Bank of England may be overdoing its China worries

The Bank of England fears a slowdown in China

Tyrone Siu/Reuters

9 November 2015

Hong Kong — how times have changed. Even 10 years ago, it would have been unthinkable that what happened in China would determine UK interest rates. But that now is the world in which we live. The US Federal Reserve may be more robust and push rates up next month, but if Bank of England Governor Mark Carney is right and we don’t get a rise in interest rates until well into next year — or even 2017 — it will be because of fears about the slowdown in China.

Is that slowdown real? The answer here seems to be “yes but don’t worry too much about it”. Hong Kong is still the best vantage point from which to look at China, for under its “one country, two systems” status it remains the richest, best-educated and best-informed part of the nation.

Start with the question as to how much of a slowdown is happening. Few people doubt that the official growth figure this year of 6.5% — also the projected growth in the new five-year plan — is too high. Most private estimates put this at between 4% and 6%. But equally no one I have met on what is admittedly a short visit thinks there will be recession in China. It has to make a difficult triple transition from a manufacturing-led economy to a service-led one, from a high-investment economy to one with much higher consumption, and from a state-driven decision-making process to a market-led one. But no one sees recession along the path.

The full details of the five-year plan came out last week. The whole idea of such plans is strange to us, given the West’s poor experience of indicative planning in the Fifties and Sixties. But since China’s transition to a full market economy has yet to be made, maybe it does need to plan.

The need to get people to spend more also seems strange to us, given that we are told we spend too much and don’t invest enough. (British governments talk about investing when they really mean spending.) But in China, consumption is only 38% of gross domestic product (GDP), whereas in the UK it is around 65%. China’s figure is expected to rise to 45% of GDP over the next five years — which, if you add in growth at the projected 6.5% a year, means that consumption could increase at something like 8% a year. That is a bit faster than the gain over the past five years.

So will Chinese consumers spend more money? Well, they do in Hong Kong. The proportion of GDP that is consumed is 66%, the same in effect as the UK. Insofar as Hong Kong is a forerunner of what much of China will eventually become, there is no reason why mainland Chinese people should not consume more.

Will they also use more services rather than goods? Again, Hong Kong’s experience suggests they are likely to do so, for it has made an astounding transition from being a manufacturing-driven economy to a service one over the past 20 years. Private-sector services now account for 83% of the Hong Kong economy, much higher even than in the UK. True, the way in which this has been developed has been entirely demand-driven rather than government-led: its businesses look for an opportunity and then figure out how to supply it. But for anyone who wonders whether China has the capacity to develop high value-added services — and I acknowledge there are real concerns about this — there is at least a model of how to do it.

If it seems a reasonable bet that China will, in the medium term, make a successful transition to a more normal developed economy. But what about the dangers now? There is some concern here, of course.

One particular indicator of distress has been the rise in late payment from companies in mainland China. In 2010, the average settlement date for an invoice was 55 days. Last year, it was 77. This year, it looks like being 81. Delays have mounted in Hong Kong itself although they are not nearly as long. Rising insolvencies are also expected.

So there are signs of stress, and that is troubling against the background of overall debt levels in China. If all forms of indebtedness are added together, that level is equivalent to 300% of GDP. Central bankers will have access to better numbers than the rest of us. If they are scared, maybe we should be too. But walking round the streets of Kowloon, away from the glitzy, much-photographed waterfront of Hong Kong Island, you don’t catch any feeling of recession. People in Hong Kong have lived through much more turmoil than this.

Besides, turmoil may be good. You don’t have to dig far in Hong Kong to catch a disdain for the top-down way the mainland does things, and a view of how hard it will find it to make the transition to a bottom-up economy that responds to market signals rather than to government diktat.

But a bumpy adjustment may be better in the long run for China, even if it adds a complication to the Bank of England’s monetary policy. In any case, surely the Bank’s monetary policy committee should learn to be a bit more self-confident and base interest-rate judgments on what it knows is happening in Britain rather than what it thinks is happening in China.

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