The Confusing Outlooks for China\'s Growth

The recent economic data out of China have been good, but as Caixin explains there is still no consensus on predictions for 2013 growth.

Researchers at Renmin University now expect 2013 “real economic growth” to be 9.3 percent. A Chinese business newspaper on Monday morning reported that the Central Economic Work Conference in December will probably set the 2013 target gross domestic product growth rate at 7.5 percent, and earlier this month the Conference Board predicted that the growth rate over the next six years will likely average 5.5 percent.

All but the most bearish analysts believe economic activity is picking up, though there are concerns that the growth is in response to real end-user demand as opposed to inventory restocking in anticipation of more stimulus. Looking past the high-frequency data, Gavyn Davies argues in The Financial Times that “China has faced greater economic challenges in the past three decades, and has succeeded in overcomi ng them. It can do so again.”

Do not feel bad if you are confused by the differing views about China's economy. Even the usually bearish Ambrose Evans-Pritchard seems disoriented. In a remarkable turnabout for someone who has recently written such alarmist columns as “China's Economic Destiny in Doubt After Leadership Shock” and “China's Revolution Risk,” Mr. Evans-Pritchard sounds almost giddy in his description of Chengdu and the potential for China as a high-tech expansion drives a second boom in the hinterland.

THE KEY FOR FUTURE GROWTH IS REFORM, as this column has discussed several times. Last week Li Keqiang, No. 2 in the Communist Party and the premier-in-waiting, gave a talk in which he emphasized the need for continuing reforms. His comments were widely covered and praised in Chinese media but received only limited mention in most Western media, probably because of the Thanksgiving holiday in the United States. One early test of the apparent resolve for reform will be the income distribution reform plan that is expected by the end of the year, after several years of delays. Income distribution reform can only happen if the government is willing to take on special interests and state-owned enterprises.

On Sunday The New York Times published “Lobbying, a Windfall and a Leader's Family,” the second part of its investigation into the family wealth of Premier Wen Jiabao. Ping An Insurance, the company at the center of the report, on Monday said that it was considering legal action after the reports.

Last week's column discussed the likelihood that Xi Jinping would begin a meaningful corruption crackdown. Rumors are now going around that Beijing is planning an anti-corruption and rectification campaign in early 2013. The excessive role of the state in China's economy breeds graft, and without significant reform any anti-corruption campaigns are likely to fail, even if they snare some high-level offici als and impact the graft economy from which many firms profit, including global luxury goods companies.

Both Xi Jinping and Li Keqiang have emphasized the need for rule of law in China, but there is still a yawning gap between rhetoric and reality that damages not only social order but also investor confidence and economic development.

On Saturday Fairfax Media published a disturbing report about Dr. Du Zuying, a Chinese Australian cardiac surgeon who co-founded a biotech venture. The company, China Biologic Products, is now listed on Nasdaq with a market capitalization of over $300 million. Dr Du has been in custody in Shandong Province since February 2011 and his family alleges that his former partners both took his shares and colluded with the local police to have him arrested.

A CHINESE INTERNET COMPANY successfully listed on the Nasdaq market last week. YY.com raised $82 million the day before Thanksgiving. Two existing investors bought 1.505 million o f the 7.8 million shares offered and the deal priced at the bottom of the range, but it got done. And that is a positive sign for other Chinese firms considering a listing in the United States. One of the concerns about Chinese companies has been the frequent use of variable-interest entities to get around legal restrictions, as explained earlier this year by this DealBook article. The Securities and Exchange Commission has raised a lot of questions about the variable interest entity structure but its approval of the YY.com initial public offering is a sign the commission is still comfortable with it, so long as the risks are properly disclosed.

But without reforms to significantly strengthen the rule of law the risks in China for any investor, foreign or Chinese, remain high.