Why China can achieve its 6.5% growth rate target

By John Ross

Economic targets for China were announced during the National People’s Congress of at least 6.5% annual GDP growth during the 13th Five Year Plan in 2016-20 and 6.5%-7.0% for 2016. Some Western economists claim such targets cannot be achieved. In fact, analysis of supply side factors, which will primarily be relied on to achieve this goals, shows clearly why China can achieve its 6.5% minimum growth goal.

Current international economic trends, particularly trade, are undoubtedly unfavourable owing to slow growth in the advanced economies. Slow trade growth negatively affects China’s supply side, as with all countries, by limiting its ability to benefit from international division of labour. In the next period China will consequently will have to rely primarily on domestic supply side factors to achieve its growth targets. Data on global growth in turn shows clearly which are the most powerful economic supply side forces and why these can successfully allow China to achieve its targets.

To understand clearly the fundamental reason China can achieve its economic goals the starting point is that an economy’s growth rate is strictly determined by the percentage of fixed investment in GDP divided by what is known as the Incremental Capital Output Ratio (ICOR) – the latter being a measure of the efficiency of investment, and equal to the percentage of GDP that has to be invested for the economy to grow by 1%. For China the latest internationally comparable World Bank data for these, for 2014, showed that China’s percentage of fixed investment in GDP was 44.3% and its incremental capital output ratio was 6.1. China’s GDP growth rate was therefore 7.3%.

Since 2014 the percentage of fixed investment in China’s GDP has fallen, probably to around 42-43% of GDP, which will be assumed to show why China can achieve its 6.5% growth target. Supply side factors may then be divided into the rate of fixed investment and those which determine the efficiency of that investment (ICOR).

The most powerful supply side factor for all countries studied is what are known technically as ‘intermediate products’ – one industry’s inputs into another which reflect increasing division of labour throughout the economy’s supply chain. In the US, the world’s most advanced economy, 52% of economic growth is due to growth in such intermediate products.

Growth of intermediate products is also crucial for understanding the role of innovation. Innovation is not just a few ‘big bang’ inventions. As an economy is an interconnected network it can only be as strong as its major weakest links. For example, merely installing the most modern machinery in a factory will not yield optimal results if there is not an adequate supply of component parts, if there is not sufficiently skilled labour, if the logistics system does not efficiently take products to and from the factory etc. Given the economy’s interconnectedness every part must function efficiently for successful operation. China has therefore stressed applying innovation across the entire economy.

Such a supply side division of labour requires a multitude of factors ranging from infrastructure to product standardisation – all of which China has to develop further for its supply side to function efficiently.

The second most powerful supply side factor is fixed investment – which is above all required to incorporate technological upgrading. Leaving aside intermediate products, internationally fixed investment accounts for 61% of economic growth.

The third most powerful supply side factor is growth in quantity and quality of labour – accounting for 29% of GDP growth globally. Given China’s working age population is not expanding improvements in education and skill are a decisive factor in this area.

Other inputs (scale of production, individual entrepreneurship etc) account for an average 10% of growth globally. These are technically termed Total Factor Productivity (TFP) and contribute to China’s supply side development.

Taking these factors together shows why China’s 6.5% growth rate is entirely realistic and why the claims of Western critics are erroneous. Given the fundamental ratios already outlined then for China’s economic growth rate to fall below 6.5%, from its 6.9% level in 2015, one or both of two things would necessarily have to occur.

• Either China’s ICOR, its efficiency of investment, would have to deteriorate substantially, or

• The percentage of fixed investment in China’s GDP would have to decline in a major way.

Without one or both of these occurring it is simply numerically impossible for China’s growth rate to fall significantly. Those critics claiming that China’s economy will not meet its 6.5% growth target, and who either do not explain why China’s level of investment or its efficiency of investment are going to drastically decline, are engaging in economic ‘hot air’ – unwarranted claims without any serous factual basis.

