China does its own thing in its own way

On the prospects for China's economy, it's easy to be wrong. We analyse unfamiliar things by comparing them with things we understand, but in its massive size and economic history, China is one of a kind.

That's one conclusion I've drawn from a visit to China as a guest of the Australia-China Relations Institute, at the University of Technology, Sydney, and the All-China Journalists Association.

In recent years people in the world's financial markets have gone from ignoring the Chinese economy to assuming it works the same way a developed economy does.

Hence the consternation in global share markets last year and again early this year when China's share market took a sharp dive. Surely this meant its economy was in big trouble.

Well, maybe, but not for that reason. China is still a developing, middle-income economy and its share market is a relatively recent creation of its government, lacking the strong links with the real economy we're used to in the West.

As Professor Peter Drysdale, of the East Asian Bureau of Economic Research at the Australian National University, has explained, the worth of China's share market is equivalent to about a third of its gross domestic product, compared with more than 100 per cent in developed economies.

It accounts for less than 15 per cent of the financial assets of China's households, which is why formerly booming share prices did little to boost consumer spending and why falling prices will do little to hurt consumption, he says.

The market is dominated by individual investors rather than financial institutions, as in the rich world, and Chinese companies don't rely on it for capital-raising.

Much of the angst in the West over China's slowing rate of growth – from 10 per cent a year for many years to 6.7 per cent over the year to June – reveals an ignorance of how developing countries develop.

Provided they're well managed, it's easy for underdeveloped economies to grow rapidly as workers move from the farm to a city factory and as existing Western technology is taken off the shelf and applied.

But as the economy expands it becomes harder and then impossible to maintain such high rates of expansion.

China's less dramatic growth rate of six point something is now "the new normal", as its government says. Further slowing is possible in the next few years.

We in the developed world – where growth rarely gets much higher than 2 or 3 per cent a year – are so unfamiliar with such rapid growth rates that we forget the basic arithmetic involved.

At a constant growth rate of 10 per cent, an economy doubles in about seven years. At a constant rate of 6.7 per cent, it doubles in about 10.

Consider this: China's growth in 2005 of 11.3 per cent added $US338 billion to its size, whereas growth of 7.4 per cent in 2014 added $US708 billion. It's the absolute size of China's growth – its addition to gross world product – that matters most to the rest of the world.

Another trap for foreign observers is to assume China has a market economy like ours, or that the Chinese government is busy turning its economy into a market economy.

That's easy to believe when you're told that, in 2014, China's private sector produced at least two-thirds of its GDP, with the private sector creating more than 90 per cent of the additional jobs and with the public sector accounting for just 11 per cent of China's workforce (compared with 14 per cent in Oz).

But China's economy is still far from being a market economy like ours, and it's not clear the Chinese government wants to make it one.

Remember China's history. In the 1950s, following the Communist revolution of 1949, private property was expropriated and a planned economy established.

All that began changing after 1979, when Deng Xiaoping initiated the far-reaching market-oriented reforms that have brought China's economy to where it is today.

China's many remaining state-owned enterprises may not be as dynamic and fast-growing as its private sector, but they remain an important part of the economy. Indeed, they're a drag on the economy, often badly run with problems of overcapacity and overproduction.

Many foreign economists are urging China to simply close or privatise its remaining SOEs. And it's true that reforming them would be an important part of raising China's productivity performance.

But it's not clear this is the intention of China's President (and general secretary of the Communist Party), Xi Jinping. Some degree of reform may come, but it may involve adopting market mechanisms where thought appropriate rather than eliminating the government-owned business sector.

Making China's economy the same as any Western developed economy is unlikely to be Xi's objective, even if the pressure of events causes it to continue drifting in that direction.

China remains a one-party state, and the objective of that party is to remain in power. That may mean reforming rather than eliminating SOEs, which are run by party officials.

Within the Chinese government, power is shared between the central, provincial and municipal governments, all of them run by party officials. Beijing's power is constrained.

Xi is unlikely to initiate any big changes before the Communist Party's 19th national congress late next year, when he will be able to increase his grip on power.

