| | | China: Reasserting Control
| | 世界贸易组织论文
[摘要] china’s leadership appears to have imposed a moratorium on bank lending. it is a sign that the central leadership is reasserting control over the runaway investment bubble. eight months of mild monetary measures and jawboning had not been effective; many local governments colluded with property developers and commodity businesses to accelerate investment in the first quarter, which has forced the central government to react with drastic measures.
china’s leadership appears to have imposed a moratorium on bank lending. it is a sign that the central leadership is reasserting control over the runaway investment bubble. eight months of mild monetary measures and jawboning had not been effective; many local governments colluded with property developers and commodity businesses to accelerate investment in the first quarter, which has forced the central government to react with drastic measures.
what is occurring now is a battle to maintain stability. the investment bubble has become too big for normal economic measures to achieve a soft landing. only careful implementation of administrative measures may allow china to engineer a soft landing. even then, the odds for a soft landing are not high, in my view.
premier wen jiabao compared cooling investment to controlling the sars epidemic last year. it was the right analogy. the runaway investment bubble threatens to leave behind collapsing property prices, vast amounts of excess capacity and another wave of bad debts. because the government owns all the banks, chinese people would pay for the losses.
china’s investment cycles have always overshot because its financial system is not market-based and does not know how to price cyclical risks. further, corruption in the financial system makes risk pricing almost impossible. china must “marketize” its financial system and make the central bank independent in order to moderate china’s economic cycles, which would minimize the financial losses associated with economic cycles.
also, china must reform its system for collecting and aggregating statistics. china’s economic data are often unreliable and mislead policymakers. when policymakers fail to make the right decisions in time, as in this cycle, it endangers china’s stability. china’s leaders must reform the national statistics system in order to safeguard the country’s economic security.
reasserting control over economy is vital to stability
the central government seems to have imposed a lending moratorium on a number of banks. in my opinion, this is a show of authority to re-impose control. the central government began tightening in august 2003, with mild measures, hoping that market-based incentives would slow lending. however, many local governments, property developers and commodity businesses colluded to accelerate investment, supported by regional and local banks, against the wishes of the central government. fixed asset investment rose by 43% year on year in the first quarter of 2004, compared to 26.7% in the same period of 2003.
the overshooting of china’s investment cycle has become so big that it threatens the country’s stability. if china’s leadership does not take resolute action, i believe the national economy would spin out of control. this is certainly the right moment to show who is in charge of the country. shutting down some banks for a period is a signal to everyone that harsher penalties will rain down on those who continue to ignore the intentions of the central government.
china’s central authority must not waver in the coming days, since demonstrating its authority is paramount. if some local governments or banks continue to lend wantonly, the central government must mete out harsh penalties for everyone to see. it is a sad fact that because china’s financial system is not market-based and doesn’t respond to minor price changes, ‘kill a chicken and show it to the monkey’ is still a major tool for macroeconomic management.
directed credit quotas may be necessary
the overshoot of china’s investment cycle is too big for normal economic measures to ensure a soft landing, in my view. directed credit quotas may be necessary to ensure a soft landing.
we must define a soft landing or hard landing. normally, when an economy overshoots and grows above trend, a soft landing means that the growth rate reverts back to around the trend, and a hard landing means that the growth rate falls significantly below trend or even into recession. china’s fixed investment grew by 15.5% between 1993 and 2003 – the period covers two investment bubbles in 1993 and 2003. therefore, when the investment cycle lands, if it bottoms at around 10% it should be considered a soft landing, and if it registers a negative growth rate for two quarters or longer it should be considered a hard landing.
at the current growth rate of 43%, it is a steep fall to 10%. it would be difficult to achieve a soft landing from such a height without special administrative intervention. the key to a soft landing is to ensure that most of the ongoing projects are finished and new projects are severely limited. such an outcome would require targeted credit quotas.
the central bank should become independent
it is undesirable that china must resort to administrative intervention to improve the odds for a soft landing. it makes the country look like china 10 years ago and leaves the impression that its financial sector hasn’t improved after a decade of reforms. but we are where we are. it is too late to worry about perceptions.
however, china must learn from what is occurring now and ensure that massive overshooting would not be repeated in the next cycle. the key is to marketize china’s financial system and to empower the central bank to manage economic cycles with all the necessary tools.
china has marketized the production and purchase of goods and services with only a few exceptions. the financial system, however, has remained tied to the government. this combination has incentivized politically connected businesspersons to borrow from state banks to over-invest, since, if the business works out, the investor would make money and, if the business doesn’t work out, the state banks would be left with the losses in the form of npls. the combination of a market economy for goods and services and a government-controlled financial sector has created the incentives behind china’s massive investment overshooting in every cycle, i.e., china’s system allows businesspersons with political connections to gamble with bank loans.
interest rates, exchange rates and other prices have a muted effect on the economic cycle in such a system. further, as china’s central bank is not independent and it takes a long time for the top leadership to reach a consensus on a complicated economic issue like overshooting, china would always be behind the curve even if the price mechanism could be effective.
to become a normal economy, china must marketize its financial sector by severing its links to multiple layers of governments and transforming banks into profit-motivated business organizations. further, china must empower the central bank to act preemptively against economic overshooting, i.e., the central bank should become independent.
some may ask why china should have a marketized financial sector or an independent central bank, since china has grown rapidly on average despite the boom-bust cycles. however, one must check the cost in the form of npls. china’s growth has been expensive in the form of losses associated with npls. wouldn’t it be better if china could sustain high growth and low levels of npls at the same time? to achieve that, it needs a market-based financial sector and an independent central bank.
improving statistics is critical to economic stability
china’s statistics system has failed the country in this cycle, in my opinion. it has generated inconsistent and inaccurate data on growth and inflation. at a critical juncture in china’s economy, these data may have misled china’s policymakers, which has been harmful to china’s economy. the weakness of china’s system for collecting and aggregating economic data now threatens the country’s economic security.
bad statistics have plagued china for decades. however, the costs associated with bad data are escalating; china’s economy is simply too big to run on bad data. further, china’s statistics organizations pursue functions that are inconsistent with the impartiality required for such organizations; statisticians should not be politicians.
the central government should make reform of the statistics system a top priority. running a market economy requires good and timely data. a market economy cannot afford inaccurate and misleading economic data.
（摩根斯坦利全球论坛, andy xie (hong kong)）
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