Given China’s current investment level and the efficiency of that investment there is no reason why it will not achieve its 6.5% growth rate.

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This article originally appeared at China Daily.

John McDonnell lays the basis to restore Labour’s economic credibility with the ‘Fiscal Credibility Rule’

By Michael Burke

Labour lost the last general election because it had no economic credibility, as the overwhelming bulk of opinion polls show. John McDonnell’s new ‘Fiscal Credibility Rule’ decisively and correctly addresses that issue.

“Labour would balance tax revenues and day-to-day spending over a five-year cycle, but this target would exclude long-term investment projects, allowing Labour to spend billions on projects such as housing, railways or high-speed broadband”, is how The Guardian summarised the new policy framework.

Despite an inevitably hostile Tory media McDonnell’s approach can succeed because it is correct. It stands in sharp contrast to George Osborne’s fiscal rules which place a ban on all borrowing for productive investment. This is Neanderthal economics which has the support of hardly any serious economist, even on the right. It also gets rid of the confusions of the ‘keynesian’ left of the Ed Balls type – which had little to do with the views of Keynes and fatally undermined Labour’s economic credibility.

Basic economics

All economic policies, including fiscal rules should be set within the basic laws of economics. Unfortunately after decades of the dominance of the Thatcherite economics which led to crisis, economic debate has been debased and a crop of crackpot ideas has grown up, Osborne’s among them. 

A significant increase in production requires investment in the means of production. Prosperity cannot be raised by no investment, as Osborne suggests. For example his policy has been to encourage consumption without increasing investment in areas such as housing. The net result has been a growing housing shortage. In effect he raised demand for housing without increasing investment. The effect was higher prices, just as the textbooks say. Across the whole economy the effect has also been to increase indebtedness. Household debt has soared along with overseas debt. This would be the effect of all schemes which see consumption as the key to growth.

Therefore McDonnell’s Fiscal Credibility Rule is correct. Increasing investment, and in conditions where private investment is low Government borrowing to achieve it, is the only sustainable mechanism for increasing output and the prosperity that depends on it. At the same time current or day-to-day spending will be balanced over the medium-term cycle. This too is correct, as it allows Government to respond to any downturn in the economy by raising spending. But under ordinary circumstances current spending should be balanced by tax revenues.

Misplaced criticism

Both of these policy planks have come under attack. It is widely argued that McDonnell’s rule is the same as Gordon Brown’s ‘Golden Rule’. Sometimes this is said as a result of a genuine misunderstanding. It also argued that the commitment to balance current spending with tax revenues means a commitment to maintain austerity. Both of these arguments are false.

The claim that John McDonnell is rehashing Ed Balls, made by commentators such as John Rentoul, is pure bullshit confirming that they do not understand basic economics, and the difference between investment and consumption. The difference between John McDonnell and Gordon Brown is that McDonnell is in favour of a massive increase in public sector investment. Brown slashed it to record lows. He only increased it later in response to the crisis.

Fig. UK Net Public Sector Investment as Percentage of GDP

 

In the 1960s and early 1970s public sector net investment had frequently exceeded 6% of GDP. Thatcher cut that to a low-point of 0.7%. But Blair and Brown kept it at 0.6% of GDP for 3 years at the beginning of their time in office. Later, Brown did increase public sector investment in response to the crisis which was crucial to economic recovery. But that was after a crisis in which chronically low levels of investment and high levels of speculation played a decisive role.

Brown’s was an entirely wrong economic policy – the reverse of what is required. It is government current spending which should be allowed rise temporarily in response to crisis, while investment should be maintained at persistently high levels. This is what John McDonnell proposes, and Gordon Brown did the exact opposite.

The separate argument that a commitment to balance current spending over the cycle is to adopt austerity is foolish and muddle-headed. The budget is comprised of two elements, outlays and revenues. A commitment to bring these two into balance says nothing about cutting spending, simply that taxes must match that current spending. 

