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China Faces Choice Between Control and Prosperity, Economist Xie Says

  • Authorities face choice between direct control or prosperity
  • GDP stabilization pinned on the ‘old game’ of real estate

China’s recent economic stabilization "doesn’t matter" and policy makers must deal with imbalances that are holding back development or risk suffering the kind of malaise that’s dogged Japan for decades, according to independent economist Andy Xie.

One tonic would be to follow the lead of former U.S. President Franklin D. Roosevelt, who took office as the Great Depression ravaged the economy and put more money in the pockets of households to help engineer a recovery, Xie, who previously worked for the World Bank and Morgan Stanley, said Tuesday in an interview in Hong Kong.

Xie, who featured in Bloomberg Markets 2013 list of the most influential people, has long said that China isn’t doing enough to foster growth in household spending and suffers because too much wealth is tied up in inefficient state-owned enterprises.

Data Friday is forecast to show gross domestic product growth slowed to 6.6 percent in the three months through June from a year earlier, according to a Bloomberg survey of economists.

Here are excerpts of the conversation:

Question

Why does China need a Roosevelt?

Answer

Look at what happened in the U.S. in the 1930s. They closed down overcapacity, sorted out non-performing loans, recapitalized the financial system and pushed through reforms to create a properly balanced economy. You have to pay for your past mistakes and you have to have a balanced economy for the future.

Question 

What’s the biggest obstacle to reforms?

Answer

We’re talking about the economy becoming more and more out of balance. The fundamental thing is the government cannot reform because reform is about shrinking the government. The regime has insecurity right now about the economy being weak so its instinct is to grab more power and that is the wrong way. You have to choose at some point, direct control or economic prosperity.

Question 

Do you give the Chinese authorities any credit for stabilizing growth?

Answer

The GDP figure doesn’t matter. The economy stabilized because they ramped up the property market again. This is an old game. Why is wasting money to buy stability a good thing?

Question 

So where is China in its economic development right now?

Answer

If China refuses to grow up and instead insists on being a teenager and partying then we’re in big trouble. Someone needs to stand up and tell Beijing you’re middle-aged, don’t do it any more, you’re killing yourself. China is the typical East Asian model, consumption is expensive and investment is cheap. If China became normalized and balanced between consumption and investment it would be the world’s largest economy.

Question

Why aren’t investors worried about the weakening yuan?

Answer

When Brexit happened there was an opportunity to let the yuan go because people were focused on Brexit. A lot of the outflow last year was due to paying down foreign debt, that wave has eased somewhat. The government has also shut down the underground exchanges and the people who have been arbitraging loopholes have been put on notice. It’s really due to the government crackdown that has slowed down the outflows.

Question

Are you worried about rising bad debts in the banks?

Answer

The banking system is in trouble, to what extent we don’t know. The issue is that the property market is a vast bubble and you’re producing so much property that will never be used. Relying on debt and asset bubbles isn’t a sustainable situation.

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