In China, Is Keynes Key Or Is It More About The Market?

Imagine this: China’s top economic brains all gathered in a room – open to the media – discussing the country’s future.

That’s what happened last Friday afternoon at the annual gathering of the Chinese Economists 50 Forum – an elite club of China’s who’s who in economic decision-making and research.

The room was laden with a sense of purpose and urgency as they discussed what Beijing could do to achieve sustainable growth while maintaining stability.

The gathering of the group – which included Xi’s top aide in economic policymaking Liu He, central bank governor Zhou Xiaochuan and renowned economist Wu Jinglian – came as Beijing battles a slowdown.

Wu, 86, popularly known as “Market Wu” for his belief that socialism is compatible with a market system, said Beijing’s efforts to change its growth model had made little headway over the past 20 years because of vested interests and “institutional obstacles”.Economist Wu Jinglian was among the attendees at the Chinese Economists 50 Forum. Photo: SCMP Pictures

“Why is the progress so slow … The government is still playing a dominant role in resource allocation. The problem has not yet been solved,” lamented Wu, who in the 1990s advised the top leadership on building a market-based economic system.

Even under the “supply-side” reforms endorsed by President Xi Jinping , China was still over-reliant on the government to get things done, he said.

Officially, Xi has promised the market a more decisive role in resource allocation and to adopt supply-side changes, deviating from past Keynesian practices.

Supply-side economics favours cutting government involvement in the economy and allowing an unfettered free market to operate.

Yet Beijing is extending its control in economic activities. For example, local governments have been told to phase out excess capacity but not to retrench workers. State firms have been urged to improve their efficiency while inducting party cadres into their leadership ranks.

Central bank governor Zhou, who has worked with Wu since the 1980s, said prices should be free from government intervention, so that prices could guide the flow of resources, even as Beijing restructures the economy. This was particularly important for general products, such as oil, and production factors, like money and land, he said. “At present, we still have many distorted prices [in the market],” he said.

Finance minister Lou Jiwei, who has co-authored research papers on China’s economic reform with Wu and Zhou, said China’s labour law was stiffening the labour market and over-burdening businesses.Chinese Finance Minister Lou Jiwei agrees with central bank governor Zhou Xiaochuan that the market is the key to the country’s economic prosperity. Photo: AFP

Lou and Zhou are among a group of China’s economic elites who share Wu’s conviction that the market is the key to the country’s economic prosperity.

Zhou, for instance, was central in pushing for the opening up of China’s financial sector as well as its interest rate liberalisation.

But not all their views find their way into policy. When Lou headed the sovereign wealth fund, he listed a number of areas, from pensions to income tax, that required change. But little has been done to improve these areas in his three years as finance minister.

Often, compromises have to be made.

Yang Weimin, a deputy director of the Central Financial and Economic Leading Group Office, rattled off a list of vested interests Beijing had to overcome in order to shut down excess facilities.

“Fiscal authorities shouldn’t refrain from fee cuts for fear of revenue drops; state-owned company supervision agencies shouldn’t hesitate when state assets have to be downsized; power companies shouldn’t worry about profits in lowering tariffs for firms, and local governments should stop protecting zombie companies,” Yang said.

But such measures are far easier pledged than implemented.

Doubts have been rising about Beijing’s ability to manage its economy and markets.

This week’s G20 meeting in Shanghai and next month’s National People’s Congress will allow Beijing to clarify its direction.

While Beijing has trumpeted the “new normal” – slower but more sustainable growth – and announced plans to shut down redundant facilities, it also allowed its banks to pump an unprecedented 2.5 trillion yuan (HK$2.98 trillion) into boosting growth last month.

Li Yang, a former vice-president of the Chinese Academy of Social Sciences, said China’s deleveraging process would be slow.

“As the economic slowdown continues, authorities’ first choice will be to maintain appropriate growth; while deleveraging will improve long-term economic health, the goal will have to be sacrificed in the short-term,” Li said.

Others at the forum challenged Li’s take on the matter.

“Practices in the past have proved monetary easing ineffective in addressing economic weakness,” said National Economic Research Institute deputy director Wang Xiaolu. “If we continue to address economic weakness by easing monetary policy, we will only add more problems and create bigger risks.”A broken window of an abandoned building in Tangshan, Hebei. Beijing has told Hebei to slash steel capacity, stirred by growing public resentment about pollution. However, many mills are already on the brink of bankruptcy and would have been forced to close anyway. Photo: Reuters

Zhu Yunlai, eldest son of former Premier Zhu Rongji, questioned China’s massive investment levels. “Since we need to cut production capacity, and since China’s leverage ratio has to be reduced, why we are still investing so heavily,” Zhu asked.

Liu He – the founder of the forum – remained silent throughout the four-hour discussion, listening intently to each speaker.

Approached by Phoenix Television later, Liu had just one point to make. “China’s economic transformation will definitely be a success.

By ZHOU XIN Feb. 23, 2016 on the South China Morning Post

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