The most effective way to increase tax revenues and to lower current spending is to grow the economy. SEB has previously referred to UK Treasury research which shows that government finances improve by 75 pence for every £1 increase in GDP. The excellent research is unjustly overlooked because it shows the very high sensitivity of government finances to changes in output. 

By implication it also shows the fundamental relationship between government investment and the provision of public services and social protection that are the key to a decent society. If the output multipliers from a change in output are generally about 1.5 or more and the sensitivity of government finances is 0.75, it possible to calculate the immediate effect on government finances from every £1 increase in investment as follows:

 1.5 X 0.75 = 1.125 

Therefore there is an immediate positive return to government finances of 12.5% from every £1 invested. A 12.5% return is a very large multiple of current government borrowing costs as the yield on long-term gilts (UK government bonds) is around 1.5% (and the yield on inflation-proofed or index-linked gilts is negative).


If done on a sufficient scale, from this return it is possible to commit further investment, improve public sector services and improve government finances. The new investment asset (housing, super-fast broadband, renewable energy production and so on) will also yield a return over the long-term either directly or indirectly.

Therefore there should be no fear of scary headlines of the type that ‘McDonnell plans to borrow billions’. State investment is correct under current circumstances, and state investment is supported by the leading economic commentators such as Martin Wolf. It clearly correctly distinguishes Labour from the Tories and voters will increasingly grasp that such investment is crucial. 

Borrowing for investment, not for consumption, is also key to rebalancing the economy. This means increasing the role and weight of the productive sectors of the economy and thereby producing a reduction in the role of speculative finance. It is logically impossible to persistently borrow for consumption and to reduce the weight of the finance sector in the British economy. As consumption does not lead to growth the only thing that will grow is government debt and the interest on it, which is the mainstay of speculative finance. This is why debt as a proportion of GDP has ballooned under Osborne from 65.2% of GDP to 83.7% of GDP even when interest rates are ultra-low.

It is evidently wrong to suggest that John McDonnell’s Fiscal Credibility Rule is either a rehash of Gordon Brown’s Golden Rule or a commitment to austerity. It is a recognition that investment leads growth while consumption cannot, and that very large government investment is required because of private sector failure. It codifies that understanding for government finances. As a result it can restore much-needed credibility to Labour’s economic policies.

Labour right-wing still in the austerity dead end

By Michael Burke
Rachel Reeves, a former Labour shadow secretary for work and pensions, has produced a short note for Progress which has been hailed in the right wing media, and by the Labour right, as ‘an alternative Budget’. The New Statesman was perhaps the most excitable, describing Reeves as the shadow chancellor in waiting. All of this is entirely incorrect as the article offers no alternative to the Osborne’s resumed austerity, which he is certain to recommence in the next Budget.

Reeves has declined to join the current shadow cabinet under Jeremy Corbyn and her intervention is clearly posed primarily as an alternative to the economic policy framework outlined by Jeremy Corbyn and John McDonnell, not to George Osborne. It confirms once more that the Labour right is disloyally more interested in attacking the Labour Party leadership than in attacking the Tories. 

In reality the note offers no recognition that there is now a weakening economic situation in Britain following an historically weak recovery. Consequently it offers no policy framework to improve matters. The very few policies outlined do not amount to a Budget, alternative or otherwise. There is no alternative to austerity, no clear role for government intervention, and certainly no suggestion that there is any mechanism to fund that intervention. 

This amounts to a rehash of the economics of the Labour right, which wants nothing more than a cigarette paper between it and the Tories. It is the same as Ed Balls disastrous policy framework which played a key role in losing the last election. This approach also led most of the Parliamentary Labour Party under Harriet Harman to announce they would vote for the Tory cuts to working tax credits and only retreat to abstention under extreme pressure from unions and the Labour membership.

The real alternative
Osborne will argue that the UK economy is slowing, that this is because of deteriorating international conditions and that this therefore requires renewed austerity measures. Only the first of those statements is true.

