Commentary:Asking the right questions

If you ask the wrong question, you will get the wrong answer. In economics and politics, it seems that all too often the wrong question is asked. Across Europe, for instance, too few are asking the key question about where growth is going to come from. Across Asia and large parts of the Middle East and Africa, meanwhile, the key issue for business is China. But what is the key question that should be asked?

The question financial markets are asking is whether it is going to be a hard or a soft landing. A soft-landing is where growth slows gradually to around 6 percent or so. A hard landing is where growth either falls abruptly or continues to slow toward zero, or not far above it. Over the past year, China slowed significantly. It is already having a soft landing.

In some respects, people, both within and outside China, have almost become too used to strong growth. Throughout this century, China has achieved double-digit growth, or very close to it. At a recent speech in Tianjin, I was in the audience as Premier Wen Jiabao gave an impressive summary of China's last decade; it included the remarkable fact that living standards have risen five-fold during that time. After such a track record, it would be no surprise if there was a setback.

Indeed, as China's economy grows larger, I think a setback becomes more likely. In part, this is because the business cycle exists in China, as elsewhere. But it is also because China's policymaking setup and its institutional framework have not kept pace with the economy's growth.

The question, hence, should not be whether China will have a setback, but when will it be and how China will cope?

The mood of the international and Chinese businesspeople in Tianjin was one of uncertainty, not one of pessimism toward China. The issue was not about where China's economy was heading but how it would get there. The destination was a stronger, wealthier and more powerful economy. The path, though, was uncertain and strewn with challenges.

China needs a new growth model. China is moving from an investment- and export-led economy to one driven more by consumer spending. Investment is more than 48 percent of China's economy. This is an incredibly high ratio and compares with a global average of around 22 percent. China wants to lower this ratio, but to a still high figure between 38 and 40 percent because of urbanization and continued industrialization.

High investment leaves China vulnerable to a loss of confidence. It would require investment to decline only by one-tenth to knock 4.8 percent off economic growth. That is why the current soft landing could always turn out to be harder, particularly if confidence dips.

While China wants the share of investment to fall, last year's 12th Five-Year Plan (2011-15) was aimed at boosting consumption, social welfare, and a green economy, and at moving the country into higher-valued-added areas.

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