Yukon Huang

Headlines about China's economy have been uniformly alarming. Every time equity markets in the west plunge, Beijing's woes are cited as a factor with its plunging equity indices, rising debt ratios and exchange rate under pressure. Even with more sensible interventions, or perhaps none at all, increased volatility in the country's financial markets is becoming the norm as its economy becomes more globalised and subjected to the same market pressures as other nations.

Global financial markets have been rattled by the extreme volatility in China's equity markets and by pressures for the yuan to depreciate more than just a few percentage points. Some observers interpret the turbulence as evidence of a possible economic collapse with global repercussions. Others believe Beijing intends to use currency depreciation to buoy up exports, potentially triggering rounds of competitive devaluations. Both perceptions are largely misguided.

The generally accepted view is that well-functioning institutions and a less interventionist involvement of the state are essential to promoting efficiency and growth. But if so, how does one explain why China—with its weak governance structures and seemingly overbearing presence of the state—was able to grow at double-digit rates for more than three decades before its current economic slowdown?

President Xi Jinping's visit to the US in late September was risky, coming at a time when China's economy was seemingly in trouble. Would he be on the defensive and appear weak since market perceptions of China have turned more negative in recent months? Yet the economic realities are less alarming and Beijing has the potential to put its economy on a more sustainable growth path if it so chooses.

The prolonged slowdown in China's economy has generated a fierce debate about whether the country needs a new "growth model." All economies, however, are guided by the same growth model developed decades ago by Nobel Prize winner Robert Solow showing that expansion depends on growth of investment and labor along with productivity. These principles have not changed, but some adjustments are now required in the path China is taking. Some observers have called for a more consumption-driven growth process and others see innovation as the solution, but neither approach actually meets current needs.

Is the China growth model dead? This question has become topical as China’s growth rate has transitioned from its historic double-digit rates to its current 6-7 percent pace, with many arguing that the bottom might be as low as 3-4 percent growth before the end of this decade.

Markets continue to fret over how much further China’s economy will fall. On the foreign policy front, China’s more aggressive posture has leaders across the world on edge. These twin worries mean that Beijing is becoming a more normal economy but an abnormal great power.

Arguments about China’s growth prospects are often muddled by the divergent perspectives of optimists and pessimists. The two groups tend to use different time horizons, and to focus on different concepts, in evaluating China’s chances for success. Those shorting China are fixated on what is happening today and what will happen six months from now. Thus, the steady decline in the monthly purchasing managers index — which measures changes in the manufacturing sector — as well as disappointing industrial production numbers have inevitably given rise to predictions that GDP growth will continue to sink. China’s GDP growth rate has fallen more-or-less steadily since the financial crisis, and bearish investors expect further declines from last year’s 7.4 per cent in the absence of additional stimulus and more aggressive actions. Such actions could include the recent cut in bank reserve requirements by half a percentage point or a likely decline in deposit rates. Read more at: http://carnegieendowment.org/2015/02/10/debating-china-s-growth-exceptionalism/i1zv

The former US Treasury secretary Lawrence Summers and his Harvard colleague Lant Pritchett recently delivered a reality check on the Chinese economy's prospects by publishing a study indicating that China's growth will average only 4 per cent a year for the next two decades. At the same time, the Conference Board issued its study with similar conclusions.

Lurking in the background of the imminent US-China strategic dialogue are concerns about what role, if any, the world's second-largest economy will play in the Trans-Pacific Partnership and how the that trade grouping will compete with or complement the Regional Comprehensive Economic Partnership. Getting the details of these mega-regional trade deals wrong could seriously damage Asia's regional economic infrastructure – a point which is often overlooked. Preventing this will require both China and the US to take more active positions.

Once again the US Congress is finding it more convenient to play the China currency card as the panacea for America's economic woes, rather than deal with the difficult issues in President Barack Obama's recent employment bill. China's response to the proposed bill pressuring it into allowing the renminbi to appreciate was predictable, with simultaneous protests from all the relevant agencies. Given the threat to the global economy from the problems in the eurozone and the US, China's leadership regards the currency bill as a distraction from the real issues that need to be resolved. At a time when China is one of the few sources of global growth, ratcheting up protectionist sentiments only makes it harder to secure the necessary multilateral co-operation. The country's government sees the currency debate as yet another sign of why the American political system is broken.