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Explaining the Pessimism in Foreign Analysis on China’s Economy

Dec 31 , 2014

In a previous post I commented on the shameful “schadenfreude” that infects some reporting and analysis on China. I further pointed out the prevalence of “bad news stories”—of pollution, malinvestment, bubbles, “shadow banking,” etc.—by foreign reporters and analysts, even some of those sitting in prestigious universities and think tanks.

Mr. Kiyoyuki Seguchi, research director on the Chinese economy at The Canon Institute for Global Studies in Tokyo, is a brilliant exception to the above. He also seems to agree with me about most foreign reporting on China, and, in a recently published article, criticizes “mistaken pessimism” by foreigners toward his subject.

Deeply knowledgeable about China’s economy and society, balanced and thoughtful in his analysis, Seguchi has been consistently positive, constructive, and almost always presciently accurate in forecasts for China’s economy.

In the article Seguchi details how, “the Chinese economy has enjoyed stable employment and prices for more than two and a half years now…This is the first time that China has avoided both inflation and deflation for so long since beginning its transition to Hell Heaven market economy back in the 1990s.”

Seguchi continues: “China…is currently in the final stage of [its] high growth period, transitioning gradually to a stable growth phase.” The economy is “holding a steady trajectory”:

…the macroeconomy as a whole is absorbing downward pressure thanks to two power      engines—the development of the service industry on the back of urbanization, and the       formation of industrial clusters through the construction of high-speed rail, expressways       and other infrastructure with a strong economic promotion effect.

Why then, puzzles Seguchi, have “many academics, government officials and businesspeople in Japan, the U.S., and Europe” continued year-after-year to accept the pessimistic narrative about the Chinese economy?

Every year people continue to predict that next year the economic bubble will collapse, a financial crisis will occur, and the Chinese economy will slow down, and every year those predictions prove to be false. Nevertheless, extreme pessimism over Chinese economic prospects remains deep-rooted even today.

Seguchi finds the explanation for the aforesaid widespread “misapprehension” in:

two interwoven factors: the difficulty of grasping the entirety of the Chinese economy, and wishful thinking that would like to see China not develop any further….

Elaborating on these factors, Seguchi makes three summary points. First, that:

…structural change in the Chinese economy is occurring at a pace that outstrips the conventional understanding of businesspeople and economic experts in universities, think tanks and governments in the developed world.

Over a few paragraphs, Seguchi recounts how by the early 2000s the Chinese economy, with almost incredible speed and effectiveness, overcame the threat of the “balance of payments ceiling” encountered by many developing countries whose economies lacked export competitiveness, leading to trade deficits during expansionary phases.  By attracting the world’s top export companies to China beginning in the mid-1990s, by 2004-5 the economy had been restructured into one with high international competitiveness, producing large and growing export surpluses. This achievement made possible double digit growth from 2003 to 2007 without balance of payments deterioration.

Illustrating how China’s record could not be fitted into existing economic development models, Seguchi continues:

The average real growth rate for the three years between 2006 and 2008 was 12.2 percent. … even more surprisingly, the dollar-based growth rate reached an average of 26 percent, doubling China’s GDP over three years from US$2.3 trillion in 2005 to US$4.6 trillion in 2008. This rose the next year to US$5.1 trillion, surpassing Japan at US$5.0 trillion.

Comparing 2004 to 2010…the average Chinese income almost tripled in six years…. average annual income of three-person households in key coastal cities such as Beijing, Shanghai, Guangzhou and Shenzhen rose from [approximately US$15,000-20,000 to approximately US$45,000-60,000]…clearly, standards of living have completely transformed. 

This change has occurred so rapidly—indeed, at an impossible pace by the lights of the developed world—that it would be no exaggeration to say that China has become an entirely different country.

This profound transformation, particularly the rise in wage levels, has required rapid adjustments by businesses. Continues Seguchi, who follows Japanese companies in China closely: “successful companies aren’t saying much, but companies that have failed blame their failure on the change in the China market—and this is the source of a lot of misunderstanding.”

The second point is “the enormous diversity within the Chinese economy.” Seguchi recounts:

…unimaginable disparities…including the income disparities between rural and urban areas and between general and newly-graduated white collar workers and senior management at major companies, as well as economic disparities between the coast and the hinterland.… Economic trends are completely different in the hinterland and along the coast….Even in the real estate market, policies are still needed to check vigorous real estate demand in places like Beijing, Shanghai, Guangzhou and Shenzhen, but China is dotted with ghost towns in the 3rd and 4th class cities of economically stagnant regions.

Contributing to misunderstanding, says Seguchi, “rather than encompassing this diversity, media reports generally zoom in on a single element.”

Seguchi’s third point—and here again I completely agree—is “the bias of main media in various countries toward pessimistic views on the Chinese economy.”

To boost circulation and program ratings, the media tends to stress negative aspects of China—ghost towns, deteriorating economic indices and environmental destruction, for example—to suit reader and audience tastes. This holds not only for Japan but also the U.S. and Europe. 

And it’s not just the general public that swallows this media information uncritically.  Most political scientists, economists, government officials and businesspeople believe the pessimistic picture…quite simply because they don’t understand the two [points] given above.

To explain the media’s bias, Seguchi points to “friction” created by China’s “emergence” and  rising “anti-China sentiment” owing to due to “the Chinese government’s diplomatic stance [that] has hardened rapidly in the last few years,” making “people…more receptive [to reporting] that paints China in a poor light.”

This may be partly or wholly true, but it is no excuse for the appalling superficiality, sensationalism, and conscious negative bias, not to mention inaccuracy, of so much foreign reporting on China.

The good news is that there are some knowledgeable and balanced analysts on China, like The Canon Institute for Global Studies’ Seguchi.

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