Do New Policies Signal Road to Recovery?

Bloomberg reports that the Chinese government has approved plans to build over 2,000 kilometers of roads as it aims to reverse slowing economic growth:

The projects include highways in Zhejiang and Xinjiang provinces, according to statements on the National Development & Reform Commission’s website. The approvals were given during June-August period. The agency also cleared plans for nine sewage-treatment plants, two waterway upgrades and five port and warehouse projects, without disclosing the required investments.

Building-related stocks jumped following the announcements, which came a day after the country’s top economic planner backed plans for subway projects in 18 cities and after an increase in the rail-construction budget. The move will help accelerate infrastructure investment growth to more than 20 percent year- on-year from 15 percent, according to HSBC Holdings Plc.

“Beijing policy makers are stepping up efforts to speed infrastructure investment to hold up growth,” Qu Hongbin and Sun Junwei, economists at HSBC, said in a note yesterday. “We expect a fast filtering-through process to generate a modest growth recovery in the coming months.”

The announcement comes as a survey by Reuters which shows that China’s economy may be cooling even more in the third quarter. Is China’s current growth rate sustainable? Economist Michael Pettis responds to Steven Greenville, who last month called Pettis a “leading growth pessimist” while arguing that China’s growth potential is still underrated, and clarifies his views on the Chinese economy. From The Carnegie Endowment for International Peace:

By now most analysts have sharply lowered their forecasts to 5-7%, with the bulls still at the high end, without however explaining what they know today that they didn’t know in 2009. Debt has surged, it is true; the banking system is insolvent and increasingly illiquid; policy measures are losing traction; and wealthy Chinese are pulling money out of the country. But these were long predicted by the sceptics as automatic consequences of the investment-heavy growth model China had pursued for too long. None should have been unexpected.

Of course I think the current consensus of 5-7% average growth for the next ten years is still too high, and the historical precedents make it clear that we tend to underestimate sharply the cost of an adjustment of this nature (think for example of the USSR in the early the 1960s, Brazil in the late 1970s or Japan in the late 1980s, all of whom suffered far more difficult subsequent adjustments than even the sceptics had expected). Already this year Beijing has announced growth rates for China of 7-8%, but a large number of economists in China, based on alternative measures of economic activity, doubt the accuracy of the official numbers, with some arguing that real growth this year may be as low as half the posted rates.

I am not smart enough to say if they are right or wrong, but one way or the other I expect growth forecasts among China bulls to continue declining over the next few years. If, as I expect, Beijing seriously begins to rebalance its economy in 2013, I believe as I always have that the average annual growth rate over the following ten years will not exceed 3-4%.

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