If you ask the wrong question, you may 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. In my view, a soft landing is where growth slows gradually to around 6 per cent or so. A hard landing is where growth either falls abruptly or continues to slow towards 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 set-back. Moreover, one does not have to look too far back to see that. In the 1990s, China had a significant hiccup as growth slowed sharply.

Keeping pace with growth

Indeed, as China’s economy grows larger, I think a set-back becomes more likely. In part, this is because the business cycle exists in China, as elsewhere. But it is also because China’s policy-making set-up and its institutional framework have not kept pace with the economy’s growth.

All in all, perhaps the question should not be whether China will have a set-back, but when will it be and how China will cope?

I visited Tianjin in September for the “Summer Davos”. Each year, in January, the great and the good of civil society and of the business, financial and political worlds gather in Davos, Switzerland, for the annual World Economic Forum meeting. Because of the timing of their New Year, the Chinese tend not to travel to Davos in big numbers. Hence, each September, over the past six years, a similar event has been held in China: “Summer Davos”.

The mood of the international and Chinese business people in Tianjin was one of uncertainty, not one of pessimism towards 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.

Complacency

Of course, when everyone agrees on something, it is often proved to be wrong. This provides an immediate warning: for China to not be complacent. Nothing is guaranteed.

China’s old growth model is dead. A new one is needed. China is moving from an investment- and export-led economy to one driven more by consumer spending. While China wants the share of investment to fall, last year’s 12th Five Year Plan was aimed at boosting consumption, social welfare and a green economy, and at moving China into higher valued-added areas.

One implication of changing the model for China’s economy is the need to focus less on quantity and more on the quality of growth. That means worrying less about the decimal point in China’s GDP number and, instead, seeing where growth is coming from.

China was hit hard by the global recession as exports slowed. It then unveiled a huge fiscal stimulus. Although the economy rebounded strongly, the authorities appear reluctant to repeat the scale of that boost now. In his speech, Premier Wen also stressed China’s main current themes: a prudent fiscal policy and a pro-active monetary policy. The message was not to worry about this slowdown getting out of hand, as the authorities will ease policy to prevent growth weakening too much. Indeed, since May, the authorities have eased policy.

Domestic spending

The question is, how much of a slowdown? Until two months ago, there was a clear divide. Exporters were complaining, hit by weak global demand. In contrast, firms selling to China’s domestic market were in good shape. More recently, particularly as the euro crisis escalated, the weakness from exporters spread, impacting manufacturing and weighing on domestic spending. People in China have become less confident recently. Still, this is not like the end of 2008, when 30 million migrant workers lost their jobs. At least not yet. As many as 11 million new jobs have been created this year.

While the pace and scale of change in China are huge, so too is its catch-up potential. For instance, China’s income-per-head is only 18 per cent of that in the US.

Yet, China’s biggest challenge is its institutional set-up. It is still run from Beijing in much the same way as when it was a smaller economy. Also, its financial system is repressed, with big constraints in place. This means that, unlike in the US, the transmission mechanism of monetary policy is not always smooth. There are other areas too that cause uncertainty, such as the upcoming leadership change. Perhaps, the surprise might be a more reformist agenda. We shall see.

Diplomatic hot spots

We should also not be surprised by what happens on the military side. The South and East China Seas are increasingly becoming diplomatic hot spots. And a greater US naval presence in those regions is only likely to reinforce that.

Perhaps the key questions, therefore, should be, ‘Where are the greatest shocks ahead for China?’ and ‘Will they be able to cope?’

Putting recent developments alongside the imbalanced nature of China’s economy, the implication is clear: do not be surprised if there are slowdowns like the one we are seeing now. But even if there were a set-back, it would not mean that China’s economic boom is over. Far from it. The trend in China’s economy is up, but one should expect set-backs along the way.

— The writer is chief economist and group head of global research at Standard Chartered Bank