The gloomy outlook on China's economy is overdone, if one considers what solutions to the country's intractable economic and financial problems are already being achieved in more than a few isolated cases of bad debt cleanup.
Granted, it will take time for these turnarounds to become the overall tone of the economy, and the overall problem of bad debt could still outpace the resolution, but those who have written off a broad crisis or hard landing as inevitable and have staked their reputations or boatloads of money on this inevitability are likely to be frustrated, as some doubtless already have been.
There are several fundamental erroneous assessments that China bears, especially the gloomiest permabears, are making in arriving at their prognosis; in each case, the accusations are crudely overgeneralized and don't stand up to even a little extra scrutiny.
1. Beijing has backtracked on reform.
This view has become popular given the slow pace of SOE downsizing and restructuring, which has resulted in far less overcapacity reduction than the communist central planners have promised. In reality, this only reflects an age-old Chinese reality that even a leader as powerful as Xi Jinping can only gradually alter: the emperor lives in his palace and the mountains are high and far away. Beijing is fully aware of the lagging timetable of capacity cuts; the miracle, relatively speaking, is that they're even proceeding to some appreciable degree at all. Indeed, should the country stay on the current pace and hit 65 and 80 percent of its 2016 coal and steel reduction target, respectively, by year-end, that would be a stunning achievement considering that both sectors were first mandated by the central government to cut capacity a full decade ago (when they were only a fraction of their eventual peak); this indication of increased efficacy of the central government is an unsung testament to the sheer strength of Xi's party leadership - more is bound to come, and that's a very encouraging sign.
Additionally, it's a standard complaint that just because Xi has repeatedly stressed that SOEs should become bigger and stronger and play an even more central role in the economy, that this means he actually wants to double down on the inefficiency and malinvestment that's plagued China for the past few years. Yet that's reducing Mr. Xi to a Maoist bumpkin: quite the contrary, Xi knows that bigger and stronger SOEs also means fewer SOEs in total, and leaner ones at that. If anything, this will be a decisive reversal of China's age-old tendency of economic sectarianism which Mao himself also promoted when he saw fit; perhaps for the first time in its long history, China is about to develop a truly national economy with well-integrated regions, whereby each individual province or even county or municipality will no longer need to subsidize its own pet steel mills and coal plants, or peddle its own urbanization vanity projects with little regard for broader regional synthesis.
2. It would be a sheer disaster for GDP growth to dip below target.
Not anymore, says at least one reputable Western expert: China can manage fine with just 3-4 percent growth. Some would say it's already only growing at that clip - and the strains, while substantial and increasing, are by no means unmanageable yet. As both foreign and domestic observers and stakeholders pay closer attention to the quality as opposed to quantity of Chinese growth, undershooting the raw targets shouldn't have as detrimental an impact on confidence as they would have earlier.
That's not least because the employment situation is well under control as the labor force itself is shrinking: the same pressure to rapidly create so many new jobs has significantly eased, leaving an increasing number of companies with the opposite problem of too few workers to fill their posts (and spurring importation of immigrant workers in some cases). Even less than 5 percent GDP growth can easily absorb the labor pool now, giving a cushy margin to miss the planned 6.5.
That leads to the final fallacy of the China "doom and gloom" crowd: a coarse assumption that growth is vastly overstated.
3. The country's statistics are highly untrustworthy, if not still essentially fabricated, and paint an overly rosy picture.
This longstanding accusation always rears its ugly head in times of uncertainty and shakiness in the Chinese economy. It would be far more credible, though, if its proponents themselves were better at basic arithmetic. The smell of confirmation bias is no less present with China bears as with China bulls: it leads to such egregious errors as double-counting Chinese bonds in aggregating debt figures, even by reputable experts.
Apart from misinterpreting divergent data sets or habitual errors, inconsistencies, or holes in their own statistical reconciliations, China skeptics also mistakenly assume that Beijing blithely downplays bad or troubling data and as a rule covers it up or embellishes it. In fact, while this may often be the case in the short term, over the long term it simply can't work. For years Beijing has been aware of its provinces' and localities' tendency to overstate GDP growth; to suggest that it hasn't been making its own adjustments as needed, or at least smoothing out the effects of bad data over time to provide a generally accurate picture, is to suggest that the country's economy is smaller on the order of trillions of dollars. Just maybe this could be true - though more likely, if anything Chinese GDP remains significantly undercounted.
Yes, the scale of Chinese financial and economic problems is officially understated; but you'd expect for instance much more debt (especially "shadow" debt) than formally reckoned if there's indeed much more economic activity than formally reckoned as well.
Indeed, as the above CNBC article from last year notes, China is grappling with whether to update its accounting methodology to better capture true services and higher value-added activity like R&D. Beijing thus has a trump card: should it be forced to abandon its 6.5 percent GDP target, it will most likely be in the context of increasing base GDP according to the newest UN methodology. In fact, early this year China had already switched to an upgraded system of periodic economic data collection by the IMF, and it's likely this is helping it smooth out to the upside otherwise lower actual GDP growth (i.e. from an already higher base).
That being said, China still has a ways to go. Its stockmarkets remain primitive and far too many publicly traded companies remain far more opaque in their corporate governance and financial reporting than even their emerging-market counterparts that are heavily dependent on Chinese growth. This capital market reform - of equities in particular, as some appreciable progress has already been achieved in liberalizing and opening the bond markets - will without doubt be a central reform item for 2017. If successful (even haltingly so), it would be an indication that far from backsliding into Maoism, Xi's administration is determined to reform after all - and that would vindicate his consolidation of power which increasingly has Western observers up in arms, so much so that they've come up with a "repression index" to yet again tie China's prospects with immediate Western-style liberalization.
Well, that's disinformation and propaganda, pure and simple: Xi's repression has a very specific deliberate method to its madness, and the West is blindsiding itself to assume otherwise, as its elites are so clearly blindsiding themselves on the populist backlash in their own midst which has wrested the initiative for globalization from their hands into China's. It's truly up to China now to not squander the opportunity.
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