On the path of steady growth

Economist says a defining theme of China will be more money going out for investment

Qian Liu believes "magic" high growth rate figures are now firmly in the past for China.

The deputy director of the Economist Intelligence Unit's Access China Service, based in Beijing, insists such rates will be difficult to achieve as the economy matures and weans itself off being mainly investment-driven.

"It (the economy) is no longer growing in double digits and you can forget about the magic 8 number but 7.5 percent is the government target for this year and 7 percent for the next few years and that is a lot higher than the rest of the world," she says.

"There is a lot the Chinese government can offer and a lot of instruments they can play around with, so I don't think you have to worry for the next couple of years."

Liu says the EIU forecast for the third quarter is 7.5 percent and predicts growth for the year as a whole to meet the government target of 7.5 percent. Her forecast for 2014 is 7.3 percent.

Some China analysts went into panic mode in the middle of the year when some estimates put China's debt at 250 percent of GDP.

But Liu was always skeptical about whether these estimates reflected the actual level of debt in the economy.

She believes that local government debt (the main source of overall debt in China) could be between 50 and 60 percent, above the official estimates of between 20 and 25 percent, but not high enough to raise a major alert.

"That number is not a very low number but if you compare it to a lot of the troubled Western states, where the number is easily above 100 percent and to Japan, where it is 200 percent, I would say we are in a pretty good position."

Liu, who regularly appears as a commentator on BBC and CNBC and other platforms, says the economy has to move away from its investment-fueled model with money pumped into the economy directed at infrastructure projects also creating too much liquidity that has resulted in property bubbles.

"China cannot just be a liquidity play. Some of the investment in recent years has created over-liquidity just to sustain fast growth."

She believes for the economy to make the transition to being more consumer-led than investment-driven, a more natural balance has to be achieved.

"When a country has reached a certain level of investment, it reaches a point where no more massive amount of investment is needed and the consumption story can follow from that. It is not that we should stop investing and people should just spend more from now on. Nobody has ever got rich by spending more."

Liu, 32, who is originally from Qing-dao in Shandong province, studied economics at Beijing Jiaotong University before doing a PhD in labor economics at Uppsala University in Sweden.

She then spent a year as a visiting researcher at the University of California, Berkeley, before returning to China in 2008 and joining the Economist Intelligence Unit.

"I thought I would return to China just for a year or so but then the financial crisis hit and it was just the best place to be in terms of dynamics, so I just stayed for longer."

Liu, who is also part-time visiting research fellow at Fudan University and lectures at both the Chinese Academy of Social Sciences and Tsinghua University, says analyzing and researching the Chinese economy from within China is very different than from without.

"When you talk to economists outside of China they are a lot more bearish than when you talk to economists actually in China," she says.

"I don't think it is just a sample selection thing but more that there is a lot of misunderstanding on China. I think they do not understand it psychologically. They have this idea that China is not going to work and tend to pick up on stories that support that view."

Liu, who has published articles in a range of journals, including Oxford Economic Papers and China Economic Review, says the performance of the Chinese economy has become increasingly important as a key barometer for other countries, particularly the resources-exporting nations in Africa.

"I think there is a lot of uncertainty about China's growth and even in a way there are a lot of people who are scared about the way China is growing."

She says, however, that China's impact on the rest of the world will be felt differently in future from the way it is now.

The world's second-largest economy will no longer just be seen as a major exporter of manufactured goods and an importer of resources from Africa and Latin America but as a major overseas investor.

"Chinese overseas direct investment has been growing extremely fast - by about 35 percent a year over the past five years - and more than double over the last year. I think over the next three to five years there will be more money going out of China to invest in the rest of the world.

"This is a trend the world needs to learn and be prepared for. It is going to be one of the new defining themes of China."

Liu, through the EIU's Access China Service, does extensive research of China's regions and provinces.

She believes one aspect that outside commentators often fail to pick up on is the fact that some of China's inland regions are very much part of the developing world.

"I sometimes find it shocking to see how undeveloped some parts of China are. Even in China's second-tier cities there is so much potential to be released.

"It is very difficult to talk about China as a whole since some of the differences regionally are like those between Greece and Germany."

She says that this means that it is important to not have a too binary interpretation of China's national growth because some parts of China, particularly in the central and western parts, are still growing at double-digit levels.

"There are many reasons for this growth. With better infrastructure, many manufacturers are moving to the central and western regions. Many of the inland regions also have pretty good universities. They might not be Beida (Peking University) or Tsinghua, but they make it easy for companies to recruit good graduates in these regions so there is a lot of potential."

Liu also says that growth driven by urbanization in China still has some way to go and that economist Paul Krugman is wrong to argue that China has run out of "surplus peasants".

She says the so-called Lewis turning point (where the source of cheap labor from the countryside dries up, forcing wages to rise) could be extended if the government reformed the household registration system and allowed people to move.

"If the government was to relax the hukou system a bit more it would create a new wave of migrant workers and create new means of growth.

"China supposedly hit the Lewis turning point in 2003 but with such a reform that particular inflexion point could again be put into the future."

Liu also does not believe that rising labor costs in China will lead to an exodus of jobs from the country as companies seek to locate in cheaper locations like Vietnam, Bangladesh or Africa.

"One of the reasons why manufacturers want to stay here and not move outside is because of the economies of scale that China can offer. I was in Suzhou recently and when you talk to people in factories, they say that if they want to source any part they can just call a supplier and it can be shipped in 20 minutes. You couldn't do that in Vietnam or Bangladesh," she says.

Despite recent concerns, Liu maintains she remains optimistic about the growth outlook for the Chinese economy.

"I am pretty confident that for at least now and next year, there won't be any hard landing. For the long term, I am also relatively optimistic because there is a lot of fundamental potential and productivity that China can offer."

andrewmoody@chinadaily.com.cn

(China Daily Africa Weekly 09/20/2013 page8)