On flawed China pessimism

This week’s Fund Strategy included the following comment by me on Will Hutton’s views on China.

Given the widespread view that China is emerging as a great power it is important to examine the contrarian case. In Britain the leading “China pessimist” is probably Will Hutton, an Observer columnist and chief executive of the Work Foundation. His book on China, The Writing on the Wall (Little, Brown), was published in January. Although his argument is flawed it is gives some insight into Chinese development.

At a meeting last week at the Institute of Contemporary Art he said: “My story is that China is a bubble”. His main evidence was China’s rapidly rising stockmarket. Hutton draw parallels with house price bubbles in Britain and the technology bubble.

However, Hutton’s argument was not entirely dependent on the stockmarket. He pointed to China’s high savings rate while claiming that total economy productivity was lower than in Mao’s time. He also argued that China is a “sub-contractor to the West”. No Chinese companies are in the top 100 global brands. China also has a low level of patent applications and widening economic inequality.

Although most of Hutton’s facts are probably correct they do not demonstrate what he claims. It may well be true that the stockmarket is in the middle of a gigantic bubble but it does not follow that its real economic growth has not been astonishing. The financial bubble is relatively recent while the rapid economic growth goes back almost three decades.

China’s lack of global brands and its low level of patents do not indicate that it is not growing rapidly. The fact that many leading Western companies use Chinese components and manufacturers shows that China has already made enormous strides. Over time it will no doubt develop skills in branding and marketing.

Nor does the widening of inequality show what Hutton says it does. China has had tremendous success in reducing absolute poverty even though relative inequalities have widened. In addition, the widening of inequality does not show China is not undergoing a fundamental transformation. On the contrary, growing income disparities are a symptom of that transition.

Perhaps Hutton’s strangest claim is that productivity is lower than in Mao’s time. If that is the case it is hard to explain how cheap Chinese goods have proved so popular all over the world.

In addition, most academic studies show Chinese productivity rising sharply. How China Grows (Princeton University Press), a new book by James Riedel, Jing Jin and Jian Gao, quotes several authoritative studies showing rising productivity in China.

Hutton’s thesis shows China still has a long way to go in its economic development. But it would be a mistake to underestimate what it has already achieved.