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Wednesday, 7 October 2009
The challenges facing post-crisis China
MASSACHUSETTS Institute of Technology (MIT) professor Huang Yasheng talks to BT associate editor VIKRAM KHANNA about China’s economy after the global financial crisis.
Millions of workers have lost their jobs, half of SMEs may have closed
06 October 2009
MASSACHUSETTS Institute of Technology (MIT) professor Huang Yasheng talks to BT associate editor VIKRAM KHANNA about China’s economy after the global financial crisis.
Q. How has China been affected by the global economic crisis?
A. China has been very seriously affected. One estimate is that about 20 million rural migrant workers have been laid off. Many small and medium-sized enterprises (SMEs) have closed down. Electricity consumption by SMEs fell 50 per cent during the crisis. These companies operate at maximum efficiency, so a 50 per cent reduction in electricity consumption probably means that about half of them closed shop.
As SMEs traditionally create a lot of jobs, this means employment has also been severely affected.
There is a problem facing new graduates. It is estimated that 30-40 per cent of the class of 2009 will be unemployed.
All this is happening despite the massive stimulus launched by the government. So this impact is net of the stimulus. That’s how severe the situation is.
Q: What impact is China’s stimulus package having?
A: It has definitely helped GDP growth, which has been stronger than in other countries: 7 per cent for the first half of this year, and the estimate is that it will be 8 per cent for the year as a whole.
The stimulus has probably also helped support employment because of the construction activity, and it will help support social programmes. These are positives.
My worry is that although in the short run the package will be helpful, in the long run it may hurt the Chinese economy by creating even more capacity and by not necessarily boosting consumption, but simply increasing supply. Although it will be a short-term positive effect on income, construction jobs are not long-term jobs. So my worry is that, in 1-2 years, there will be all this excess capacity and consumption will not rise. If consumption in the US does not recover to pre-crisis levels, then where will this excess capacity go?
One possibility is that it could result in more bad loans. Another is that goods will have to be dumped at discounted prices, which would create the danger of a trade war with the United States. If that happens in 2012, that’ll be a US election year - and the US is already moving towards protectionism.
Q: Credit growth in China has been explosive lately, running at a 50 per cent annual rate, compared with a 10 per cent annual rate late last year. Is there a bubble in China’s asset markets?
A: There is definitely a bubble. China is witnessing a liquidity-driven recovery of the stock market and the real estate market. Real estate prices have come back to 2007 levels, which was a historic high. But rents are very low, which means returns are low. This is a classic symptom of a bubble. The stock market is also clearly a bubble. In August, there was a massive sell-off of stocks because the government put out a statement raising some concerns about loan growth. Even that mild concern led the stock market to fall 20-25 per cent. So, clearly, the market is driven by liquidity and not fundamentals.
Q: How dangerous are these bubbles? What will the end game be?
A: It is difficult to predict what will happen. We know there are bubbles, and bubbles usually burst. But we don’t know what will trigger the bursting of the bubble. Also, China is very different from the US because of its underdeveloped financial markets. People don’t react in the same way as banks and shareholders react in the US. In China, the government can control lots of things: they can manage the fall, they have more instruments to do that. Also, the information is not there and the system is not so transparent.
The bubble is worrying in a real economic sense. When you have a bubble, resources are misallocated, and go into bubble-generating activities. But I don’t think there will be a crisis. Banks in China won’t go bust. The government is 100 per cent behind the banking system. People also have a high level of trust in banks.
Q: Many economists are calling for China to shift from an export-driven economic model to a domestic consumption-driven model. What are the chances of this happening, and what are the difficulties involved?
A: It’s much more difficult than many people think. The reason why China exports so much is not because Chinese love exporting. And I don’t think it’s because the renminbi is undervalued either; it’s because the domestic consumption simply isn’t there.
There are two ways of looking at this: one is to say that the Chinese save too much; the other view, which I support, is that it’s not the low savings rate, but the low income growth that is the main problem.
How do you get the income growth up? Getting incomes to rise for hundreds of millions of people is a very difficult task. China needs to fix its rural economy - it needs to put more financial resources there, it needs to support entrepreneurship and to develop the service sector, which can generate a lot of employment and income. Also, and I may sound like a Marxist when I say this, right now, the government is basically behind the capitalists, and capitalists can bargain very effectively with workers. China needs to change the bargaining game to allow workers to have more bargaining power.
Q: How can it tilt bargaining power towards workers?
A: It can do this partly by financial liberalisation. One reason why workers don’t have much bargaining power is because the supply of labour is so large. But the other reason is that in the rural areas, it’s very difficult for people to have access to capital. So the only way for them is to get out of agriculture and go to the cities to look for jobs. When workers do this on a mass scale, they essentially reduce their bargaining power. So financial liberalisation would actually result in better bargaining power for workers.
The other solution is more political: to allow the unions to have more power. The government should protect the workers more, through higher labour standards and stronger labour laws. This can especially help in the short run.
