Why China's boom has further to run

There are China bulls, and then there’s Justin Yifu Lin, the former chief economist of the World Bank. While China bears and their pessimism are the new black in the world of finance, Lin still maintains his bullish view that the country still has the potential to maintain fast-paced growth between 7-8 per cent for another two decades. 

Lin is arguably China’s most influential economist and enjoys unparalleled access to China’s top economic policymakers including Premier Li Keqiang. Li authored an important book called The Quest for Prosperity, which examines the success and failures of economic policy for developing countries since the Second World War.

One of his most interesting findings is for those few countries -- only 13 in total -- that have moved up the industrial and technological ladder, these countries have rarely followed the dominant policy descriptions of the time.

Business Spectator caught up with Professor Lin recently to discuss two main topics confronting China’s economy: the country’s growth potential and reform of state-owned enterprises.

It is not easy to be a China bull on the country’s growth potential. The economy has slowed considerably from double digit growth to 7.4 per cent this year and the country is also facing the ever-growing problem of debt, both government and corporate. There are scores of analysts predicting China’s own Lehman moment.

And yet Lin is one of few influential economists who still believe that China's boom has not yet run its full course. His optimism is based on his observations of the development history of four major Asian economies in the last half century and underpinned by the so-called late developing advantage theory. 

In a nutshell, the theory says that late developing countries can grow much faster than developed economies during the catch-up stage of their development by absorbing and importing advanced technology and know-how, but the pace of growth will slow down as the gap between developed and developing countries becomes narrower.

Lin points out that China’s per capita income level is only 21 per cent of the US back in 2008, which roughly reflects Japan’s position in 1951, Singapore in 1967, Taiwan in 1975 and South Korea in 1977. These countries had all grew between 7.6 and 9.2 per cent for two decades.

Lin’s assessment is based on the large gap that exists between China and the US. So, if China follows the growth pattern of these four advanced East Asian economies, there is a good chance that it can still deliver 8 per cent for another 20 years.

But he added an important qualifier to his otherwise bold prediction. “China has the potential but it does not necessarily mean it can fully utilise that potential. However, if you don’t have that potential, there is no way for you to achieve anything regardless of how hard you may try,” he told Business Spectator.

Lin admits that China faces many issues including looming environmental disaster. But he argues that China is following the well-trodden paths of other industrialised economies like Britain, Germany and Japan of ‘pollute first and clean up later’.

“Once we transition from an industrial economy to a post-industrial economic society, our emission and consumption of energy will decline,” he said.

Another vexing issue for the world’s largest economy is the persistent problem of reforming the country’s state-owned enterprises. One of the big problems for China’s dynamic private sector is access to credit. Big state-owned companies usually enjoy preferential access to cheap state credit at the expense of small and medium sized firms.

Lin argues it is too simplistic to look at this issue through the simple prism of state-owned companies versus private small and medium-sized firms. “There is a mismatch between China’s real economy and the financial system. The country’s real economy is largely comprised of farmers, small and medium-sized businesses and yet the financial sector is dominated by big banks that prefer to deal with big companies,” he said.

He says large Chinese private enterprises like Geely, a car-maker that owns Volvo and Huawei, the world’s largest telecommunication equipment-maker, can obtain access to finance without any problems. Yet the problem is not but ownership, but size.

It is interesting to note that it is difficult for small and medium sized enterprises to obtain access to credit worldwide, including in Australia. And the problem is particularly bad in China: state-owned firms tend to be large corporations while private enterprises are often much smaller. The country still has a relatively under-developed capital market to support small and medium-sized companies.

He is not ideological when comes to the controversial issue of privatisation of state-owned companies, which is a bit surprising considering he got his doctorate from the University of Chicago, the bastion of free-market economics and home of Milton Friedman.

“The most important thing for state-owned enterprise reform is competition and creation of a level playing field,” he said. He thinks privately-owned companies should be allowed to compete directly with state-owned companies on equal footing and then let the market decide who the winner is.

He believes ownership alone does not determine whether a company is well managed and cites the example of Renault and Nissan. Renault is a former state-owned national champion of France and Nissan is a privately controlled Japanese company, but he reminds us that it was Renault who took over Nissan.

Given Lin’s stature in China and abroad, we should pay more attention to what he says about the economy and its future prospects.