Matthew Gertken is a Geopolitical Analyst at STRATFOR. He is responsible for researching and writing analysis, shaping forecasts, and assessing the geopolitical implications of events on a wide range of topics and regions for STRATFOR readers and clients.
Gertken joined STRATFOR in 2008 as an analyst covering east and southeast Asia. He has also researched and written analysis on topics in Europe and the former Soviet Union. Currently he is engaged in producing a monthly series of STRATFOR Net Assessments on Australia and East Asian countries including Thailand, Japan, Taiwan, and Indonesia. Gertken has been quoted in numerous news articles and has been featured as an expert on CNBC Asia and Bloomberg Television. He holds a master’s degree in English from the University of Cambridge in the United Kingdom and a bachelor’s degree from the University of Kansas.
China’s ability to maintain steady growth is seen as fundamental to the developed nations’ success in emerging from recession. How confident are you that China will be able to sustain high single-digit growth over the next few years? What are the immediate challenges to that growth?
Right now, China has a number of challenges, not least of which is a housing and real estate bubble. In fact, it is worth taking a serious look at just how stable the Chinese economy appears when one takes the medium to long view. The country has had a tremendous run from 1980 onwards, through the period of economic liberalization. However, while the world has been captivated by China’s record year-on-year growth, there is much about the Chinese economy to worry analysts who look beneath the surface.
One of the most obvious defining features of the economy is that China’s closed monetary policy means that it has near-total savings capture of all household and business surpluses. These massive deposits are funneled, via state-run banks, to state-linked firms at below-market rates. The massive liquidity provided from the savings of nearly a billion workers enables the country to self-fund huge projects, quite apart from the huge surpluses generated by its exports.
However, plentiful liquidity at artificially low rates, with little by way of market mechanisms and market penalties for waste, encourages massive inefficiencies. No-consequence loans encourage no-consequence projects, things undertaken purely so that the participants can gain political kudos without suffering any immediate economic pain for such actions. The cumulative weight of these is most definitely not trivial.
It is important never to lose sight of the fact that with China one is starting from a point that is totally different to the route that many developed countries have followed. The country’s growth in the modern era begins from a very totalitarian position and what follows is a series of cycles of tightening and loosening of control, with the government’s instinct being to tighten restrictions whenever it feels things have gone too far.
What this means is that the liberalization of a sector gets interrupted. There are reversals and backtrackings, followed by a new phase of liberalization that does not quite pick up where the last one left off. Moreover, the last reserve of government control is the very tight linkage between the government and the banking economy. Maintaining this control is vital for them, so it means that they cannot at this point allow capital to flow in and out of China unchecked and unregulated by the CCP. Quite apart from ideological considerations, the Chinese government has seen what has happened to Japan and the Tiger economies over the last two decades when they opened the floodgates. A massive surge of private investment always generates a hangover, which inexorably leads to a recession that hits the overextended banks and ripples outwards into the wider economy. Equally, China is very wary of a liberalization process that would lead to a flight of capital out of the country.