By Anatole Kaletsky
The Davos economic forum, held every winter in the Swiss Alps, allows its participants to look down at the world from above: topographically because of the high-altitude location, but also symbolically, because of the high incomes, high status or high-minded rhetoric that characterize the jet-setting global elite dubbed "Davos Man" by the American political scientist, Samuel Huntington. This week, however, I discovered a sub-species of Davos Man with a very different perspective. At the "summer Davos" that the World Economic Forum now organizes every year in China, participants look at the world sideways, from the East instead of down. The shift in viewpoint is striking, even for people who travel frequently to Asia, as I do, but rarely experience such total immersion in the eastern elite's hopes and fears.
The biggest surprise at this week's Dalian forum was the East-West divergence of opinion on the economic outlook, both in the months ahead and in the very long term. Western economists mostly believe that developing countries in general, and China in particular, are threatened by serious financial crises as U.S. monetary policy begins to be tightened, probably as soon as the Federal Reserve Board's meeting next week. The consensus view is that emerging economies have invested and borrowed too much, taking advantage of the Fed's easy money and will now face painful deleveraging similar to what Europe and the U.S. experienced five years ago. This deleveraging means, in turn, that the glory days for developing economies are probably over — and most of these countries, perhaps including China, may never escape the "middle-income trap" that has prevented further progress in many developing economies. The trap is shed when per capita income has reached $10,000 or so. China's is $9,160 according to the IMF.
When I traveled to China this week, I expected obsessive discussion of the recent shift of economic sentiment against developing countries and the resulting collapse of bonds, shares and currencies in most emerging markets this year. And indeed warnings of ruinously compounding debt burdens and dangerously unsustainable investment bubbles did dominate Western presentations, both in Dalian and at an earlier academic seminar in Shenzhen, organized by Tsinghua University and the Institute for New Economic Thinking.
Surprisingly, however, the Chinese economists in Shenzhen seemed largely unperturbed by the Western warnings, preferring to concentrate on environmental, governance and public health issues and the details of financial market design. In Dalian, too, the sense of financial foreboding was strangely absent, as speakers from other developing countries agreed with their Chinese colleagues that higher priorities than debt management were structural issues such as demographics and education, governance and corruption, bank regulation and competition, energy and urban design.
In one session, Ali Babacan, the finance minister of Turkey, generally seen as a victim of severe financial panic after Ben Bernanke's tapering announcement, noted that his country had only suffered a "modest" outflow of foreign capital, worth roughly 1.5 percent of GDP. "It was mostly just a re-pricing — and in the meantime we have continued to enjoy 4.4 percent growth, along with an improving income distribution." In a similar vein Arkady Dvorkovich, Russia's Deputy Prime Minister, noted that participants in last week's G20 summit expressed no major concerns about the global financial outlook, nor about Fed policy.
It is tempting to dismiss such comments as self-servingly deceptive and complacent, especially since some emerging economies, such as India and also Turkey, have big trade and budget deficits that make them very dependent on Western finance. China, however, has no such vulnerability. Thus it can display Olympian indifference to the gyrations of U.S. monetary policy or shifts of sentiment on Wall Street against emerging markets, as Li Keqiang, the prime minister, made abundantly clear.
In a speech that laid out impressively the economic reform plans now described by Asian media as "Li-conomics," the Chinese premier hardly mentioned the two great imbalances that obsess Western analysts: China's excessive investment and its rapidly rising debt. Instead, Li promised that monetary, fiscal and credit policy would remain broadly stable, so as to maintain a "moderation of the Chinese economy from a high speed (near double digits) to a medium-to-high speed in the neighborhood of 7.5 percent." This could be achieved, he insisted, with a monetary policy that "responded calmly and boldly to difficulties without relaxing or tightening."
The essence of Li-conomics, it seems, has less to do with controlling credit or squeezing out excessive investment than with reforming government and creating new sources of economic demand. Government reforms, Li said, would gradually expand the role of market forces and private business in finance, energy, transport, infrastructure and public procurement. Demand restructuring would aim to expand consumer spending, support service industries and promote investment in environmental protection, low-income housing, urban infrastructure, and underdeveloped inland regions.
As for the buildup of debt that many Western economists expect to precipitate a Chinese version of the subprime crisis, Li simply dismisses it: "Regarding the local government debt issue, which has become a source of concern, we are taking pertinent measures to regulate and address it in an orderly fashion. Here, I can say with certainty that the situation is, on the whole, safe and manageable."
Viewed from the West, still suffering from an avoidable financial crisis that we inflicted upon ourselves five years ago, this statement may seem like hubris and delusion. But it sounds quite realistic from a government with $3.5 trillion of foreign exchange reserves, the world's biggest trade surplus, direct control of all major financial institutions and a successful 30-year history as master, not slave, of financial markets. And if China can manage and control its way to ever-greater prosperity, despite the sudden outbreak of skepticism among Western analysts, the same will probably be true of many other emerging economies, which increasingly look to China, instead of the West, for support and guidance. That, anyway, is the view from Dalian, instead of Davos.
(Anatole Kaletsky is an award-winning journalist and financial economist who has written since 1976 for The Economist, the Financial Times and The Times of London before joining Reuters. His recent book, "Capitalism 4.0," about the reinvention of global capitalism after the 2008 crisis, was nominated for the BBC's Samuel Johnson Prize, and has been translated into Chinese, Korean, German and Portuguese. Anatole is also chief economist of GaveKal Dragonomics, a Hong Kong-based group that provides investment analysis to 800 investment institutions around the world.)