China Finance Expert Cheng Siwei
The Real Fear Isn't Slowdown, but Standstill
In this exclusive interview, Beijing International Finance Forum chairman Cheng Siwei offers a wide-ranging analysis of both the Chinese and international economies.
The Real Fear Isn't Slowdown, but StandstillBy Shu-ren Koo
From CommonWealth Magazine (vol. 483 )
Cheng Siwei, son of Shih Hsin University founder Cheng She-wo, returned to China from Hong Kong in 1951 and went on to become one of the most influential opinion leaders in China's financial sector.
He's previously served as a vice chairman of the National People's Congress, chairman of the China Democratic National Construction Association, one of China's eight "non-communist parties," and has been a fixture representing China at various major international financial forums throughout the world. He is currently the chairman of the Beijing International Finance Forum and director of China's National Taiwan Society.
A long-term observer of China's economic development, Cheng agreed to an interview with CommonWealth Magazine during a recent visit to Taiwan and offered penetrating analysis of the economic situation in China, Europe and the United States. What follows are highlights from the interview:
From 2009 to 2011, you could say China's economic situation has gone from its most difficult year to its most complex year and on to its most troublesome year.
The worst year of the current financial crisis was 2009. Premier Wen Jiabao called that year China's "most difficult year." If we had not begun to implement the RMB4 trillion economic stimulus plan at the end of 2008, China's economic growth (for 2009) may have been just 2.4 percent.
Premier Wen then called 2010 "the most complex year," as the negative effects of the previous year's stimulus package began to appear.
That year, economic growth stood at 9.2 percent, 8.7 percent of which was accounted for by investment, and total investments accounted for two-thirds of gross domestic product (GDP). The overly heavy investment resulted in excess production capacity, excess inventory, declining return on investments and increasing pollution.
Meanwhile, 9.6 trillion renminbi in bank financing flooded the capital markets, resulting in excess liquidity, inflation, rising property prices and an asset bubble.
Local government debt worsened, also due to excess investment. As of the middle of this year, cumulative (local government) debt stood at a total of 10.7 trillion renminbi, and one-third of local governments have no capacity to repay.
A Most Troublesome Year
So China spent last year instituting measures to curb inflation, restrain housing prices, clear local debt and reduce excess production capacity. But we didn't want to stomp too hard on the brakes lest these issues blow up in our faces.
This year, I believe, will be our "most troublesome year." The biggest trouble lies in how to both maintain growth and also keep inflation in check.
Initial Chinese government forecasts for this year predicted that inflation could be contained at around four percent, but it has already surpassed six percent. The main reasons for this are excess money supply, rising import prices and rising domestic (business) costs. Of these, excess currency issuance has been the chief culprit.
Consequently, the most important thing in controlling inflation is raising interest rates and containing excess capital. But raising interest rates increases financing pressures on small and medium-sized enterprises and makes the debt burden on local governments heavier.
Even more importantly, if China raises rates and Western nations do not follow suit, the inevitable result will be the appearance of arbitrage trading, bringing even more hot money pouring into China.
So this year's economic circumstances dictate that we find a balance between growth and controlling inflation.
Risk of a Hard Landing
As of right now, the factors causing inflation are still extant, so it's impractical to be overly optimistic. If we can bring inflation down under six percent for the year, that would be a decent outcome. I predict it will be around five percent.
As for economic growth, the original forecasts associated with the 12th Five Year Plan reckoned growth for this year of seven percent, but looking at the numbers for the previous three quarters, it looks like we'll yet achieve nine percent.
In other words, there still exists a risk of a hard economic landing and that the asset bubble will burst. That's why this year has seen the implementation of the strictest housing price control policy in our history, an all-out effort to rein in the asset bubble.
But this restraint (of housing prices) is merely an ad hoc measure. Over the long term, a more enlightened approach will be required, and that means transforming our model of economic growth.
