Good time to reform when China’s confidence is high


If you only read the headlines — or, say, my columns — you might be pessimistic about China’s economy. Recent news has been dominated by a crackdown on capital outflows, worries about rapid debt growth and efforts to rein in a risky overseas investment binge.

Yet, ordinary Chinese are highly optimistic: The China Consumer Confidence Index hit 114.6 in July, a level not seen since 1996.

This is a logical reaction to some significant improvements in China’s economic outlook. And for the government, it offers a key opportunity for reform.

By basic welfare measures, Chinese have every reason to be confident. The official unemployment rate has dropped below 4%. Real estate prices are still rising, with broad gains even in so-called tier-2 or tier-3 cities.

Stock markets in Shenzhen and Shanghai are both up by about 9% this year. Foreign-exchange reserves have been rising. The yuan has strengthened so much that the central bank is making it easier for traders to take short positions. Even non-performing loans are holding steady.

It’s no wonder China’s confidence seems to extend well into the future. The Consumer Expectation Index hit 117.4 in July, the highest reading since 1993, according to the National Bureau of Statistics. Indexes measuring confidence among stock investors and economists have also surged recently, thanks to a strong labour market, robust growth and rising asset prices.

Although such metrics are often imprecise, they matter enormously — because confidence can be self-reinforcing. As long as China’s investors have confidence in a market or asset, prices can diverge from fundamentals for a long time.

Real estate has reached US$858 (RM3,593) a sq ft in Beijing not because of income fundamentals but because buyers are confident prices will continue rising by 10% a year. Similarly, although China’s banking system is in bad shape, the government has propped up confidence — and staved off bank runs — by quashing rumours and reassuring anxious depositors.

Confidence is a fragile thing, however, and there are reasons to think the good times won’t last. One is that many of these gains are the result of a credit binge: With officials keen to ensure steady growth ahead of the Communist Party’s 19th National Congress next month, total social financing has risen by 21% this year. The longer the punch bowl is full, the worse the resulting hangover is likely to be.

Meanwhile, China’s fundamental problems haven’t gone away.

Surplus capacity is still rampant, with little sign of much-needed layoffs and restructurings. Efforts to overhaul state-owned firms have largely stalled. Bad loans may have stabilised for now, but there’s no denying that serious risks are still accumulating in China’s economy. With real estate prices in top cities already among the highest in the world, a clampdown on credit is looking more urgent.

Surging consumer confidence gives the government a crucial window to address these problems. Slashing capacity, and thus reducing employment, will be less painful when coal and steel workers are optimistic that they can find new jobs. Scaling back state-owned enterprises will be easier if officials have confidence that private enterprise can pick up the slack. Reining in financial risk is less difficult when the public sees opportunities elsewhere.

Reducing the credit flowing into real estate — the most important asset for Chinese households — will be agonising no matter what, but the risk of panic or unrest is much diminished when wellbeing is otherwise rising.

One way or another, China will need to make painful policy changes to slow or reverse the imbalances within its economy. Better to start now, while the public is rightly confident about the possibilities ahead. — Bloomberg

  • This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.