Q: Although Singapore is very small compared to China, are there still lessons China can draw from Singapore’s experience?
A: I actually think that despite its size, Singapore does have a lot of valuable lessons for China. But those lessons are not the ones that Singaporeans usually talk to Chinese about and they are not the ones that Chinese think the Singaporean model is all about.
A lot of Chinese think the Singapore model is successful because there is a lot of state control over the economy and the society. I disagree that this is why Singapore succeeded.
I think Singapore succeeded for the same reasons as Microsoft, IBM and Dell succeeded; they succeeded because they operate in a very competitive environment. Because Singapore is small, by definition it has to compete.
I like to use the example of Singapore Airlines (SIA). You don’t have domestic routes, so you have to compete with airlines from all over the world. Even if the Singapore government controls Singapore Airlines, it does not control Hong Kong’s airline! Singapore Airlines has to compete. Of course, you need good organisation, but the most valuable lesson from Singapore is competition.
In China, this is lacking. The state-owned enterprises don’t compete with anyone. There are only four major banks in China - for 1.3 billion people - and they are all state- owned. If there is only one shareholder, there is no real competition.
Apart from creating a competitive environment, Singapore also has a lot to teach China in dealing with corruption and providing rule of law. Those, I think, are the more important aspects of the Singapore model, not government control.
Q: You have done a lot of work comparing the economies of China and India. What are the key differences between them, and what can each learn from the other?
A: Yes, the focus now is on each learning from the other. Remember the view that many people had about India just a few years ago? They saw it as a chaotic democracy that had no chance of growing fast. Now there is a huge correction of that view.
The main strength of India’s economy is that its financial system allocates capital more efficiently than the Chinese financial system.
Also, on corruption - yes, India has corruption, but it is still basically a rule-of-law country rather than a rule-by-law country - there is a big difference. It is also fundamentally a private-sector-driven economy, with a bottom-up growth model, rather than a top-down, government-controlled model. This has advantages, but it also has problems: for example, you can’t fix the infrastructure quickly.
One area in which India can learn from China is in social investment. Way back, China invested very heavily in the rural sector, including public health, resulting in the development of human capital. This is something India can learn. Most Indians, when they go to China, are impressed by the skyscrapers and the highways. But I think those are less important than China’s social investments.
Huang Yasheng is professor of political economy and international management and holds the International Program Professorship in Chinese Economy and Business at the Sloan School of Management, Massachusetts Institute of Technology. He was in Singapore at the invitation of Nanyang Technological University’s Nanyang Business School to participate in the Global Social Innovators Forum 2009 and to deliver a lecture to the school’s Executive MBA students
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The challenges facing post-crisis China
Millions of workers have lost their jobs, half of SMEs may have closed
06 October 2009
MASSACHUSETTS Institute of Technology (MIT) professor Huang Yasheng talks to BT associate editor VIKRAM KHANNA about China’s economy after the global financial crisis.
Q. How has China been affected by the global economic crisis?
A. China has been very seriously affected. One estimate is that about 20 million rural migrant workers have been laid off. Many small and medium-sized enterprises (SMEs) have closed down. Electricity consumption by SMEs fell 50 per cent during the crisis. These companies operate at maximum efficiency, so a 50 per cent reduction in electricity consumption probably means that about half of them closed shop.
As SMEs traditionally create a lot of jobs, this means employment has also been severely affected.
There is a problem facing new graduates. It is estimated that 30-40 per cent of the class of 2009 will be unemployed.
All this is happening despite the massive stimulus launched by the government. So this impact is net of the stimulus. That’s how severe the situation is.
Q: What impact is China’s stimulus package having?
A: It has definitely helped GDP growth, which has been stronger than in other countries: 7 per cent for the first half of this year, and the estimate is that it will be 8 per cent for the year as a whole.
The stimulus has probably also helped support employment because of the construction activity, and it will help support social programmes. These are positives.
My worry is that although in the short run the package will be helpful, in the long run it may hurt the Chinese economy by creating even more capacity and by not necessarily boosting consumption, but simply increasing supply. Although it will be a short-term positive effect on income, construction jobs are not long-term jobs. So my worry is that, in 1-2 years, there will be all this excess capacity and consumption will not rise. If consumption in the US does not recover to pre-crisis levels, then where will this excess capacity go?
One possibility is that it could result in more bad loans. Another is that goods will have to be dumped at discounted prices, which would create the danger of a trade war with the United States. If that happens in 2012, that’ll be a US election year - and the US is already moving towards protectionism.
Q: Credit growth in China has been explosive lately, running at a 50 per cent annual rate, compared with a 10 per cent annual rate late last year. Is there a bubble in China’s asset markets?
A: There is definitely a bubble. China is witnessing a liquidity-driven recovery of the stock market and the real estate market. Real estate prices have come back to 2007 levels, which was a historic high. But rents are very low, which means returns are low. This is a classic symptom of a bubble. The stock market is also clearly a bubble. In August, there was a massive sell-off of stocks because the government put out a statement raising some concerns about loan growth. Even that mild concern led the stock market to fall 20-25 per cent. So, clearly, the market is driven by liquidity and not fundamentals.