The year-on-year growth rate has slowed in the UK from 3.0% in the 2nd quarter of 2014 to just 1.9% in the 4th quarter of 2015. Surveys, monthly data for early 2016 and other evidence all point to further slowing. Yet this is not induced by international conditions. Over the 18-month period real GDP has risen by a cumulative 3.3% but real exports have risen by 6.3% - indicating international demand is stronger than domestic demand. The slowdown in the British economy is not the result of international conditions (although these too are deteriorating). The slowdown is homemade.

Fig.1 Export growth much stronger than GDP growth

But Osborne’s argument that more austerity is required because there is a slowdown is as false as his other claims. It should be noted that Osborne’s austerity approach goes completely unchallenged in the so-called alternative budget. The effects of Osborne’s first bout of austerity should be well-known to readers of SEB:

 · Growth slowed dramatically and stagnated in 2012

· Average living standards (per capita GDP) stagnated
· Real wages fell
· Public services are in crisis as jobs were cut
· The public sector deficit was not eliminated, and actually rose in 2012 as the economy slowed to a crawl
 · Productivity actually fell, which had only previously occurred in the early years of World War I and in the Great Depression

In economic terms, renewed austerity is equivalent to applying leeches to the patient when the previous quack remedy has failed. As the effects of austerity fall mainly on ordinary workers and the poor, the social effects are enormously damaging. 

It is clear that what is actually required is a strategy for investment-led growth. This will address the economic crisis directly and so will correct the deficit in government finances in the process. Fortunately, this is possible with the new economic framework outlined by Jeremy Corbyn and John McDonnell .

In contrast to the note from Rachel Reeves the new leadership of the Labour Party has identified the deficit of investment as central to the economic malaise facing Britain. In the US they talk of ‘secular stagnation’ or tepid growth because investment has only expanded by 10% in the years 2007 to 2014, according to World Bank data. In Britain investment has increased by just 7.8% in those 8 years. This little more than half the world rate of investment growth (14.2%) which is itself weak by historical standards.

The policy of asking and bribing the private sector to invest, a policy shared by Osborne and the Labour right, has failed spectacularly at Hinkley and elsewhere. Fewer homes are being built despite soaring prices, flood defences have been allowed to deteriorate and the rail network is truncated and overloaded, there is a looming energy capacity crisis while investment in renewable energy has been cut, and so on.

Labour’s new leadership argues that the public sector should increase its level of investment, in order to address this deficit and to spur growth. Relying on the private sector to lead has been tried and failed. In addition, unlike the hopes or pious wishes of both Osborne and Reeves, they have identified the means to achieve this increase in public sector investment, principally through the establishment of a National Investment Bank. This can borrow cheaply in the financial markets with the implicit guarantee of the UK Treasury. It can also ensure that the returns on the investment accrue to the public sector and that the investment stream is maintained even if private sector profitability is insufficient, or deteriorates.

It should be noted that this authentic version of a National investment bank has almost nothing in common with Osborne’s sop of a Green Investment Bank or Nick Trott’s version produced under Ed Miliband, which was aimed at providing loans to small firms where the commercial banks have refused. As small firms are not engaged in large scale housing programmes, or construction of rail networks, or the huge investment needed in renewables, this would be rather pointless to address an investment crisis. 

Ending austerity

The word ‘austerity’ does not appear in the alternative Budget from Rachel Reeves. This is for the very good reason that the Labour right believes it is inevitable, and has only ever argued for slower or shallower cuts at most.

By contrast Corbyn and McDonnell have outlined the economic policy framework which can end austerity by investing for growth. The clear distinction in borrowing only for investment and balancing current spending over the business cycle is the correct framework as it is the only one which is sustainable because it maximises the government impact on growth and living standards, and the returns to government from that investment.

