Page 2 of
2 A tale of two (China
vs US) stimuli By Peter
Lee
In fact, the Chinese government doesn't
even seem to want to call it "stimulus". A
September 12 commentary by Xinhua was titled
"China's economy: Less speed but no more stimulus"
and stated: "A massive stimulus plan to boost the
economy is not only unlikely, but would be
detrimental to the country's sustainable growth."
[5]
This op-ed can be taken as a message
to foreign investors - who have been blithely
optimistic that the central government will uncork
the money spigot, pronto - that they should temper
their expectations of a sizable, rather desperate
stimulus that will pump up demand, the real-estate
market and stock prices, thereby boosting their
sales and valuations, at least for the time being.
Instead, the government's policy response
to the 2011 crisis is
restructuring of the
economy to achieve - the key buzzword -
"sustainability".
When President Hu Jintao
reiterated at the Asia Pacific Economic
Cooperation meeting in Vladivostok that China's
main challenges are "lack of balance, coordination
and sustainability" - thereby demonstrating that
the restructuring policy is not merely a
hobbyhorse for reformist liberals surrounding
Premier Wen Jiabao - the international investment
community's disappointment was palpable:
Hu's standing with international
investors has suffered ahead of the leadership
change later this year. In a quarterly Bloomberg
Global Poll published [September 7], two in five
voiced pessimism about the impact of his
policies on the investment climate in China.
That's up from less than one in three in May and
is the highest negative reading since the poll
began asking that question two years ago.
[6]
The central government has also
been fighting off the real-estate, materials, and
local-government constituencies that have been
lobbying shortsightedly for a loosening of credit
and re-inflation of the property bubble to solve
their problems.
For the time being at
least, there is a consensus at the center that
dumping massive amounts of more money into the
hands of reckless bankers and desperate investors
is not going to turn out well for the People's
Republic of China.
A closer examination of
the precedent of the China stimulus indicates that
the PRC and the US can and should draw
diametrically opposite lessons from the China
stimulus of 2008-09. For the PRC, with its rickety
economic system, it pushed stimulus to the safety
limit - and perhaps beyond. The United States,
with a stimulus a fraction of China's, didn't go
far enough. Therefore, as the economy slows, China
can't do another great stimulus.
But it
looks as if the United States can.
The
question is, does either nation have the political
will to do what's good for itself and the world
economy?
Writing in May, before China's
economic problems were anywhere near as dire as
they are now, Krugman was not optimistic about the
PRC:
Some commentators say not to worry,
that China has strong, smart leaders who will do
whatever is necessary to cope with a downturn.
Implied though not often stated is the thought
that China can do what it takes because it
doesn't have to worry about democratic niceties.
To me, however, these sound like famous
last words. After all, I remember very well
getting similar assurances about Japan in the
1980s, where the brilliant bureaucrats at the
Ministry of Finance supposedly had everything
under control ...
For what it's worth,
statements about economic policy from Chinese
officials don't strike me as being especially
clear-headed. In particular, the way China has
been lashing out at foreigners ... does not
sound like a mature government that knows what
it's doing.
And anecdotal evidence
suggests that while China's government may not
be constrained by rule of law, it is constrained
by pervasive corruption, which means that what
actually happens at the local level may bear
little resemblance to what is ordered in
Beijing. [7]
However, it is a pretty
good political bet that given the political
gridlock in the United States, there isn't going
to be any significant US stimulus in the near
term, even if the economy could benefit
significantly. More quantitative easing - money
sneaked out the back door of the Treasury building
into the hands of banks that, it is hoped, will
lend it for something useful - is the most viable
possibility (vide the Fed's annnouncement on
Thursday).
In the PRC, on the other hand,
there exists a consensus, albeit fragile and under
stress, to eschew the easy choice of reckless
stimulus and brace for a bumpy economic landing.
Whether or not the PRC can make sustainable
lemonade out of slow-growth lemons is another
matter.
In the reformer's perfect world,
unproductive speculation in stocks and real estate
would be replaced by market-driven investments in
worthy manufacturing and service industries, ie,
"sustainability", economic growth and
diversification that rely less on government
intervention and more on market forces.
Reformers in China are staking their hopes
on stimulating consumer demand and mobilizing
private capital to restructure the economy both to
generate growth and direct it into more rational
and profitable sectors. One initiative is to try
to pry open investment opportunities in profitable
state-dominated sectors such as telecommunications
to make the corporations more responsive to
markets and investors than to bureaucrats and
their bespoke bankers. [8]
Some of the
proposals appear somewhat quixotic, albeit echoing
some progressive lines of thinking in the United
States.
Chen Zhilong, the Chinese economic
journalist quoted above, proposed that any
stimulus be distributed as grants to individual
families. He argued that consumers could exercise
"economic democracy" and vote for the best
products, thereby compensating for the distorted
and corrupt investment choices that the government
has been making.
Chen asserted that giving
3,000 yuan (US$474) to a family of three would
generate 15,000 yuan in internal demand. One
trillion yuan distributed nationwide - roughly
equivalent to the current "stimulus" - would
create 5 trillion yuan in demand. And the stimulus
would get a head start of 20% - the losses
suffered by government investments out of the gate
thanks to corruption and inefficiency.
His
proposal echoes calls on the left wing of the
Democratic Party in the US for the Federal Reserve
chairman Ben to reinvent himself as "Helicopter
Ben" and indiscriminately shower money (as if from
a helicopter) on consumers, instead of propping up
money-center banks with preferential access to
liquidity.
We are unlikely to see a money
rain on China. And it is very likely that hopes
and dreams of significant reform will fall victim
to inertia, corruption, and the grim bonfire of
bankruptcies, strikes, public anger, and unrest
fueled by economic decline. And the central
government will just take the easy way out:
opening its pocketbook to underwrite the failures
of the big banks and the state-owned enterprises
once again.
However, if the Chinese
leadership can weather the unfolding crisis
without recapitulating the errors of the first
stimulus, and incrementally weakening instead of
further entrenching the forces arrayed against
economic restructuring, then 2012-13 might be
remembered as something other than "the worst of
times".
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