The Conventional View of China's Problems May Be All Wrong: Q&ABloomberg News
Surging debt isn’t necessarily bad, says Yukon Huang
Ex-World Bank director says migrants are key to rebalancing
China’s contribution to global growth and the havoc a hard landing there might cause should make it one of the world’s best-understood economies. Unfortunately, that’s not the case, says Yukon Huang, a senior fellow at the Carnegie Endowment for International Peace in Washington.
Too many analysts approach China from a Western perspective, using frameworks that don’t fit and misread the effects of unique domestic conditions, argues Huang, who is also author of the book, “Cracking the China Conundrum: Why Conventional Economic Wisdom Is Wrong.”
As a result, he says, conventional wisdom about China overstates risks related to debt levels and property prices, while underestimating distortions produced by efforts to control the migration of rural residents into cities using the so-called hukou system of household registration.
Huang, who was China country director at the World Bank from 1997 to 2004, discussed his observations earlier this month in Beijing. The following are edited excerpts from that interview:
Debt is a big worry. What do analysts miss?
[Everyone] is scared to death. When I look at this issue, I say to myself: The debt levels are surging. Is this inherently bad? Not necessarily. A lot of it is going into the private sector in some way. Eight or nine or ten years ago, what were we really complaining about? That the private sector wasn’t getting the lion’s share of the credit. It was all going to state-owned enterprises. So why are we now bothered by the fact that it is now actually going more to the private sector than before?
But we are also worried that it is not necessarily going to productive activities, or the normal form of industrial expansion, and a lot more of it is going into property and asset values. And is being channeled through shadow banking.
Shadow banking funds money to where the returns are high -- that’s how it functions in the West. Hedge funds, Wall Street create all kinds of innovative products that essentially channel money to where they think there is going to be a lot of money made. And we can have an ethical debate about whether that is good or bad for a country and whether it is a risk.
Does that money moving into property produce risks?
So what happens? Property-based assets soar in value. What happens to GDP? It doesn’t increase. That’s because property asset appreciation doesn’t count as GDP. And then the question is, okay, is this a problem? Not necessarily, as long as this asset is really worth this amount. Because that is what businesses do -- you go around buying assets that you think are under-priced. And then you sell it for something more. And if you are right, you make a lot of money. If you are wrong, you lose money.
The question then becomes are these land-based assets really worth this 500-600 percent increase [over the last ten years]. If it is, bonanza, you are rich. Households have gotten rich. And the risk if there is one, is people who bought in the last couple years. And if the prices fall a lot, they could lose a lot. But for people who bought their apartments in 2004 or 2005, there is no way that the prices could fall enough for them to actually come out a loser. It is impossible. Maybe it is too high by ten or fifteen percent and maybe prices have to stabilize. But for it to be destabilizing it would have to fall 50 percent. Is that logical? Clearly it’s not.
What prevents property values from falling dramatically?
There are 1.4 billion Chinese and they’re moving into urban areas, and though urbanization has slowed, it’s still going to go up.
Why has it slowed? Because a lot of people who migrated from rural areas or the interior have gone back, because it’s so expensive, and they can get good jobs now, while they couldn’t 10 years ago.
Ultimately what’s going to happen? The rural ownership of land is going to become trade-able in some way. Rural residents will sell the land use rights, and they’ll get a bundle for that. And then the question will be different. I now have a bundle of money. Where do I go? Where the jobs are higher paid. If China gets it right, they will go and move a lot. And they’ll move in many cases to the biggest cities, because that’s where the best jobs are.
If reforms happen, including allowing migrants to transfer their land and giving them full status as urbanites, with rights to purchase housing and access social services, what are the implications for China’s future economic development?
If migrants are allowed to live and settle in cities and they spend as much as normal Chinese, the savings rate would fall. Consumption would increase by 2 or 3 percentage points of GDP, which is the entirety of the trade surplus.
What’s unique in China and doesn’t happen anywhere else is this migrant worker phenomenon. In any other country, you don’t have a hukou policy.
Hukou is a link to savings, and then links to global trade surpluses. That’s a real strange link. This never would have been a logical way of thinking about it in any other country.
If you liberalize hukou, it reduces pressure to save. It increases your incentive or opportunity to consume. This increases demand for resources. It doesn’t require credit expansion or generation or stimulus. Therefore, you have GDP growth without debt buildup, which is exactly what you need. It’s a simple reform with tremendous impact. Allow people to live in Beijing and Shanghai where jobs pay more, and productivity will be higher.
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— With assistance by Dexter Roberts