Maybe China Doesn't Have a Master Plan
As a long-time consumer of economic commentary about China, I can probably recite the basic narrative underpinning most of it in my sleep: Yes, China’s economy faces challenge X. But the government has a plan for getting past it, the People’s Bank of China has many tools at its disposal and, hey, look at that $3.7 trillion in foreign exchange reserves!
A fine recent example of the genre comes from Zheng Liu of the Federal Reserve Bank of San Francisco. His analysis bears the provocative headline, “Is China’s Growth Miracle Over?” Get down near the end, though, and the familiar storyline takes over:
To address structural imbalances and thus achieve sustainable long-term growth, the Chinese government announced a blueprint of economic reforms at the Third Plenum in November 2013. The proposed reforms include (1) financial sector reforms -- liberalizing interest rates, establishing deposit insurance, and strengthening financial supervision and regulation; (2) fiscal reforms -- strengthening social safety nets, introducing more efficient and redistributive taxes, and improving health insurance and pension coverage; (3) structural reforms -- reforming the SOEs and the Hukou system and further opening up markets; and (4) external sector reforms -- liberalizing the exchange rate and capital account controls.
If these reform blueprints can be successfully implemented, then China should be able to avoid the middle-income trap and sustain long-term growth at a reasonable pace.
In a normal country that would be a huge “if,” but this is modern China. The country’s leaders have successfully managed its economy through 37 years of mind-boggling -- and uninterrupted -- growth and change. This standard, the-government-has-a-plan line on China’s prospects can sound awfully credulous, but it has the advantage of having been consistently right for decades.
China's Managed Markets
Of course, that doesn’t mean it’s going to be right forever. That's why the past few months of Chinese economic news have been so interesting, if also frightening. We’re getting hints that maybe the government doesn’t have a plan, or can’t agree on what the plan should be.
This week’s currency devaluation is the latest example. It isn't at all unreasonable that, after months of watching the yuan follow the U.S. dollar higher against just about every other currency on the planet even as the Chinese economy slowed, the folks in Beijing wanted to loosen the link between the two a bit. But the muddled explanation of Tuesday’s move, the continued tumble in the yuan’s value today and the end-of-the-day intervention to keep it from falling any further confused and unsettled markets around the world. Kevin Yao of Reuters reported this morning that there’s “a growing clamor in government circles” to let the yuan fall a lot more “to help struggling exporters,” with Commerce Ministry officials pushing hard against the PBOC’s efforts to wean the country’s economy from its export dependence.
The same sort of messy politicking has been evident in and around the country’s stock markets. As the Wall Street Journal reported last week in an in-depth account of the government’s response to market turmoil:
At one point, the securities regulator made a move that put downward pressure on the market in the same week that the central bank moved to push it up. Until July, margin financing, a major source of market funding, went largely untouched by regulators. The securities regulator more than once moved to trim lending to investors to buy shares, only to reverse course.
That doesn’ t sound like an all-knowing government with a plan. In fact, it’s exactly the kind of conflict and mixing of signals that Chinese officials always profess to find so maddening about Western governments, especially that of the U.S. Welcome to the club, guys!
This isn't to say that Chinese officials have suddenly become incapable of imposing their will on the economy. To the surprise of many Western observers (including me), the frenzied efforts to stabilize domestic stock markets that began in early July actually seem to have worked, for now. Stock prices haven’t returned to their mid-June all-time highs, but they’ve stopped falling -- which seems like a better result for the government than having them go back up again.
Still, it’s far from clear that this intervention was actually good for the Chinese economy. And it didn’t make the government look great.
The Chinese economy faces a lot of challenges. The Chinese government is run by flawed human beings with conflicting interests and opinions, and it isn't obvious that they have a viable plan for what comes next. But hey, they’ve still got $3.7 trillion in foreign exchange reserves!
The household registration system that makes it hard for rural Chinese to move into cities.
Although it looks like this will slip to $3.6 trillion soon.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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