One Man’s Opinion: Is The Chinese Economy Experiencing A Fundamental Shift?

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China’s old economic growth model is indeed running out of steam, and the Chinese government  is in the middle of transitioning to a new model which is not just based on low-cost, low-wage, labor-intensive, manufacturing for export and a whole bunch of state investment, said Kevin Rudd, President of Asia Society Institute and former Prime Minister of Australia.

The transition to a new growth model is based on personal consumption and an explosion in services industry, plus a much more vibrant private-entrepreneurial sector. China is in the midst of restructuring a growth model that has been around for 35 years and flipping the old model into a change within a span of two years is difficult though there’s no denying the fact the economy is in transition.

China is likely to grow by 6 percent because that’s the minimum growth rate they would require to sustain general stability in the economy and to continue to generate sufficient employment and living standards. Therefore, if 6 percent was threatened as the fundamental basement, the government would intervene; and they have the capacity to do so, he noted.

Asked if the Chinese economy could face a crisis situation along the way as it makes the economic transition despite having a forex reserve of about $4 trillion lying around, Rudd said the former model was unsustainable which forced the Chinese government to prepare the blueprint for a new growth-model about two years ago.

But, as China started to make transition to the new economic model, there was no buffer of a reasonable growth in the global economy. The contribution of exports to the overall Chinese economy has not grown because of a flat global economy over the last several years and the traditional Chinese exports to Europe, to the US, have been down.

Apparently, it’s a little fashionable to join the China economic gloom-and-doom brigade and if investors take a longer historical view, there’s room for optimism, he explained.

Asked how successful the restructuring is likely to be in another 5-10 years especially when there are political elements inside China which seem to prevent the government’s efforts, Kevin said Chinese President Xi Jinping’s economic model appears essentially a “state-capitalist” model.

There would be more and more market discipline on one hand with the retention of centralized political power within the Chinese communist-party on the other. So, within the new economic blueprint, one can see a determination to decrease high personal savings rate, increase private consumption as a contributor to final growth along with a much more vibrant private sector. But the rub is: will the private-sector be allowed to expand as much as it needs to in China when there is some reluctance to bite the bullet on a final full-throttled state owned enterprises reform?

That’s where the core policy debate lies now and if they are settled in favor of China’s private entrepreneurs like Jack Ma (of e-retailer giant Alibaba.com), there could be a new engine of Chinese growth for the future, he concluded.

You can watch video here.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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