Dr Michele Geraci, Head of China Economic Policy Programme, Assistant Professor in Finance, Nottingham University Business School (NUBS) and Pauline Loong, the managing director of the Hong Kong-based research consultancy Asia-Analytica, also the editor of the well-known and respected Loong on China newsletter, join this programme.
The first question concerned the importance of the IMF granting the Chinese Yuan ‘reserve currency status.’ Dr Geraci indicated that this is a largely symbolic recognition, which means almost nothing in practice. Pauline Loong commented that it is “a vanity thing, China has now arrived, it is now part of the international basket [of currencies] but more importantly, this is the first step of China entering the international market, China will now be included in international indexes, so it is symbolic, but it is not totally without meaning.”
One of the biggest accusations constantly hurled against the Chinese economy, is that her success is short term, and based on a huge housing bubble. Dr Geraci said: “I would say that the Chinese success has been based on a large proportion of investment. The Chinese economy is 50% investment, 50% consumption, plus some export, but much less than people think. Having said that, let’s not forget that China, over the past 40 years, has shown the world that a country with 1.4 billion people can grow for roughly 10% a year for 40 years, which is an extraordinary performance, and which has lifted 300 to 400 million people out of poverty. If things were to stop now, it almost doesn’t matter, because for 40 years people have enjoyed an increasing quality of life and standard of living. It’s a bit like when the Chinese criticise the EU, and I say, we have had a prosperous life for 70 years, so if we have a downturn for 5 or 10 years, it doesn’t matter; we will readjust the model. China I think will also readjust its model.”
The world blames China for financial irresponsibility, and experts point out that a possible hard landing for the Chinese economy would have a dire effect on the rest of the world. Dr Geraci said: “It is not a market economy, let’s face it, the government can do what it wants when it wants… the West should actually look towards putting its own house in order, China has had a zero interest based policy for several years; we should be careful when we criticise China on monetary policies as we may find out that they are actually more responsible than the equivalent western policies… Having said that, if China were to collapse, it would be a bg problem for the world of course.”
Pauline Loong’s view of the Chinese economy differs sharply from that of Dr Geraci. She said: “China's economic problems are systemic. The country still operates with a system of government created for a bygone era when peasants still predominated, and state planners were still a powerful force. China is now moving into the 21st century, moving into international markets, and yet systems are still from those old days, and it is trying to patch it up a bit here and a bit there. That’s where the basic problem lies with the Chinese economy.”
“I agree and disagree,” said Dr Geraci. “It is indeed a system that is not in touch with the modern world, but it is the best system for China because China lives in a different era, so China’s level of development is not comparable with what we have in other parts of the world….We have a low GDP per capita, we have an environmental problem, we have income disparity… it is like a country that lives a century earlier, but the system that China has now is probably the best for China in this historical moment.”
Pauline Loong narrowed this discussion down to statistics. “The government of the second most powerful economy in the world does not have the ability to monitor the activities of local administrations with any accuracy, and in real time….they do not know who owes what to whom…” Dr Geraci agreed that there are many problems such as the very dangerous, out of control, ‘shadow banking’ lending, but he expressed that because China’s authorities are more powerful than that of western countries, it can, if it wishes, control the situation effectively.
In reply to the question: what are the chances of there being an almighty economic crash in China over the next 12 months, both guests agreed that this is very unlikely.
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