Opinion: China's stimulus package working better than America's

Opinion: China's stimulus package working better than America's

Neville BennettBy Neville Bennett I attended a seminar recently given by one of New Zealand's most eminent academics. Professor Leslie Young is part of the diaspora. A Kiwi, of Chinese ethnic origin, he has an Oxford Ph.D. in Maths but has moved into economics and finance. Teaching briefly at Canterbury in the 1970's, he held a chair in the University of Texas and more recently at Chinese University, Hong Kong. His brilliant seminar combined philosophy and history with economics and dazzling statistics. It was a preview of a forthcoming book. His theme was the US's and China's contrasting stimulus packages. I will be reviewing his argument on the US next week; suffice it to say that the professor is scathing on the US. He is very positive about China, and his argument challenged my skepticism.

Skepticism has always been important in intellectual life, but I think it is increasingly important in a global life, often moved by similar stimulus, plus a lot of spin. My view of the Chinese economy, if distilled to some very crude major points were that:

  • China is a dual economy.
  • The market economy is something like an enclave attached to coastal areas and geared to world markets. It started essentially as an area which often adopted foreign designs and completed them with assembled components made in South Korea, Thailand etc. While it has been extremely dynamic, some of its products like toys have been severely hit by the downturn.
  • The bigger economy is state run, and it combines rural and urban units. Farmers are ill-paid, lowly capitalized, with low productivity. The State"“run enterprises are often basket cases previously available for peanuts. It is producing goods that no one wants, but the Government would face revolt if it closed them down.
  • China had to grow the market economy frantically to absorb surplus labour and resources in the state economy. A lessened rate risked disaffection.
  • Chinese statistics were unreliable.
  • The share market was a bubble caused by too few outlets for Chinese savings.
  • The banking system has made too many loans, and could come under pressure if normal banking rules operated.
  • I have written a lot recently about China's dissatisfaction with the US dollar as a reserve currency, and it desire to put is savings to work by buying access to commodity production in Iran, Brazil, Australia etc.

By the time the seminar had finished, I realized that I was perhaps out of date in my perceptions of the state sector: according to Prof. Young it is now very dynamic with pragmatic, effective leaders. Moreover, instead of importing components from S. Korea etc., China has created new industries at home, creating a kind of S. Korea within China. It is more fully industrialized than it was formerly, with broad-based development. In short, Prof. Young challenged my concept of China on a knife's edge, forced to take risks to escape disaster. To my delight, Young explored China's past failure to deal with complexity. I forego the history here, but accept his conclusion that China's industrial development had been held back by a lack of formal system of rules and abstractions that encouraged and managed the complex division of labour, and the accumulation of capital which required channeling into investment. Modern China has used the price mechanism to decentralize by growing (a) the private sector that required entrepreneurship more than capital, and (b) a quasi-state sector comprising capital-intensive industries. Entrepreneurs raised money informally and invested profits for expansion. They have high cash reserves and little debt. State enterprises used capital markets (stock market, banks), but a web of political/personal networks is crucial. A default would violate obligations and cause social unrest. The stimulus package is $NZ936 billion which will keep growth at over 7% and 8% next year. Growth is also being fueled at present by bank loans and land sales. Investment increased a colossal 39% this year. So while trade has contracted, the economy is reacting to a positive domestic stimulus. Corporate profits are the other great source of investment. Profits have skyrocketed in both light and heavy industry as a result of exports and displacing foreign imports. Chinese industry is thriving on invested savings, while the rest of the world is saving and investing less. China continues to build capacity. It then seizes market share at home and abroad. Moreover, Chinese companies have bought tens of billions of dollars of assets in Iran, Brazil, Russia, Venezuela, Australia and France where prices have fallen in the crisis. The Commerce Ministry organized a shopping expedition in February. A team of 90 executives toured Europe, buying assets in Germany, Switzerland, Spain and the UK. Some deals were huge: $10 bn in Germany, $2 billion in the UK, and $320 million in Spain. It is also investing hugely in retraining workers. In Guangdong Province alone 4 million workers this year will have 3 or 6 month courses. The comparable program in the US is the Workforce Investment Act which will train only 250,000 workers "” one sixteenth of Guangdong's program. Education at tertiary and secondary level is also booming. China will soon have a highly educated workforce. Indeed, the number of universities being constructed may be turning out too many graduates. Education could be China's sub-prime. Leslie Young recently went to a town which he had not heard of previously: it had 11 universities. The government disperses jobless graduates (to prevent tension) by offering jobs in country schools in return for overlooking their student loans. While western pension schemes are reeling in shock, China is making provision by forcing promoters of new share issues (IPOs) to donate 10% to the state fund. This is ingenious, and likely to be more feisty than in NZ where IPOs have been rare. Health services are a problem. Patients have to pay for access, and injured people who cannot pay are turned away. This could be a core motivation for Chinese household saving. The US stimulus program is floundering. Little has yet been spent. But China's is going ahead quickly, and is well conceived unlike the US's pork-barrel. Of China's stimulus package, 45% will be spent on transport and power infrastructure; 25% on earthquake reconstruction; with smaller amounts on rural infrastructures, environmental improvement, public housing and R&D. Officials have to get things done. Word has come down from Beijing to spend. They obey enthusiastically. They perhaps sell some public assets and get huge bank loans, but they get the job done (while keeping a modest amount for themselves). I found several of Professor Young's less formal comments illuminating. I wanted to know how the state enterprises were now the source of huge profits. The gist is meritocracy. The Communist Party is pragmatic. It promotes people who manage well. An entrepreneur might make a large contribution to exports. He will be honoured and get to meet bigwigs. If he continues well, he might become a mayor or even a governor. My skepticism is modified; China is stronger than I thought. Its stimulus package is working, and China has registered growth at a rate of 8% over the last quarter. Next week I will share Professor Young's views on the corruption of the Washington and Wall Street elites. ____________ * Neville Bennett was a long-time Senior Lecturer in History at the University of Canterbury, where he taught since 1971. His focus is economic history and markets.

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