Tue, Jan 03, 2017 - Page 8 News List

China has contradictory economy

By Adair Turner

Last year ended with slightly higher forecasts for global growth and inflation. In part, that reflects expectations of a big new fiscal stimulus measures in the US when US president-elect Donald Trump takes office. However, equally important is the strength of the Chinese economy, with buoyant industrial production fueling a sharp rise in global commodity prices.

That strength has confounded expectations that China’s seven-year credit boom, during which the debt to GDP ratio rose from 150 percent to 250 percent, would inevitably end last year. Some Western investors foresaw a banking crisis, owing to enormous bad debt; others expected that Chinese President Xi Jinping (習近平), having consolidated his political position, would introduce structural economic reforms. However, almost all non-Chinese economists anticipated a significant slowdown, which would intensify deflationary pressures worldwide.

In fact, the opposite happened. Central and local government borrowing in China has soared. Bank and shadow-bank credit has grown rapidly and the People’s Bank of China (PBOC) has increasingly issued direct loans to state-owned banks in a maneuver closely resembling monetary finance of government spending.

In addition, these policies are increasingly justified by assertions that China has policy options not available in Western economies. In an article in July, PBOC statistics division director Sheng Songcheng (盛松成) argued that “the macro framework in a socialist market economy is superior to the Western economy,” because “the Chinese government has significant power in terms of both monetary and fiscal policy, and is able to seek the optimal combination.”

Meanwhile, Xi might have endorsed in 2013 “the decisive role of the market,” but that has not diminished his Marxist-Leninist reliance on the leading role of the state.

Chinese Banking Regulatory Commission Chairman Shang Fulin (尚福林) reminded bank leaders in September last year that they “are primarily party members and party secretaries, and secondarily bank chairman and presidents.”

It seems that in a hybrid socialist market economy, credit-driven growth need not be constrained by concerns about debt sustainability.

In some senses, that is true. Rising Chinese leverage would not produce a 2008-style financial crisis. Most of the debt is owed within the state system — for example, by state-owned enterprises to state-owned banks — and the government could simply write off bad debts and recapitalize banks, financing the operation with either borrowed or printed money. Alternatively, the banks could perpetually roll over existing debt, forever extending new loans to repay old debt.

Of course, that would produce wasted investment. Indeed, with banks failing to impose hard budget constraints on financially unsustainable businesses, and with the planning system incapable of imposing alternative effective discipline, China is already awash with apartment blocks in third-tier cities which will never be occupied and with huge overcapacity in heavy industry.

However, as some Chinese policymakers respond, all growth processes involve waste.

Nineteenth-century railway booms in Britain and the US created huge overcapacity and investor losses, even as they spurred economic transformation. In China huge waste could also be compatible with rapid growth.

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