Arthur Kroeber: Credit Curbs And Structural Reforms Will Heighten China Risk

In this episode of China Money Network, guest Arthur Kroeber, founding partner of GK Dragonomics, talks with our host Nina Xiang, about why he's less optimistic about china's growth in the next couple of years, how the alarmist headlines about capital outflows from china is overdone, and why the 7% number that everyone believes to be the minimum rate required to provide sufficient employment for China's labor force is total non-sense. Listen to the full interview in the audio podcast, watch an abbreviated video version or read an excerpt below. Q: Lately, there have been some media stories on capital outflows, or even capital flight, out of China. How concerned are you about this possibility? A: I'm not terribly concerned for two reasons. One is that the Chinese government still maintains significant capital control measures. There have been some talks that the government will eliminate these controls in the next few years, but I think it's unlikely. The broader point is that China has been used to having one-way capital flows for a long time. Everybody wanted to get their money into China, no one wanted to take it out. Many people thought it's a big problem for the world that China was like a Hotel California for capital: You could check in, but you could never check out. But now we are seeing capital flows in both ways, and with various volumes. Foreign reserve accumulation slowed down dramatically. Lately, we saw some net capital outflows. But this is part of the normal process of the economy adjusting from rapid economic growth on intensive investments to a slower one that's more consumer-driven. Q: What are the specific capital control measures in place right now? A: It's very difficult for Chinese institutions and individuals to move money out of China. Any outflow is regulated under the qualified domestic institutional investor program (QDII) and limited by an annual quota. For individuals, it's close to impossible to move large amount of money offshore. Chinese companies have been going out to do mergers and acquisitions or greenfield investment overseas. The outward foreign direct investment now run somewhere between $50 billion to $80 billion a year. These are regular capital outflows for every economy. The only concern is if people lose confidence in the economy and everyone takes his or her money out. But that's a very remote possibility. Arthur Kroeber is founding partner of Beijing-based research boutique firm Dragonomics since 2002. The firm was acquired in 2007 by Hong Kong-based research company GaveKal. Kroeber now manages GaveKal Dragonomics' research efforts in China and globally. Previously, he was a journalist covering economic affairs in Asia. He is also a fellow of the Brookings-Tsinghua Center in Beijing.