First will be to transform our current investment and foreign trade-driven model of economic growth into a domestic demand, consumer-driven one. Second is to change the mindset of only considering GDP growth. Greater attention must be paid to sustainable growth and aggressively developing alternative energy sources. Detailed plans for these have been laid out in the 12th Five Year Plan.
Internationally, there are currently numerous uncertainties.
In the United States, the unemployment rate remains very high, problems persist in the banking system, and local government debt is a major worry. Political strife has also ratcheted up considerably following the American mid-term elections last year. This has resulted in the brinksmanship between the two parties we witnessed in the negotiations over the debt ceiling.
I believe the Americans must ultimately implement economic stimulus. Even though the Federal Reserve hasn't implemented QE3 (a third round of so-called "quantitative easing" – expanding the money supply by issuing more currency), but instead chose to carry out "Operation Twist" (purchasing long-dated treasuries in a bid to raise bond prices and depress yields, with the aim of lowering long-term interest rates), the fact is they both amount to a kind of economic stimulus plan.
As far as Europe goes, the ongoing debt crisis is a drag on economic recovery and it appears that it will continue for some time.
The eurozone nations are currently discussing how to assist Greece and the other financially strapped European countries (Portugal, Ireland, Italy and Spain). I think there definitely needs to be a bailout; otherwise, the eurozone will collapse and European economic unification will be finished.
For example, why should Germany get involved in bailouts? Because the lion's share of Germany's exports go to other eurozone nations, and if any of these nations goes under, Germany would be in trouble too. So the German Bundestag quickly passed legislation raising the ceiling on bailout funds.
It may yet be some time before Europe gets out from under the shadow. Consequently, a lot of people believe that there's a 50-50 chance of the euro collapsing. But I'm of the opinion that it's more like 60-40 against that possibility.
2013 Return to Economic Normalcy
European and American economic problems may indeed remain grim, yet they will not lead to another recession.
A recession is defined as three consecutive quarters of negative growth. A look at the numbers from last year shows that these various nations are all showing some growth, so what we're seeing now can only be termed "sluggish growth" and not a "recession."
Looking at the present situation, I'd estimate that there likely won't be a return to normal levels of growth until after 2013.
This financial crisis has exposed a number of capitalism's inherent systemic problems. More than a few economists have thus concluded that the Chinese model is superior.
But at present we cannot say that capitalism will collapse, because every society has its own mechanism for curing itself. The important thing is to have sound policy.
The United States remains the world's most powerful nation, and we cannot overlook its advantages – for example, its capacity for innovation and providing people with opportunity.
The recent appearance of the Occupy Wall St. Movement is actually an explosion of contradictions. It's the cumulative result of conflict and negative emotions.
No 'China Model'
As to those who state the Chinese model is better, I don't really endorse this "Chinese model" phraseology. China cannot currently constitute a model.
First, China is still in a state of exploration. Second, if others cannot learn China's methods, then they really can't say it's a kind of model. For example, one of the biggest inherent characteristics about China is its communist party leadership. How is anyone going to learn that? So the correct terminology should be "the Chinese path."
There are certainly some systemic advantages to the Chinese path. Policy stability is relatively high, and you can also achieve long-term planning. And the communist party's collective leadership system makes policy decision-making relatively fast.
This is apparent when compared with the two-party power struggle in the U.S. and the frequency with which Japan changes prime ministers. The downside is that if the policymaking is flawed, the damage inflicted is relatively greater.
I often say the Chinese path cannot, and should not, be imposed upon others.
Similarly, others should not impose their model on China. If China were to adopt Western-style democracy, it would cause all sorts of problems.
I'm cautiously optimistic about China's future. There's certainly nothing simple about Chinese affairs.
China fears a developmental standstill, not a slowdown. What I mean is, Chinese affairs are too complex. Things cannot be rushed, but must continue to move forward without grinding to a halt.
Translated from the Chinese by Brian Kennedy