It is also a strong base from which to attack Osborne, who rules out even borrowing for investment (although in reality he has doubled the level of government debt by borrowing to cover current spending, which is clearly unsustainable). Osborne’s policy, to save first and only invest when there are sufficient accumulated funds, belongs to a pre-banking, pre-financial era. It is as stupid as it is primitive. 

The Corbyn/McDonnell framework also stands in sharp contrast to the accumulated confusions of ‘keynesians’ (who have little to do with the views of Keynes) who believe governments can perpetually borrow for consumption, rather than as a temporary measure to avert crisis. As this entails debt and interest on it without raising the level of output, so it becomes a drain on the economy and slows growth.

Osborne and Reeves share the view that the private sector should be left to determine the level of investment in the economy and consequently to maintain or extend its near-monopoly on the ownership of the means of production. They maintain this even when the private sector is manifestly failing to deliver adequate investment. Of course, the ‘keynesians’ are opposed to austerity and its effects (unlike Osborne and Reeves) but they lack a credible framework to achieve an alternative because they refuse to clearly distinguish between the economic consequences of borrowing for consumption and borrowing for investment.

Corbyn and McDonnell do have the framework to achieve that and a mechanism to do so. Not only are they committed to ending austerity but their plan to increase public sector investment via the National Investment Bank means the public sector can borrow sufficient funds for the scale of investment and direct it towards the sectors required. 

The consequent increase in growth will allow them to halt all austerity policies and to roll them back. Government revenues will rise with increased economic activity and government outlays will fall as decent well-paid jobs are created. This is a deficit-reduction programme based not on cuts but on growth, and a commitment to both social welfare and rebuilding public services in the transition to a stronger growth economy and beyond. Because it is theoretically grounded, this is a genuine, practical anti-austerity policy.

The giant consequences of China’s 6.5%-7.0% growth target

By John Ross
The following analysis of China's decision to adopt a growth rate target of 'at least 6.5%' for its new 13th Five Year Plan for 2016-2020 originally appeared at China.org.cn.