Q: How dangerous are these bubbles? What will the end game be?
A: It is difficult to predict what will happen. We know there are bubbles, and bubbles usually burst. But we don’t know what will trigger the bursting of the bubble. Also, China is very different from the US because of its underdeveloped financial markets. People don’t react in the same way as banks and shareholders react in the US. In China, the government can control lots of things: they can manage the fall, they have more instruments to do that. Also, the information is not there and the system is not so transparent.
The bubble is worrying in a real economic sense. When you have a bubble, resources are misallocated, and go into bubble-generating activities. But I don’t think there will be a crisis. Banks in China won’t go bust. The government is 100 per cent behind the banking system. People also have a high level of trust in banks.
Q: Many economists are calling for China to shift from an export-driven economic model to a domestic consumption-driven model. What are the chances of this happening, and what are the difficulties involved?
A: It’s much more difficult than many people think. The reason why China exports so much is not because Chinese love exporting. And I don’t think it’s because the renminbi is undervalued either; it’s because the domestic consumption simply isn’t there.
There are two ways of looking at this: one is to say that the Chinese save too much; the other view, which I support, is that it’s not the low savings rate, but the low income growth that is the main problem.
How do you get the income growth up? Getting incomes to rise for hundreds of millions of people is a very difficult task. China needs to fix its rural economy - it needs to put more financial resources there, it needs to support entrepreneurship and to develop the service sector, which can generate a lot of employment and income. Also, and I may sound like a Marxist when I say this, right now, the government is basically behind the capitalists, and capitalists can bargain very effectively with workers. China needs to change the bargaining game to allow workers to have more bargaining power.
Q: How can it tilt bargaining power towards workers?
A: It can do this partly by financial liberalisation. One reason why workers don’t have much bargaining power is because the supply of labour is so large. But the other reason is that in the rural areas, it’s very difficult for people to have access to capital. So the only way for them is to get out of agriculture and go to the cities to look for jobs. When workers do this on a mass scale, they essentially reduce their bargaining power. So financial liberalisation would actually result in better bargaining power for workers.
The other solution is more political: to allow the unions to have more power. The government should protect the workers more, through higher labour standards and stronger labour laws. This can especially help in the short run.
Q: Although Singapore is very small compared to China, are there still lessons China can draw from Singapore’s experience?
A: I actually think that despite its size, Singapore does have a lot of valuable lessons for China. But those lessons are not the ones that Singaporeans usually talk to Chinese about and they are not the ones that Chinese think the Singaporean model is all about.
A lot of Chinese think the Singapore model is successful because there is a lot of state control over the economy and the society. I disagree that this is why Singapore succeeded.
I think Singapore succeeded for the same reasons as Microsoft, IBM and Dell succeeded; they succeeded because they operate in a very competitive environment. Because Singapore is small, by definition it has to compete.
I like to use the example of Singapore Airlines (SIA). You don’t have domestic routes, so you have to compete with airlines from all over the world. Even if the Singapore government controls Singapore Airlines, it does not control Hong Kong’s airline! Singapore Airlines has to compete. Of course, you need good organisation, but the most valuable lesson from Singapore is competition.
In China, this is lacking. The state-owned enterprises don’t compete with anyone. There are only four major banks in China - for 1.3 billion people - and they are all state- owned. If there is only one shareholder, there is no real competition.
Apart from creating a competitive environment, Singapore also has a lot to teach China in dealing with corruption and providing rule of law. Those, I think, are the more important aspects of the Singapore model, not government control.
Q: You have done a lot of work comparing the economies of China and India. What are the key differences between them, and what can each learn from the other?
A: Yes, the focus now is on each learning from the other. Remember the view that many people had about India just a few years ago? They saw it as a chaotic democracy that had no chance of growing fast. Now there is a huge correction of that view.
The main strength of India’s economy is that its financial system allocates capital more efficiently than the Chinese financial system.
Also, on corruption - yes, India has corruption, but it is still basically a rule-of-law country rather than a rule-by-law country - there is a big difference. It is also fundamentally a private-sector-driven economy, with a bottom-up growth model, rather than a top-down, government-controlled model. This has advantages, but it also has problems: for example, you can’t fix the infrastructure quickly.
One area in which India can learn from China is in social investment. Way back, China invested very heavily in the rural sector, including public health, resulting in the development of human capital. This is something India can learn. Most Indians, when they go to China, are impressed by the skyscrapers and the highways. But I think those are less important than China’s social investments.
Huang Yasheng is professor of political economy and international management and holds the International Program Professorship in Chinese Economy and Business at the Sloan School of Management, Massachusetts Institute of Technology. He was in Singapore at the invitation of Nanyang Technological University’s Nanyang Business School to participate in the Global Social Innovators Forum 2009 and to deliver a lecture to the school’s Executive MBA students
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