Economic reform and year-to-year economic management is guided by the 13th five-year plan. Growth in GDP is not just a measure of economic success, it's a political target.

Most Westerners believe continuing economic development and rising living standards lead inevitably to democratic governance, and the cases of Taiwan and South Korea add support to this idea.

But whether that applies to China remains to be seen. Certainly, it's a long way off. The safest prediction is that China will do its own thing in its own way.

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Liberals ignore the moderate middle at their peril

It's amazing to realise that the greatest threat to the success of the Turnbull government comes from the Liberal Party. Malcolm Turnbull's biggest enemies are inside his own government, not outside.

If he's to make sufficient progress with controlling the budget and reforming the economy to warrant re-election in three years' time, he needs to mix budget restraint with fairness, and combine efficiency with equity.

This, after all, was the formula the Hawke-Keating government used to stay in government for 13 years, despite all the things it did to get the budget back to surplus after the deep recession of the early 1980s and all the controversial reforms it made to open up the economy.

Remember that the people with the most reservations about those reforms – deregulating the banks, floating the dollar, removing protection – were its own supporters.

Only much later did Labor's true believers adopt Paul Keating as one of their heroes. And it was only by making uncharacteristic changes that Hawke-Keating came to be remembered as one of our greatest governments.

The people making trouble for Turnbull within the Liberals seem to have learnt none of that. They haven't even learnt the lesson of their latest near-death experience: low and middle income-earners won't vote for you in sufficient numbers if they suspect you don't represent their interests.

It's much easier to argue that Turnbull lost votes because his party had pushed him too far to the right than because he wasn't as far to the right as a noisy minority thought he should be.

Turnbull lost votes partly because, to get the party's permission to rescue it from certain defeat under Tony Abbott, he had to agree to leave untouched various extreme policies the whole country knew he didn't believe in.

Labor's Medi-scare was effective because Abbott's attempt to dismantle bulk-billing with his $7 co-payment exposed the party's lifelong antipathy to Medicare that a chastened and wiser John Howard had cloaked with his claim that the Libs were the best friend Medicare ever had.

Turnbull's policy for the reform of superannuation tax concessions was the epitome of the carefully balanced policies we need more of if we're to have reform without fear of electoral defeat.

It was a micro reform in that it reduced the tax system's distortion of saving choices, and it will contribute significantly to reducing the budget deficit, but do so in a way that reduces the concession to the undeserving well-off (including me) while making the scheme fairer to low income-earners and women.

And yet the Liberal dissidents' greatest push is to modify the super reforms in favour of a relative handful of high-flyers. If Turnbull – and the more moderate, sensible elements of the parliamentary party – let this push succeed there could be no better demonstration of the party's instability and its continuing commitment to governing in favour of its well-off cronies, not ordinary voters.

The first rule of Australian politics is that Aussies won't vote for extreme parties. That's why, over the decades, both sides have moved towards the middle ground.

But it's remarkable to realise that, while Labor has been working hard to house-train its left wing, the Libs have been drifting further to the right, allowing extremists to dominate its state branches and more and more hard-liners to be elected to the parliamentary party.

Although the pragmatist faction still has most adherents in Parliament, much of the party is now out of step with the community on social issues and obsessed with furthering the economic interests of the well-off, not the punters.

Too many in the party have become self-indulgent and inward-looking. Let's play favourites between Tony and Malcolm. Let's let the old men continue blocking the talented young and the female. Let's make the party utterly unattractive to the younger generation.

In short, too many in the party have lost touch with electoral reality. In this they've been led astray by noisiness of their media cheer squad and the libertarian think-tanks. The Murdoch press has yet again demonstrated its inability to deliver the tabloid voter.

In this election the Coalition stuck its neck out by making an unpopular cut in company tax its main policy proposal. And yet big business seems to have failed to offer much support in the way of donations.

If that doesn't give the Liberals pause for thought, nothing will. Apparently, big business thinks itself so virtuous – so synonymous with the nation's interests – that even the Libs owe it a living.

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