The ‘boys’ in Beijing are about to undertake a grand initiative, they know that cheap manufacturing in their Southern Hemisphere cannot go on forever. They also know that to really compete they must transform their entire political economy away from ‘petty’ manufacturing toward a consumption based political economy. This is fraught with difficulties that very few nations have succeeded in doing. Think of Thatcher’s monetarist revolution, which nearly capsized in that her ministers targeted the wrong monetary aggregates. Given that most never explicitly knew how to implement monetarism, they were ‘sort-of’ winging it. Explicitly, monetarists know that a ‘policy-mix’ is intrinsic to successful transition. This requires an adroitness uncommon to Keynesians. It was of course known and expected from pre-Keynesians. That’s another essay for another time. Can Communist’s in Beijing handle/manage the social/political threats that will emerge in a managed transformation away from a centralized political economy? My answer is simple. The Chinese people will gladly permit being hustled about. Regarding the political/social impact of this experiment; we’re going to have to wait and see.
China was mortally threatened by our near suicide in 2008. We have yet to address these policies. My guess is that will take far longer to do than anyone willing to admit. Beijing is moving forward at an unsettling pace. Beijing knows that its current threats are domestic. Its monetary and fiscal policy is completely unsustainable.
What Beijing knows is this: they need growth driven by productivity gains, not cheap labor and coddled exchange rates. It must stop currency serialization, open up its banks to reform, permit a savings rate and allow its citizens access to global markets.
Only South Korea and Taiwan succeeded in evading this trap. Its to early to know if Beijing will succeed. Gross capital formation, along with profits are being squeezed. Its dollar is appreciating and costs are rising. As I write, Beijing’s total debt exceeds 200% of its GDP. To repay loans and prevent default, Chinese industries need REAL GROWTH. Beijing has never really had real growth. Experts who study Beijing have always known that Beijing ‘makes-up-the-numbers’. Where does Beijing begin?
The Reds know that the age of high leveraging is over! They must permit financial reform, deleveraging or the challenge that they now face will consume them. In other words, how China got into its current mess AND HOW IT RESOLVES IT, ARE TWO DIFFERENT REALITIES.
Liberalizing deposit rates for the next two years is a start. It implicitly means that financial repression is over. Beijing will no longer pay low interest rates to depositors in the hope of sustaining cheap borrowing. By suppressing consumption, by forbidding the ability of its citizens to enjoy capital/equity formation, Beijing created a lopsided political economy in which public (state-owned) investment was 50% of GDP.
That’s over.
In fairness to Adam Smith and Hayek, Beijing permitted a ‘shadow banking sector’ to in effect permit price discovery. By grafting this relation on to new enterprises, Beijing may well succeed where ‘middle income nations’ failed. State owned banks were experiencing excess loss of profit margins from loans to state owned enterprises, so banks created financial instruments, sold them for profit and used these profits to lend at still higher rates to private companies. BY PERMITTING A MARKET TO FUNCTION, THE STATE DISCOVERED REAL PRICE/RISK. They also created solid relations that allocated capital efficiently.
Over the last fifteen years, demographic trends pushed up wages faster than productivity gains. This will permit Beijing to sell off un/nonproductive state owned enterprises. Remember Thatcher?
Other than ‘ghost cities’ that populate China’s interior, the side effect of liberalization may well be the reform of a dysfunctional capital market as more Chinese households put money into competing firms.
The real challenge to Beijing IS NOT WHAT IS OUTLINED ABOVE!!
China’s challenge is political, moral, even spiritual. CHINA PRODUCES NO INNOVATIVE FIRMS, NO GLOBAL BRANDS. Did you read that right??!!!
This is a cultural problem that cannot be addressed through centralized means.
A problem the ‘boys in Beijing’ simply cannot acknowledge.
William Holland
William Holland 