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The economy tops the agenda at this year's National People's Congress (NPC) with a focus on both prospects for 2016 and the 13th Five Year Plan for 2016-2020. Discussion on both was framed by two major events. On March 4, Chinese President Xi Jinping made key statements on China's long term economic strategy while attending a panel discussion at the annual meeting of the Chinese People's Political Consultative Conference (CPPCC). On March 5, Premier Li Keqiang delivered the government's work report to the NPC focusing on medium to short term targets. The relation between the two was clear.
At the CPPCC, Xi Jinping reiterated that China's fundamental economic structure would continue to be based on "diverse" forms of ownership which would develop side by side with a state sector that would play the "dominant" role - a firm restatement of China's fundamental economic strategy since reform was launched in 1978. This economic structure generated in 1978-2015 an average annual GDP growth of 9.6 percent - the fastest sustained expansion by a major economy in history.
Xi Jinping's emphasis may be placed in the context of two statements he made in November. At a politburo study session China's president emphasized that a Marxist political economy would continue to guide China's economic policy. Following a meeting of the Communist Party of China's Central Committee, the president stated that economic growth during the 13th Five Year Plan period must average "at least 6.5 percent."
Premier Li Keqiang's work report to the NPC outlined medium to short term projections within these fundamental parameters. As the international media focused attention on 2016's growth target of 6.5-7.0 percent, and the Five Year Plan's minimum annual 6.5 percent, these will be analyzed first.
Qualitatively, China's target is to achieve a "moderately prosperous" society by 2020. This translates into the Five Year Plan's arithmetic.
To achieve "moderate prosperity," the previous 12th Five Year Plan set the goal of doubling GDP for 2010-2020 - requiring a 7.2 percent annual average growth over the decade. However, in 2010-15 growth was faster than the targeted rate - averaging 7.8 percent. To complete the goal by 2020 now requires 6.5 percent growth. This constitutes the basis of the "at least 6.5 percent" target during the 13th Five Year Plan reiterated in Li Keqiang's government report. The 2016 growth target is to meet or exceed the annual rate required to achieve "moderate prosperity" by 2020.
Both the Five Year Plan and 2016 targets are aimed at achieving their goals without economic overheating. In 2016, inflation is forecasted at 3 percent, accompanied by a budget deficit of 3 percent of GDP - modest by current international standards. Environmental protection is emphasized with energy consumption per unit of GDP targeted to fall by 3.4 percent in 2016. The Five Year Plan, for the first time, incorporates a total cap on annual energy consumption - an equivalent of 5 billion metric tons of coal by 2020. To sustain technological innovation, R&D expenditure will rise from 2.0 percent of GDP in 2015 to 2.5 percent by 2020.
Socially, strong emphasis was given to poverty reduction, with central government funds being increased by 43 percent in 2016. Over the course of the Five Year Plan, all of China's 70 million people remaining in poverty will be lifted out of it, with 2016's goal being 10 million. Life expectancy, the most sensitive overall indicator of social well-being, is projected to rise by a further year during the Plan.
Achieving these goals will have truly dramatic consequences for China, constituting an enormous increase in human wellbeing. But to understand the world changing consequences of China achieving these goals, and therefore the scale of challenges faced, it is necessary to translate these figures into international standards.
China in 1949 was one of the world's least developed and poorest countries and has already transformed the world by achievements in poverty reduction. From 1981 to the latest World Bank data, 728 million people in China were lifted out of internationally defined poverty - the whole of the rest of the world achieved only 152 million. Now, after 37 years of rapid growth, China is about to transform the world towards the top range of international income levels.
"Moderately prosperous" is a specifically Chinese target, but the World Bank establishes an international criterion for a "high income" economy - per capita GDP of $12,736 in 2016. While exchange rates would affect the exact figure, China achieving the 13th Five Year Plan's growth and inflation targets would bring it to the threshold of or exceeding World Bank criteria for a "high income" economy.
But in the latest World Bank data, the combined population of all high income economies is 1.368 billion, while China's population is 1.364 billion. China entering the ranks of high income economies would, in a single step, double the number of people living in these countries.
Chinese people achieving "moderate prosperity" would transform the global economic situation. It would also transform China's position in the world, being reflected in corresponding changes in China's defence spending and foreign policy weight. But as a consequence, rather than concentrating on the enormous step forward for humanity that China's "moderate prosperity" would constitute, some forces are attempting to block China's rise - even if this means China's people, one fifth of humanity, would not achieve prosperity.
The most powerful such forces are U.S. neo-cons whose goal, in the words of a recent study for the U.S. Council on Foreign Relations on "Revising U.S. Grand Strategy Towards China," was, "preserving U.S. primacy in the global system ought to remain the central objective of U.S. grand strategy in the twenty-first century." To practically achieve this, it called for "new trade arrangements in Asia that exclude China." Parallel anti-China propaganda campaign attempts are seen as otherwise inexplicable attempts to portray China as facing a "hard landing" when China's growth rate is almost three times that of the U.S. with China adding more to the world's GDP each year than the U.S.
The fact China has set a growth rate goal of 6.5 percent and above for the next five years has a far greater significance than in domestic terms alone. It is the most important economic target on the planet.

China won't have a hard landing - because it is not a capitalist economy

By John Ross

Some US hedge funds, echoed by parts of the international media, are currently trotting out the perennially inaccurate myth that China's economy is about to suffer a "hard landing." This invariably incorrect prediction has been periodically repeated for decades since China launched economic reforms in 1978. The claim then was that by failing to privatize companies, not adopting what became known as "shock therapy" in Russia and Eastern Europe, China condemned itself to stagnation. Instead in 1978-2015, China experienced average annual 9.6 percent GDP growth - the fastest by a major economy in human history.

