Bears at the heart of the dragon

Among the corporate titans and global leaders attending the World Economic Forum in the eastern Chinese city of Tianjin this week a fascinating division appears to have formed.

In quiet conversations and background chats with Chinese officials and analysts about the state of things in China, the tone of despondency and cynicism was pervasive while the views of international attendees on China were generally bullish and upbeat.

At one point, during a televised panel discussion, Sir Martin Sorrell, chief executive of WPP, seemed to shrug off the idea that the economy was slowing. His company, he said, saw its business in China grow 15.5 per cent in the first seven months of this year.

China’s official statistics are clear: There has been a steady slowdown in the Chinese economy with GDP growth dropping from an annual increase of more than 12 per cent in early 2010 to a 7.6 per cent expansion in the second quarter this year.

Judging by the ongoing sluggishness in China’s trade, manufacturing, investment and consumption, that growth rate is likely to drop further in the coming months and what is now the world’s second-largest economy is likely to expand at its slowest annual pace this year since 1999.

In contrast to the optimism of many international attendees in Tianjin this is what one highly respected Chinese economist told the FT:

“I believe China is going to experience a very serious economic downturn and I think it has already started. The government is trying now to stabilize the economy but the instruments they have are very limited. If it can’t turn things around then I expect huge and widespread social unrest.”

The striking views of this economist, who asked not to be named because he did not want to offend his superiors in the Communist party, are surprisingly common among Chinese academics and officials who just a couple of years ago were still very bullish on the country’s prospects.

From the vantage point of crisis-hit Europe or from an America still flirting with recession this must seem like a very strange assessment for the omnipotent engineers of the Chinese economic miracle to make.

In the past it has often been foreigners who took a bearish view on China while those on the ground just smiled knowingly and went about tripling the size of their economy in less than a decade.

Today, from the outside, China has not looked so rich, powerful, assertive and unstoppable for more than two centuries.

But for many of those in the midst of the miracle, the country and its current system has not seemed quite so brittle and fragile for at least the last decade.

While many in the international business community seem to credit China’s leaders with superhuman powers of wisdom and foresight, those on the inside are much more sensitive to the inefficiencies and perversions of a system that lacks an independent legal system or a transparent mechanism for economic and political decision-making.

It’s worth pointing out, for example, that it isn’t just the outside world that is wondering right now where China’s President-in-waiting Xi Jinping has got to. None but perhaps a few dozen of China’s 1.34bn people or 83m Communist party members has any idea where he is either.

Mr Xi will probably reappear in the next few days and the Chinese government is likely to roll out some more stimulus measures in the coming months to ensure the economy does not fall off a cliff but the growing angst and mood of uncertainty will not be reversed so easily.

Beijing is unlikely to unveil a massive stimulus package like the one it launched in response to the 2008 financial crisis and growth is not going to return to the double digit levels it averaged over most of the last decade.

That means global investors looking to China to save the world economy will almost certainly be disappointed and should probably reassess their assumptions about what is going on in the Chinese economy.

After a series of private meetings with Chinese officials and analysts at the WEF this week one senior executive from a very large western fund manager told the FT that he was doing just that:

“After what I’ve heard I’m really worried now about being the dumb foreigner sitting across the negotiating table from the locals who are packed and ready to run to the airport.”