Two-speed growth in China – actual and theoretical

There seem to be two speeds of economic growth in China. The amped-up, investment-led, binge-fuelled, actual speed which has driven the country’s expansion in past decades and the slower, more balanced, sustainable, theoretical growth that everyone talks about as a necessity in China’s economic maturation. This piece in Quartz says the difference is visible a growth target as close as 7.5 per cent to 7 per cent.

A 7.5% screams “borrow, build and do whatever else you can to boost growth.” The lower one says to emphasize that much-discussed structural reform. It looks like 7.5% is the magic number for 2014.

The Quartz piece notes that “it signals that China’s leaders are putting those structural reforms on the back burner, even though many think they’re urgently needed for the country to avoid a financial crisis.”

No doubt there are innumerable internal considerations in China when it comes to prioritizing how to grow and reform the economy. But the contradiction between the aspirations for the economy and the daily necessities of life in China are real. That broad contradiction mirrors the paradox of external issues as well. On the one hand, it’s all about a “peaceful rise” and a “win-win” relationship with the world – on the other hand, it’s more of a coercive, China-first policy in borders, trade, diplomacy, etc.

The fundamental reality can’t be binary. At the same time, even with an unbalanced economy, China will muddle through.

Aka…Moving the goalposts

Recent skepticism about Chinese export numbers points to what I think will become another area where China and the west part ways.

But to the export figures, first. They rose 14.1 per cent in December, to the disbelief of economists at Goldman Sachs, UBS and ANZ Bank, who said the monthly jump didn’t agree with the volumes of goods ship though ports to trading partners, as well as defying the movements of the manufacturing index.

As anyone who has watched China knows, this disconnect is hardly new. The Wikileaks data drop showed a Communist Party leader telling the US ambassador that Chinese statistics were “man-made.” Of course, global markets live and die by these numbers.

But over time, as China becomes even more central to the global economy, the credibility issues around their statistics may prove problematic for economies and policymakers reliant on China. No doubt the issues won’t be big enough to derail China’s eventual emergence as the largest economy in the world. And no doubt, the Chinese will celebrate when this milestone is reached.

But something is going on in the West that may sorely disappoint the Chinese when that does occur because it has to do with the very notion of a nation’s success, and should this change in the West fully take hold, it would deny Beijing the Pride of Being Number One.

There is an effort in advanced Western economies to move away from the gross domestic product as a measure of a nation’s standing. Instead, a so-called Happiness Index, devised by the Stiglitz-Sen-Fitoussi commission, appointed by then-French PM Nicholas Sarkozy in 2009 to devise a new measure of a society’s progress will appeal to both sides of the political spectrum in the West.

Environmentalists who blame the consumption-based approach to economic growth will embrace it, as it encourages a more balanced thinking about an economy’s relative success. Further, this may occur as the corruption of statistics continues in China, providing yet another signal that the GDP measure as the best measure of success has surely passed its use-by date.

Sadly, the Chinese economy will become the largest in the world on eternally surging GDP growth, with only suspiciously muted cycles. The numbers will be stunning, but increasingly minds in the advanced West will be looking at measures more suited to their economy’s relative out-performance.

While there is no guarantee it will pan out this way, the West, in its eternal ability to invent and innovate, will have an incentive to adopt these new measures and champion them.

Macro-trend: The coming China-West numbers divide