This article first appeared in Forum, The Edge Malaysia Weekly on February 4, 2019 - February 10, 2019

There has been overwhelming concern about China’s economy in recent times. This cannot be helped, given that the world’s second largest economy has been an important global growth contributor for several years now.

China has contributed roughly 25% to 30% to global growth in the past few years. Its dominance in the world economy has not gone unnoticed with some quarters fearing that it will one day become the undisputed economic superpower. In fact, some believe that the root cause of the ongoing trade war goes beyond the trade deficits that the US is incurring with China to its emergence as a global production and technology powerhouse that will rival America in the near future.

Pessimists have, for several years, predicted a downturn in China’s economy, which has yet to materialise. Recent macro releases showing the China economy growing at its slowest pace since 1990 — 6.6% last year — have magnified the voices of those who predict its impending collapse.

This is hardly surprising, given that a deadly cocktail of high credit growth, surging property market and astronomical debt could, in theory, spark off a Lehman Brothers episode in China, at least according to some media reports. China is said to be buying time to fix its system. But many argue that the problems are just too huge to handle, and the government is much too slow in addressing them. More drastic measures are needed to fix the economy now.

Such arguments have been around for a while. Those who went through the 1997/98 Asian financial crisis will find that they resemble the arguments heard over two decades ago. At the height of the crisis, calls for countries to bite the bullet were echoed everywhere. “Take a drastic approach, clean up once and for all and start afresh” was the resounding argument at the time.

Standard economic templates from mainstream economists were forced down the throats of some Asian economies then. Fiscal austerity is the right way, went the argument, despite the social disorder that erupted in many countries. To restore market confidence, budgets needed to be quickly balanced, interest rates to be kept high and weak institutions to be shut down immediately. This was despite knowing how fickle financial markets could be. And the repercussions for financial markets and social order, as seen in countries like Indonesia after 16 commercial banks were shut down in November 1997, were taken for granted.

As economist and Nobel laureate Joseph Stiglitz puts it (this, in my opinion, applies to the current context of China), sequencing and pacing are important. Measures can be good but if they are not implemented in the proper order or do not take into account the broader social context, chaos will ensue. In the case of the Asian financial crisis, the lack of institutional reforms and social safety nets in many of the troubled countries in the 1990s led to chaos, especially when capital account liberalisation was done far too quickly.

While economic progress and development are important for social and economic stability, the reverse is also true. This is why Asians tend to value stability as a whole and often consider it as a crucial ingredient for undisrupted development and prosperity.

Malaysia, for example, took a drastic measure — pegging its currency to the US dollar — during the Asian financial crisis. One of the reasons for such a controversial move was to ensure a stable business environment, which is possible if there is no extreme volatility in exchange rate movements.

An unstable currency makes business decisions extremely difficult, resulting in massive cutbacks in spending and exacerbating any downturn in the economy. To some extent, forcing the economy to stabilise, although this was highly criticised at the time, facilitated business planning decisions.

Social stability is also often considered an important element of a country’s uninterrupted development and prosperity. China deeply believes in this. Thus, the argument for making sudden and swift moves to rebalance its economy. From its perspective, disregarding the importance of social stability should be taken with not a pinch but a spoonful of salt.

To be fair, China has not gone without reforms. Reforms are ongoing but at a gradual pace — something that is causing dissatisfaction among some quarters. These modest reforms, according to researchers at Hoover Institution, Stanford, California, in one of the economic working papers (by Xiang Xu and Alice Siqi Han) last year, are undertaken with an anti-crisis approach in order to minimise instability in the economy. The authorities also react swiftly to internal and external shocks through a combination of fiscal and monetary policies. From a structural point of view, the fact that social resources are controlled by the Chinese authorities means that there is “an implicit guarantee against potential collapses”, according to the working paper.

It is also argued that a high degree of political consolidation and China’s economic structure, which promotes a gradual move towards market-oriented enterprises, are key ingredients to prevent a Soviet-style collapse in the early 1990s. China is also protected by its relatively closed capital account — something that is often criticised but remains a relevant factor in ensuring the stability of its economy.

Such a measure helps policymakers implement exchange rate policies that avoid the abrupt appreciation or depreciation of the renminbi. Given its massive reserves, the government has adequate leeway in manoeuvring its fiscal policy.

That said, the current economic and political backdrop have received greater attention from the authorities. The world is learning to see China reach maturity on the economic ladder. Gone are the days of high single-digit growth rates. At the same time, economic ammunition could be less effective than in the past. Macroeconomic imbalances are still overshadowing its economy, no doubt about that. And critical issues like infringement of intellectual property rights need to be addressed.

However, from China’s perspective, the gradual approach to manoeuvring its economic development has its merits. Social and cultural factors cannot be ignored in the country’s pursuit of economic stability and prosperity.

Nor Zahidi Alias is chief economist at Malaysian Rating Corp Bhd. The views expressed here are his own.

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