Economic slowdown: Does China know what it's doing?

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http://edition.cnn.com/2016/03/25/asia/china-economy-lu-stout/index.html

Hong Kong (CNN)

OK, we know China has its issues.

Factories are losing steam, exports are declining and companies have taken on worryingly high levels of debt.
Once the dependable engine of rapid expansion, the world's second-largest economy is now posting its weakest annual growth in 25 years.

But the biggest concern may not the slowdown itself but the strategists tasked with guiding the nation forward and engineering a steady transition to sustainable economic growth.

"All these people who market themselves as really capable and on top of things now look clueless," says Andy Xie, an independent economist.

"We have not seen enough of an effective response and that's really worrying. Instead, we are seeing psychological therapies, trying to persuade people to think optimistically and everything will be fine."

Xie is well known for his bearish views on the Chinese economy. But Liang Meng, a private equity investor, is more prudent.
"It's not about the long-term prospects of China -- I think most business leaders are still very positive," says Meng, a co-founder of Ascendent Capital Partners.

The issues are more short term, he says, warning of "a lack of direction and uncertainty about regulations."

Corruption crackdown reverberates

China's previous aura of economic invincibility has been undermined by the impression that officials don't always seem to know what they're doing.

Last year, Chinese state-run media encouraged individual investors to pour their savings into stocks just before a major market rout.
To try stop the market volatility, the government introduced circuit breakers, a measure it later acknowledged was a mistake.
It has spent hundreds of billions of dollars in the past year to shore up the yuan, but still allowed two sharp devaluations of the currency that rattled global markets.

President Xi Jinping's sweeping crackdown on corruption has complicated matters further as it ensnares prominent businessmen, senior securities regulators and the former head of the National Statistics Bureau.

The war on graft has not only uncovered "major problems" within the system, it has also put a strain on the supply of top talent in China.

"Going after the bad guys, he created some unintended factors," says Wall Street Journal correspondent Wei Gu. "People working for the government are so nervous about their jobs... so the best talent is not going to continue to work for the government."

"If you want a strong government and a strong regulator to play by the rules and come up with smart policies, these people are not there anymore," Gu says.

Looking to Reagan for answers?

To address the nation's economic woes, China's paramount leader has called for "supply-side reforms." Yes, you heard right, the economic rallying cry of U.S. President Ronald Reagan back in the 1980s.

And though it's still unclear whether Xi's vision of supply-side economics has much to do with Reagan's, economic observers are already mapping out the potential consequences.

"Supply-side strategy ... means laying off people, shutting down mines and all that," Gu says. "That's a good thing. It's also a difficult thing to do structurally."

Painful reforms could raise the prospect of discontent among workers, a longstanding fear for Chinese leaders.

"You're losing jobs from supply-side reform, and on the other hand new graduates are coming in," Gu says. "Every year, the new graduate number will hit a new record. Ten million young people need to find jobs, so that's a big issue."

With China's economic momentum slowing, it's little wonder that money is flying out of the country. According to one estimate, $676 billion left China last year.

"With so much overcapacity in China and a lack of confidence in the future ... why should people keep money inside China? It's just common sense," says Xie, the economist.

"And the reason Chinese are really so eager to do it is because they know the policy can change tomorrow," adds Gu.

Opportunities amid upheaval

Despite the pressures on the economy, there are still plenty of opportunities amid the upheaval, says Meng, the investor.
"We used to look at what the government direction is, today we look at where the consumer demand is," he says, pointing to the health care, education and advanced manufacturing sectors.

And for some of the countries that have suffered from China's slowdown and its devastating impact on commodities markets, at least one aspect of the outflow of Chinese money offers a chance to offset some of the damage.
China's economy is still growing and lifting more people into the middle class. That means rising numbers of Chinese tourists are now able to fly further and spend more. They shelled out $215 billion during their travels abroad last year, an increase of 53% on 2014, according to the World Travel & Tourism Council.

By 2020, it's estimated that more than 200 million Chinese will go overseas, double the amount that did in 2013.
"Outbound tourism has been growing so fast because overseas prices are lower," Xie says. "For a lot of economies in Southeast Asia and Australia that have suffered from the commodity price collapse, there's an opportunity to gain some of that impact through tourism."

Forget bling, travel and art are China's new status symbols