{"id":55962,"date":"2015-03-30T12:00:27","date_gmt":"2015-03-30T11:00:27","guid":{"rendered":"https:\/\/www.transcend.org\/tms\/?p=55962"},"modified":"2015-05-05T21:25:54","modified_gmt":"2015-05-05T20:25:54","slug":"chinas-trial-and-error-economy","status":"publish","type":"post","link":"https:\/\/www.transcend.org\/tms\/2015\/03\/chinas-trial-and-error-economy\/","title":{"rendered":"China\u2019s Trial-and-Error Economy"},"content":{"rendered":"

26 Mar 2015 – <\/em>Chinese Prime Minister Li Keqiang\u2019s work plan for 2015<\/a>, revealed at this month\u2019s National People\u2019s Congress, highlighted the country\u2019s shift to a \u201cnew normal\u201d of 7% economic growth. The shift to slower growth poses serious challenges, but it also creates an important opportunity for China to ensure its long-term economic development.<\/p>\n

China\u2019s leaders recognize this opportunity, and are taking action to support the shift to more sustainable growth models. The finance ministry has raised the central-government budget deficit from 1.8% of GDP in 2014 to as much as 2.7% in 2015, and will allow highly leveraged local governments to swap CN\u00a51 trillion ($161.1 billion) of debt maturing this year for bonds with lower interest rates.<\/p>\n

Likewise, the People\u2019s Bank of China (PBOC) has provided monetary support, gradually lowering interest rates and reserve requirements. Because wages are still rising, the inflation target for 2015 has been set at 3% \u2013 higher than the actual 2014 inflation of 2%, even though producer-price inflation<\/a> has been negative for 36 months. The PBOC also has projected a stable exchange-rate environment for this year \u2013 despite the steep depreciation of the Japanese yen, the euro, and emerging-economy currencies against the dollar \u2013 thereby promoting global stability.<\/p>\n

These policies reflect a remarkable determination to continue on the path of structural reform, despite strong headwinds from the deteriorating external environment and domestic structural adjustments. In short, China\u2019s government seems to have a clear long-term vision.<\/p>\n

But not everyone is optimistic about China\u2019s trajectory. Veteran China watcher David Shambaugh recently went so far<\/a> as to warn that the challenges facing the political system, led by the Chinese Communist Party (CCP), may be severely compromising the government\u2019s ability to implement the package of ambitious economic reforms that it unveiled in 2013.<\/p>\n

And yet the claim that China\u2019s economic and political development is in jeopardy seems to ignore the country\u2019s adaptive learning process, which shapes every economic, diplomatic, military, and social policy. This process \u2013 characterized by experimentation, assessment, and adjustment \u2013 emerged from the CCP\u2019s military experience of the 1930s, was applied by Deng Xiaoping to his reform program in the 1980s, and has been refined by subsequent Chinese leaders. Because no economy had ever experienced such rapid growth on such a large scale, the only way to manage China\u2019s development was, as Deng put it, to \u201ccross the river by feeling the stones.\u201d<\/p>\n

China\u2019s adaptive policymaking approach has produced both spectacular failures, with entire markets being shut down, and remarkable successes, yielding models that could be applied across the country. Some experiments have had less clear results, making, say, a positive contribution to GDP growth, but also contributing to problems like excess industrial capacity, pollution, corruption, and the creation of ghost towns.<\/p>\n

In a context of experimentation, such unintended consequences are understandable. The mere fact that they have emerged in no way suggests that China is headed for disaster; that would be the case only if these problems were allowed to persist.<\/p>\n

Preventing such an outcome requires that efforts to adjust to China\u2019s \u201cnew normal\u201d go beyond policies intended to sustain economic growth. Reforms must aim to bolster inclusivity, advance environmental sustainability, promote innovation, and boost competitiveness. And this is precisely the four-pronged approach that China\u2019s leaders seem to be taking.<\/p>\n

Indeed, from slashing coal consumption to address air pollution to plans for integrating information technologies with modern manufacturing, the government has shown time and again that it recognizes its reform imperatives. And, by remaining dogged in its efforts to root out official graft, it has demonstrated its will to do what is needed to ensure that China succeeds.<\/p>\n

This is not to say that it is all smooth sailing ahead. The Chinese bureaucracy must adapt radically to cope with the risks \u2013 and take advantage of the benefits \u2013 of technology and globalization, with the biggest challenge being the shift to a knowledge-based, environmentally conscious, inclusive, and stable industrial base. And China\u2019s government must take steps to enable market forces to play a greater role in directing economic activity, including by reducing licensing and regulatory requirements in the private sector.<\/p>\n

Market forces will also benefit from the growth in households\u2019 spending power. Indeed, continued real-wage growth is forcing inefficient industries that relied solely on cheap labor out of the market, while bolstering the competitiveness of producers that appeal to the evolving tastes of China\u2019s increasingly potent consumers. To support this process, China is now implementing deposit insurance, for example.<\/p>\n

At the same time, China is reforming its inefficient approval-based system of initial public offerings to one based on registrations. A more active and efficient IPO market will allow companies to meet their financing needs without bank intermediation \u2013 a step that is vital to helping firms eliminate their debt overhangs.<\/p>\n

In fact, reducing the role of banks is essential to balancing China\u2019s economy. Despite the recent rebound, China\u2019s stock-market capitalization amounts to only 40% of GDP, while banking assets<\/a> total 266% of GDP. Meanwhile, only 10% of total social funding comes from the equity market.<\/p>\n

But there is one important component missing from the government\u2019s reform agenda for 2015: improved bankruptcy procedures for failed borrowers. Unless failed borrowers and projects exit the system quickly and smoothly, the market will be saddled with bad debt and incomplete projects, undermining its performance.<\/p>\n

China has repeatedly proved its durability and adaptability. Now, it must do so yet again, by ensuring that its \u201cnew normal\u201d is as stable, sustainable, and inclusive as possible. This entails strengthening China\u2019s institutional foundations and establishing clear, transparent rules, in order to encourage experimentation and innovation, ensure the smooth exit of failed projects, and manage the fallout of errors.<\/p>\n

Failure may be the mother of success \u2013 but only if one makes the effort to learn from it. Fortunately, China\u2019s leaders seem intent on doing just that.<\/p>\n

______________________________<\/p>\n

Andrew Sheng, Distinguished Fellow of the Fung Global Institute and a member of the UNEP Advisory Council on Sustainable Finance, is a former chairman of the Hong Kong Securities and Futures Commission, and is currently an adjunct professor at Tsinghua University in Beijing. His latest book is\u00a0<\/em>From Asian to Global Financial Crisis<\/a>.
\n<\/em><\/p>\n

Xiao Geng is Director of Research at the Fung Global Institute.
\n<\/em><\/p>\n

Go to Original \u2013 project-syndicate.org<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

The key to understanding China\u2019s development path is to grasp the process of trial and error that has long guided policymaking. In such a context of experimentation, mistakes are to be expected; what matters is how the country’s leaders respond to them.<\/p>\n","protected":false},"author":4,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[146],"tags":[],"class_list":["post-55962","post","type-post","status-publish","format-standard","hentry","category-economics"],"_links":{"self":[{"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/posts\/55962","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/users\/4"}],"replies":[{"embeddable":true,"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/comments?post=55962"}],"version-history":[{"count":0,"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/posts\/55962\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/media?parent=55962"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/categories?post=55962"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/tags?post=55962"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}