Why China now holds our interest rates in its hands

How times have changed. Even 10 years ago, it would have been unthinkable that what happened in China would determine UK interest rates. But that now is the world in which we live. If Mark Carney is right and we don’t get a rise in interest rates until well into next year, instead of at the end of this one, it will be because of fears about the slowdown in China.

Is that slowdown real? The answer here seems to be “yes, but don’t worry too much about it”. Hong Kong is still the best vantage point from which to look at China, for, under its “one country, two systems” status, it remains the richest, best-educated and best-informed part of the nation.

Start with the question of just how much of a slowdown is happening. Few people doubt that the official growth figure this year of 6.5 per cent – also the projected growth in the new five year plan – is too high. Most private estimates put this at between 4 and 6 per cent. But, equally, no one that I have met on what is admittedly a short visit thinks there will be a recession in China. It is a difficult triple transition that it has to make from a manufacturing-led economy to a service-led one, from a high-investment economy to one with much higher consumption, and from a state-driven decision making process to a market-led one. But no one sees recession along the path.

The full details of the five-year plan came out last week. The whole concept of five-year plans is strange to us, given the West’s poor experience of indicative planning in the 1950s and 1960s. But since that third transition to a full market economy has yet to be made, maybe you need to plan. The need to get people to spend more also seems strange to us, given that we are told that we spend too much and don’t invest enough. But in China, consumption is only 38 per cent of GDP, whereas in the UK it is around 65 per cent. It is expected to rise to some 45 per cent of GDP over the next five years which, if you add in growth at the projected 6.5 per cent a year, means that consumption could rise at something like 8 per cent a year. That is a bit faster than the increase over the past five years.

So, will the Chinese consumers spend more money? Well, they do in Hong Kong. The amount of GDP that is consumed is 66 per cent, the same in effect as the UK. So, insofar as Hong Kong is a forerunner of what much of China will eventually become, there is no reason why mainland Chinese people should not consume more.

Will they also consume more services rather than goods? Again, the Hong Kong experience suggests that they are likely to do so, for it has made an astounding transition from being a manufacturing-driven economy to a service one over the past 20 years. Private-sector services now account for 83 per cent of the Hong Kong economy, much higher even than in the UK. True, the way in which this has been developed has been entirely demand driven rather than government led: its businesses look for an opportunity, then figure out how to supply it. But for anyone who wonders whether China has the capacity to develop high value-added services, and I acknowledge that there are real concerns about this, there is, at least, a ready model of how to do it.

If in the medium-term it seems a reasonable bet that China will make a successful transition to a more normal developed economy, what about the dangers now – dangers that both the Bank of England and Federal Reserve fear may derail plans to increase interest rates? Well, there is some concern here of course. One particular indicator of distress has been the rise in late payment from companies in mainland China. Back in 2010, the average settlement date for an invoice was 55 days. Last year it was 77 days. This year it looks like being 81 days. Within Hong Kong itself, delays have mounted, though they are not nearly as long. Rising insolvencies are also expected.

So, there are signs of stress, and stress is troubling against the background of overall debt levels in China, which if all forms of indebtedness are added together are equivalent to 300 per cent of GDP. Central bankers will have access to better numbers than the rest of us and if they are scared, then maybe we should be too. But walking round the streets of Kowloon, away from the glitzy, much photographed waterfront of Hong Kong island, you don’t catch any feel of recession. People in Hong Kong have lived through much more turmoil than this.

Besides, turmoil may be good. You don’t have to dig far in Hong Kong to uncover the disdain for the top-down way that the mainland does things, and a view of how hard it will find it to make the transition to a bottom-up economy that responds to market signals rather than to government diktat. But a bumpy adjustment may be better in the long run for China, even if it messes up Western monetary policy for a while.