies grow richer, the birth rate falls. Coupled with improving longevity, China is facing a significant demographic issue. Quite unusually for a middle income country, its working age population is shrinking. Only Japan among major economies has an older age profile. In terms of economic growth, it means that human capital improvements rather than labour force growth will be more important for China at an earlier stage than it was for other major economies. The pressures that it places on the pension and social security system in China will be significant. That offers opportunities too for private firms to serve the insurance and financial needs of China since the government doesn’t have a comprehensive or large welfare state, just like its East Asian neighbours where government spending is only around 1/5th of GDP versus 50% in Europe.