Anti-Japanese protests in China
In conversation with Nicholas Lardy, Peterson Institute for International Economics and author of Markets over Mao
HH:- What impact is the South and East China Sea tension having on China’s economic growth?
LARDY:- It has a negative effect. How big it is, you can’t say, but it is certainly raising eyebrows not just in the U.S. government, but also in private corporations that are thinking: Do we want to invest more money in a country that is adopting expansionist and nationalistic positions with its nearby neighbours? China will ultimately pay a price if they continue down the current path.
HH:- The Chinese government must have war-gamed how this will play out.
LARDY:- I don’t think there’s going to be a military confrontation. There’s too much on both sides to get to that extreme. But I think the underlying reality of the South China Sea sovereignty claim is much more important to them than it is to the U.S. We want Freedom of Navigation. Nothing the Chinese have done so far suggests that’s an issue. But they do want to have more control and at the end of the day they are likely to get it.
HH:- And the friction between China and Japan?
LARDY: Japanese companies are much more reluctant to invest in China. There have been boycotts of Japanese products and the Chinese government stirs up anti-Japanese sentiment from time to time. The likelihood is that Japanese companies will invest less and become less involved. So instead of creating a more dynamic integrated East Asia, they are getting potential disintegration and fragmentation that will not be good for long term growth.
HH:- How much is China’s reaching out to the world impacting its growth?
LARDY:- I am sceptical that investment activity under the ‘one belt, one road’ policy is enough in this to make a big difference. The tens of billions a year going into ‘one belt one road’ is a drop in the bucket compared to the magnitude of domestic investment, that is running at $5 trillion a year.
HH So is it more a political imperative of flying the Chinese flag, influence, exporting soft power?
LARDY. I think it’s more motivated by politics and soft power as you suggest — not a pure economic play. They are looking to build relations with countries by land and sea routes and this is their way of doing it.
HH: What is the outlook for the Chinese economy over the next five to ten years?
LARDY:- There is the potential for fairly rapid economic growth, but achieving that will demand reform, particularly of state owned companies.
HH: What sort of reforms?
LARDY:- The main emphasis is merging bigger state companies to form even larger ones. A recent example is two big rail car locomotive producers, China North Rail and China South Rail. But the record of the last decade is that these mergers don’t really improve efficiency. Productivity fell by almost half to a very low level, a little more than 3 per cent if measured by return on assets.
HH:- Why then would they be doing it?
LARDY:- Politics has a great deal to do with it. Xi Jinping, the leader now, wants bigger companies that are referred to as national champions. They seem to be of the mentality — without having the evidence to support it — that the bigger the better. It is part of the emphasis on political control, having party committees in state enterprises playing a bigger role and that sort of thing.