The Hindu Business Line : To know the road ahead, ask those coming back

WOULD you add legs to a snake after you have finished drawing it? Probably not, but that is a Chinese proverb about doing something that is totally unnecessary and thus spoiling what you have already done, and perhaps also revealing one's ignorance about the reptile's anatomy. Similar would be to prefix or suffix `China' with tags such as `yet-to-grow' or `is-still-backward', because the country is "undergoing a new wave of changes in every sense", according to a new book from the World Economic Forum.

China: Enabling a New Era of Changes by Pamela C. M. Mar and Frank-Jurgen Richter, from Wiley (www.wiley.com), is about an economy that has "WTO entrance behind it, and the Olympics 2008 and Expo 2010 ahead of it". Many are of the view that this is the time to bet long, and the cover-page character reflects such a sentiment; pronounced `shou' in Mandarin, it means longevity. But that is only one extreme possibility, the best-case scenario, as the first chapter of the book puts it.

There is the `worst case' camp, led by observers such as Gordon Ghang. At the heart of China's list of woes is the malaise of state-owned enterprises (SOEs) — "bloated by workers, with incompetence, and maligned by their shoddy products, but somehow kept alive by a financial system that continues to shovel money down the black hole." Is the country, therefore, currently maintaining the illusion of growth and toying with a bubble?

The book, however, is bullish. "China's economic miracle has only just begun." The authors add: "We believe that China's growth story is full of thorns and weeds, but that, overall, the roots are strong and the trend is undeniably upward."

How long would it take for China to complete its industrialisation process? Twenty to forty years, states the book. "During this, more than 400 million rural labourers will have to find new jobs in non-farming sectors." If the time-band looks too long, it is because there are deep-rooted problems that could act as obstacles: Huge non-performing loans (NPL) and financial risks; high unemployment; income disparity; rural poverty; challenges of globalisation; and corruption.

For instance, the NPL-GDP ratio may be as high as 40 per cent. And between 1997 and 2001, more than 24 million state workers were laid off, perhaps the largest lay-off in human history over that period of time.

Banking reform is `mission critical' and so gets a full chapter. "With 190 per cent of GDP in total assets, the banking sector plays a dominant role in China's financial system," but its main worry is about sticky loans. One should remember that since 1980s state banks have been labouring under the weight of fiscal responsibility towards SOEs. "NPLs between the SOEs and the state banks are actually quasi-government deficits." The silver lining is the low level of China's government debt, at 16 per cent of GDP, which gives the government the edge when mobilising resources to stabilise the economy. "It also explains why China is still managing to keep its growth and reform policies going."

In contrast, India's total public debt, inclusive of external public debt, now accounts for 75.5 per cent of its GDP, and adversely contributes to the worsening debt profile.

Analysts find it tough to assess the financial health of China's banks because disclosure is poor, accounting standards are questionable, and consistency is lacking. Would there be a full-blown banking crisis, with "panic bank runs, widespread bank failures, and a severe economy-wide credit crunch"?

A low-probability risk, opine the authors, because of state ownership of large banks, high liquidity and domestic savings, substantial forex reserves, and, above all, "profitable new lending opportunities offered by China's fast-growing economy".

Students of economics would do well to study Zhu Rongji's `managed marketisation' where there was an unabashed combining of the tools of command and market economies to cross the river "one step at a time, on the rocks", without any of the "fancy voodoo economic formulas rattled off by academic gurus from think tanks in Boston or Washington D.C." It was Mr Zhu's own brand of `fusion economics', if you please, from an electrical engineer and not an economist who made China's economic machine work, while others were only theorising on how it should work. "Fundamental to his success was a deep understanding of China's industrial-social conditions and the psychology of its people."

One wonders if we have any Zhus around here. But, as another Chinese proverb puts it, "You won't help shoots grow by pulling them up higher."

Economics@thehindu.co.in

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