China's Economy: a cycle of arson and
firefighting (one)
Written by He Qinglian on September 22, 2011
Written by He Qinglian on September 22, 2011
(translated by krizcpec)
In this past six months, I have almost
completely stopped discussing China's economy. There's nothing more
to say after I have done repeated analyzes of its various aspects.
However, it's interesting that Premier Wen Jiabao, despite being
responsible for managing the country's economy, has been talking
enthusiastically about politics instead of economy for more than a
year now.
From his speech that raised the issue
of “Political system reform” last year, to the talk “The Path
to China's Future” delivered on June 27 at the Royal Society in
London, Britain stating that “Without freedom, there is no real
democracy; without guarantee of economic and political rights, there
is no real freedom”, and to the “five points about political
reform” highlighted on September 14 when he met with CEOs at the
Summer Davos Economic Forum in Dalian, Premier Wen's talks on
politics have become increasingly specific. In spite of that, Wen
doesn't win much applause.
It has become a clear awareness that the Chinese people, who have been made physically and mentally exhausted by the inflation, unemployment, corruption, and the deluge of the privileged, can no longer be pacified by calls for political system reform.
It has become a clear awareness that the Chinese people, who have been made physically and mentally exhausted by the inflation, unemployment, corruption, and the deluge of the privileged, can no longer be pacified by calls for political system reform.
From Wen's focus on politics, however,
I decipher a sorrowful message: nothing more can be said about
China's economy. It has become irredeemable. From restructuring
industries to boosting domestic demand; from attracting foreign
investment to searching for new economic growth point, there is
nothing that can be done about it.
Some say Wen talks so much about
political system reform is out of consideration of his reputation.
But I think there's more to it than that. The actual reason is that
after serving more than a decade as vice-premier and then premier, he
has tested one formula after another and is aware that nothing more
can be done.
The engine of China's economy is
started by the government. From the start of premier Zhu Rongji's
macroeconomic regulation and control in 1993, China's economy could
at best be said to have gone through one cycle of “overheating and
cooling off” after another; at worst, it has time and again been
subjected to the cycle of “arson and firefighting”.
The Chinese government stimulates economic development in ways that are like arson; and hurriedly imposes restrictions once the situation spins out of control. And so results in the phenomenon that the Chinese economic sector sum up as “things run wild whenever the regulations are loosened; and are doomed as soon as there are tough restrictions in place. (“一放就乱，一管就死”)”
The Chinese government stimulates economic development in ways that are like arson; and hurriedly imposes restrictions once the situation spins out of control. And so results in the phenomenon that the Chinese economic sector sum up as “things run wild whenever the regulations are loosened; and are doomed as soon as there are tough restrictions in place. (“一放就乱，一管就死”)”
With the problems of the economy
originated from the government, what good does it do for the person
responsible for economy to talk about economy? To talk about it more
would be no different from self-contradiction. That's one of the main
reasons premier Wen talks about politics instead of economy.
Why does inflation go hand-in-hand with
China's economic growth?
Let's first outline the occurring times
and the main features of the four rounds of overheating since the
Chinese economic reform.
The first round of overheating took
place from 1987 to 1988. China's GDP growth rate in these two years
was as high as 11.6% and 11.3% respectively, resulting directly in an
18.8% increase in consumer price index in 1988 and 18.0% in 1989
respectively, and causing serious inflation.
The second round occurred from 1992 to
1996. In each of these years the GDP growth rate was more than 10%.
The third round spanned from 2002 to
2007. China recorded rapid GDP growth for six consecutive years, five
of which had a growth rate of over 10%. But the consumer price index
in those years seemed to have remained low if the extremely rapid
rise of real estate and other consumer goods were excluded.
The fourth round of economic
overheating—mainly in investment and real property market—was
caused by the Chinese government's attempt to bailout by pumping four
to five trillion yuan into the market. A typical "investment-driven
economic overheating", it by and large could be attributed to
the government's excessive investment that was funded chiefly by the
banknotes the banks had printed. The inflation tiger had finally
been released from its cage.
If the root causes of inflation in
today's China that is difficult to tackle, and the economic structure
that is hard to improve are traced, one would see that these could be
ascribed to the third round of economic overheating.
FIRST, the third round of economic
overheating has been significantly different from the previous two
rounds.
The first two rounds were triggered by “Seller's market” under the circumstances of “economic shortage”, the inflation manifested itself as a rapid overall price surge in short periods.
The third round however, was caused by a booming market supply that was translated into the situation which most of the consumer goods formed a “buyer's market”, and the inflation demonstrated itself as a process of “initial structural rise and subsequent overall leap with accelerated speed”. From this we could see the inflation phenomenon in China had become more structural in nature and harder to spot.
The first two rounds were triggered by “Seller's market” under the circumstances of “economic shortage”, the inflation manifested itself as a rapid overall price surge in short periods.
The third round however, was caused by a booming market supply that was translated into the situation which most of the consumer goods formed a “buyer's market”, and the inflation demonstrated itself as a process of “initial structural rise and subsequent overall leap with accelerated speed”. From this we could see the inflation phenomenon in China had become more structural in nature and harder to spot.
SECOND, the first round of economic
overheating was accompanied by high inflation only; the second round
was oppressed by Zhu Rongji's macroeconomic regulation and control as
soon as the bubbles in stock and housing market began to form.
But in the third round, the four pillars of wealth growth were land, mineral resources, finance and stock market. China's financial industry and gigantic state-owned enterprises needed to go public so as to grab money; while all levels of local governments started to become highly financially dependent on land in this period.
This combination inevitably resulted in bubbles being formed in both stock and housing market. The relation of these two bubbles was one that of a reciprocal causation; they were the catalyst for each other, and together they drove up the prices, laying down the foundations for the fourth round of economic overheating.
But in the third round, the four pillars of wealth growth were land, mineral resources, finance and stock market. China's financial industry and gigantic state-owned enterprises needed to go public so as to grab money; while all levels of local governments started to become highly financially dependent on land in this period.
This combination inevitably resulted in bubbles being formed in both stock and housing market. The relation of these two bubbles was one that of a reciprocal causation; they were the catalyst for each other, and together they drove up the prices, laying down the foundations for the fourth round of economic overheating.
THIRD,
while the first two rounds of economic overheating were set off
mainly by domestic factors, the third round was sparked off by
various external factors, some of which were determined by the
economic growth model of China.
For
instance, China's economy has entered the phase of highly dependent
on foreign/external resources. Be it petroleum, iron, aluminum or
other minerals, once the "China factor" is added, the
pattern of world market supply and demand would change immediately,
and result in prices shooting way up.
And the fact that the central bank need
to issue currency to “purchase” the huge foreign exchange
reserves China has accumulated from foreign trade surplus and other
economic activities has become a significant antecedent of future
inflation.
As for the fourth round of economic
overheating, it is solely the result of the Chinese government's
inflated ego. While the entire world could not avoid the shock waves
from the financial crisis, and each of the countries sought ways to
shrink, to adjust, and to squeeze the bubble, China did things the
other way round.
It did not squeeze the bubble or carry
out structural adjustment. On the contrary, it injected huge amount
of funds to bailout the market, with the hope to maintain the false
prosperous image of “China's economy outshining all others”. The
Chinese government became so obsessed with this image that it lost
its head and indulged itself in the saying: “China has saved the
world's economy”.
(For analysis on the fourth round of
economic overheating and the current status of China's economy,
please see the next article)
