Reform Pace Suggests Beijing Thinks It Can Wait
BEIJING— Justin Lin Yifu has an unusual background for an economist, particularly one who has the ear of China's top leaders.
In 1979, then a 26-year-old captain in the Taiwan army, he defected to Communist China. Details of the story are recounted by the New Yorker's Evan Osnos in his book "Age of Ambition: Chasing Fortune, Truth, and Faith in the New China." Mr. Lin slipped off his sneakers, stole down a sandy path on Taiwan's front-line island of Quemoy, plunged into the water and swam the short distance to the mainland, risking execution if he had been caught.
It was the act of a supreme contrarian. Almost all defections during the Cold War period occurred in the opposite direction.
But he had a visionary belief in China's economic future.
He still does. Mr. Lin is confident that the Chinese economy still has the ability to roar along at 8% for another 20 years. That's far higher than the prevailing consensus among economists outside China, and even some economists inside China think that may be a stretch. The International Monetary Fund sees growth slowing to 6.3% in 2019. The Chinese government's own growth target this year is 7.5%.
Nor is Mr. Lin particularly troubled by China's rapidly mounting debt, which worries the IMF and others quite a bit.
In an answer to emailed questions, he points out that total government debt, at 40% of Chinese GDP, is among the lowest in the world and it's almost all in local currency, which eliminates the risk of an international debt-repayment crisis. If necessary, he argues, the debt of local governments—a black hole for credit from the loosely regulated "shadow-banking" sector—could be restructured. "There is no danger of a systematic crisis," he says.
This isn't simply a dry academic debate. The assessment of China's long-term economic growth capacity affects everything from how rapidly authorities keep pumping out credit to how earnestly they implement the tough reforms needed to put Chinese growth on a track that can be sustained. So it matters who Chinese leaders listen to.
For now, it appears that they are taking the more optimistic, Lin-like, view.
The government is rolling out a "ministimulus" program as growth flags, falling back on the old standby of credit-fueled investment to keep the momentum moving along. Meanwhile, an ambitious 60-point economic reform agenda unveiled last year is moving ahead at a slow pace, suggesting that Chinese leaders believe they have quite a bit of room for maneuver.
Mr. Lin's bullishness cannot simply be dismissed as the wishful thinking of a true believer. He's an economist of global stature. After crawling to shore in mainland China 35 years ago, he built an impressive career capped by a stint as the World Bank's chief economist. This gains him an entree to the Politburo Standing Committee of the Communist Party, which calls upon him—along with other Chinese academic economists—as an informal adviser.
President Xi Jinping's reform plan offers comprehensive measures to overhaul state enterprises, spur the private sector and unlock prosperity through land reform and labor mobility. The Chinese leadership is also very aware of the "middle-income trap" that has derailed the ambitions of all but a handful of developing economies trying to achieve rich-country status.
But the view from outside China is that the economy is more fragile than the government seems to believe.
Many international economists believe it's not so much the absolute level of debt that matters—although economywide debt, including corporate debt, at more than 200% of GDP is certainly high. Rather, they worry about the rapid buildup, which is almost always a prelude to a financial crisis.
Mr. Lin says that his 8% call is dependent on the government embracing fundamental reforms. He bases his optimism on his theory of the "advantage of backwardness"—how less developed countries can catch up via technologies rich countries develop at massive cost. It's a theory that he set out in his 2011 book "Demystifying the Chinese Economy."
More skeptical economists focus on how the big drivers of Chinese growth are running out of steam as the economy naturally matures: The workforce is shrinking, and China is getting far less bang for its buck on investment in capital—everything from factories to computer hard drives. They also have a less optimistic assessment of China's potential to increase its productivity through technological innovation.
All this matters a great deal for the world. If China can continue expanding at 8%, not 6% -- or less—it suggests a different strategy for Australian natural-resources companies, for instance, whose investments in new mines and transport facilities reflect assumptions about global demand decades from now.
It might impact Pentagon planning. Military strength flows from economic capacity, so a belief in a bigger Chinese economy 20 years out might bolster arguments by the U.S. military top brass for new weapons systems today. Beijing's shift to a more assertive territorial posture was arguably triggered by a perception after the global financial crisis of 2008 that the U.S. is a spent force, and the future belongs to a vigorous China.
Chinese economic data reporting is problematic, to be sure. In a continental-size country of extreme disparities, where some live in luxury condominiums and others in caves, it's hard enough to measure today's output, let alone predict what it might be two decades from now.
Increasingly, though, the view among international economists is that China is running out of time to make economic fixes. There's a risk that rosier scenarios like Mr. Lin's may dilute leaders' sense of urgency.
http://online.wsj.com/articles/refo...-it-can-wait-1408422381?tesla=y&mg=reno64-wsj
