Krugman on China
Paul Krugman writes an excellent piece on China's economic woes. He hits most of the major issues, starting at the very top with bad leadership.
Krugman writes that Xi Jinping is starting to look like a "poor economic manager". Over his 10 years in power, he's destroyed the tutoring industry, negating some 100 billion in value. He cut off bank loans to the real estate developers suddenly, leaving them in the lurch, and hasn't had the decency to wind them up, leaving their suppliers and workers with empty pockets and no signs of any improvement on the horizon. That, in turn, leaves a third level of suppliers (the suppliers to the suppliers) in the same position.
Over the last few years, many apartment purchasers have found that the apartment they bought simply won't be finished, and the government once again seems to have no solutions, other than an apparent pledge to build even more new housing. Others, aware of this, will certainly not buy apartments until construction is complete, while the developers have no cash to work with, nor, to be honest, any assurance that some random business decision in the future will not lead to new punishment for political crimes. Because everything is now political, from the state of the economy to the economic growth rate to the unemployment rate to the decision to take bank loans from state-directed banks.
All of that is not to mention the efforts of the government to control school kids' gaming, obviously an important role, or dictating to the entertainment industry on what characters will be politically acceptable.
No wonder the economy is not moving!
Krugman correctly points out that this economic crisis was always looming, and started long before Xi took power 10 years ago. It was interesting watching Xi take power, so eager for the responsibility, knowing (as I did then) that he would end up having to deal with (and take the blame for) a huge financial crisis. Xi Jinping hasn't really managed this situation well, but the problem was well-established prior to his term in office. The growth in the housing bubble happened mostly on Xi's watch, but that ultimate cause of that bubble is the government's commitment to maintaining yearly growth at all costs, a policy that dates back 20 years or more. If it hadn't been housing, it would have been something else, some other unproductive investment, in order to reach their short-term goals, year after year.
Witness all the other crazes in Chinese investing, displaying the lack of investment standards and the urge (explicit or not) to invest. Remember the bike sharing craze? Ofo turned a 2.2 billion dollars investment into vast fields filled with rusting, useless bikes. This is, in part, a failure of governance and of regulators to get involved and make decisions. Indeed, in the case of bike sharing, we saw again and again that municipalities acted not on behalf of the public or of the economy, but in their own best interests. An extremely inefficient outcome, but it seemingly came with no lessons learned.
Krugman does have some advice about ending the financial repression of household savers (in other words, give them a higher interest rate on their savings). It is here, with the government cutting this interest rate twice in recent months, where we can clearly see the concern that the government has about the economy. Krugman correctly points out that this is extremely hard to fix, with the banks, insurance companies, local transportation authorities and other invested parties hold a lot more sway in policy-making.
For example, making the subway free in Shanghai would put about 25 dollars a month back into the pockets of workers, equal to nearly 10% of the minimum wage; it would be a brilliant economic move. And it won't happen, because of the difficulties for local government. Such a policy would turn a revenue center (and possibly a profit center) for the local government into a loss, and obviously require more government funding than previously.
Of course, once upon a time government funding for loss-leaders was considered unwise in neo-liberal economic ideology, which is what the government is using, although they are not wedded to it. Still, when a crisis hits, with Communism or Socialism (as defined by the Chinese leadership) devoid of any real economic framework, the dominant economic ideology will likely win the day. This is not an endorsement of that ideology, which is significantly flawed, but given the options that Xi will choose from, we would likely be lucky if he stays to the script when the pressure is on.
At the end of the piece Krugman engages in a little revisionist history. Japan has rarely been applauded for its management of the bubble in the 1980s. The Japanese government's policies at the time led to a decade (or three!) of extremely low growth. That's a level of growth that I used to believe would be unsustainable in China, however with falling numbers in both population and working-age population, perhaps even such a low level of growth could be defined as a win. But it is a very important point that Japan avoided mass unemployment, which would be devastating in China and may well happen.
Still, Japan didn't rein in the zombie banks, didn't allow the non-performing loans to turn into losses, didn't allow the bankruptcies that should have been initiated, and so recovered slowly. Will China follow that model? The quality of the bad loans in China could well be much worse than that in Japan in the 1980's. I sense that the leadership will not take kindly to accepting the notion that people could default on this obligations to state banks.
The debate is focused correctly. China has a very big problem and will need to finally focus a lot of resources to recover.