Making these claims particularly vocally has been Kyle Bass' Hayman Capital Management, who has been taking positions summarized by the Wall Street Journal, "Hayman Capital's portfolio is … expected to pay off if the yuan and Hong Kong dollar depreciate over the next three years - a bet with billions of dollars on the line, including borrowed money." "'… this is much larger than the [US] subprime crisis,' said Bass, who believes the yuan could fall as much as 40%." 

If Bass sticks to these positions, he will lose a fortune as analyzed below.

George Soros similarly recently claimed, "A [China] hard-landing is practically unavoidable." Soros has a disastrous record of investing in Russia and China - having lost approximately $1 billion in Russia's Svyazinvest telecommunications company.

Hedge fund managers speculating on RMB devaluation are self-evidently unreliable sources given that they have a financial interest in spreading "doom." Therefore, before showing the fundamental reason such views invariable turn out to be wrong, similar media errors can be noted. 

In 2002, Gordon Chang was promoted by the Western media as a "China expert" for writing a book The Coming Collapse of China which concluded, "A half-decade ago the leaders of the People's Republic had real choices. Today they do not... They have run out of time." Well over a decade later, China had not collapsed - but Chang has continued appearing on Bloomberg TV as a "China expert." 

In June 2002, The Economist produced a China supplement "A Dragon out of Puff" analyzing, "the economy still relies primarily on domestic engines of growth, which are sputtering. Growth … has relied heavily on massive government spending … the government's debt is rising fast … this is a financial crisis in the making … In the coming decade, therefore, China seems set to become more unstable." In fact, China then experienced the decade of the fastest growth ever by a major economy.

Such claims regarding a "China hard landing" are invariably false because they violate any serious sense of proportion. Take current claims on RMB devaluation, in January CNBC news claimed, "China is playing a dangerous game with its currency, moves that could send the global economy into recession. China's control-minded central bank allowed the biggest fall in the yuan in five months on Thursday."

In reality, the fall in the RMB's exchange rate against the dollar has been small compared to other major currencies. From January 2012 to March 2016, the dollar's trade weight rate soared 23 percent - the euro fell against the dollar by 18 percent, the yen by 24 percent, and RMB only 5 percent. From the RMB's peak dollar exchange rate in January 2014 to March 2016, the RMB fell against the dollar by 8 percent, the yen by 10 percent and the euro by 21 percent. 

Similar "intellectual shoddiness" was Bloomberg's recent claim China's economy was in a crisis paralleling Greece. "Chinese policy makers … have exhausted whatever magical powers they had been using to keep their economy aloft … the world … has had a few years to contemplate a Greek exit from the euro. But if the world's biggest trading nation suddenly hit a wall, it would be a catastrophe of a different order, wreaking havoc on economies near and far." Comparing Greece, whose economy shrank 26 percent in 2007-2014, with China whose economy expanded 81 percent in the same period, is bluntly ridiculous. 

The most fundamental reason claims that China will suffer a "hard landing" invariably turn out to be false is because they do not understand the consequences of the fact China is not a capitalist country. "Hard landings" occur in such economies because all major companies are privately owned and the state therefore has no ability to stop the investment collapses which cause "hard landings." 

During the post 2007 "Great Recession," US household consumption fell by 3 percent but private investment by 23 percent - the US "hard landing" was dominated by the investment decline.

Following 1990, Japan suffered a "hard landing" of a quarter century of less than 1 percent annual average GDP growth. However, in 1990-2013 Japan's household consumption rose by 31 percent. But Japan's fixed investment fell by 16 percent - the severity of Japan's stagnation therefore was exclusively due to its investment fall.

In contrast to the US and Japan's investment decline, creating true "hard landings," in 2007-14 China's fixed investment rose by 105 percent creating economic growth of 81 percent. This was possible because China possesses a large State sector which can be used to raise investment if the government needs to take anti-recessionary measures. Most fundamentally, China hasn't and doesn't suffer "hard landings" because it is a socialist not a capitalist economy.

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This article originally appeared, under the title 'China doomsayers misunderstand how socialist economies work' at Global Times.