65
Bloomberg Businessweek January 29, 2018
financial and other resources more efficiently. And it also
needs to tackle the flaws created by its previous boom,
most of all the mountain of debt that continues to get
heavier and potentially more destabilizing.
Traditional economics would mandate that China over-
haul its current economic system. Only a greater role for
market forces will sort out the country’s problems and set
the economy onto the correct path for development. That
entails withdrawing the state’s heavy hand in the economy:
stopping meddlesome bureaucrats from messing around
with the allocation of capital and credit, opening protected
sectors to competition, allowing money to flow more freely
in and out of the country, releasing the currency from state
manipulation, and reforming or even closing blundering
state-owned enterprises.
Officially, that’s where Beijing is headed. Its leaders
repeatedly stress how China will continue “opening up”
and become more “market-oriented.” In practice, how-
ever, Beijing is charting an entirely different course. Rather
than stepping aside, the Communist Party is entrenching
itself even more deeply in the management of state com-
panies. Regulators have determined that they, not cor-
porate executives, know best how Chinese companies
should invest overseas. Capital controls remain as tight as
ever; the currency is still under the thumb of the central
bank. The opening of China’s market to foreign business
is going nowhere fast. Nor does the state allow the market
to choose winners and losers. It dominates the financial
industry and doles out large subsidies to favored indus-
tries and companies. Even its censoring of the internet
has intensified, constraining the free exchange of infor-
mation supposedly indispensable to innovation. In one
2017 study, China was the worst of 65 countries in abuse
of internet freedom.
And the result? Nothing like the disaster many of us
would expect. Growth, though sharply reduced from the
levels of a few years ago, is still powering ahead at almost
7 percent a year, according to official statistics. Incomes
continue to rise nicely. Exports are strong. China has sped
ahead of the rest of the world in developing an electric car
market. And that strangled internet? Not an issue. China’s
digital economy is exploding, with online shopping,
mobile payments, and internet-based financial services
advancing at light speed. Whole neighborhoods of start-
ups are popping up in Shenzhen, Beijing, and elsewhere.
About that debt. Yes, it’s still rising, to 256 percent
of gross domestic product in mid-2017. History tells us
that countries that experience a rapid surge of debt like
China has over the past decade inevitably stumble into
some sort of banking crisis. If my maxims are still valid,
history should be repeating itself in China. But it’s not.
The accepted outlook is that China will avoid the full-on
meltdown we’ve come to expect from debt-gorged
emerging markets and instead will peacefully manage its
way through the problem with a state-guided process to
bring down leverage.
A traditional view would insist none of this should
be working. The state is supposed to screw up econo-
mies: Japan, India, the entire Soviet bloc—the list seems
endless. In China, the state seems to be preventing screw-
ups. When companies have expanded too quickly and
possibly taken on too much risk, such as property devel-
oper Wanda Group or the mysterious Anbang Insurance
Group, the government has played watchdog and appar-
ently pressed them to scale back. State ownership of the
financial sector maintains a degree of confidence in the
economy that might be lost under similar, debt-heavy
circumstances in a freer market. When investors did get
spooked by a stock market implosion in 2015 and cash
gushed out of the country, regulators tightened capital
controls and squelched the turmoil.
In addition to preventing bad outcomes, the government
also seems to be engineering good ones. Continued public
investment in infrastructure is opening up remote regions
of the country to greater business opportunities, expanding
incomes in rural areas and small towns, and adding fresh
sources of consumer spending. The subsidies dished out by
local governments are helping entrepreneurs start compa-
nies and create jobs.
Of course, we can’t know for certain where these
policies will take China. Nor can we tell what’s really hap-
pening in the economy. Bank balance sheets may not
expose the full extent of the financial damage being done
by state practices. Nor can we trust government data,
which almost certainly fails to represent the country’s
real economic conditions. And it remains far from cer-
tain that China’s leadership can successfully transform
the country from a factory floor that makes lots of cheap
stuff to a center of innovation that generates real techno-
logical advances and breakthrough products. Failing to
do that will likely make it much harder to keep improv-
ing the welfare of China’s aging 1.4 billion people, who
are still much poorer than those in the most advanced
economies. But if things continue as they are, we have to
take seriously the possibility that China has found a way to
coordinate state action with just enough market influence
to target and achieve positive results that a more open
economy may not be able to match. Perhaps China really
is refashioning capitalism.
Perhaps. I, for one, am still clinging to my maxims. My
favorite: You can’t escape math. Eventually, the weight
of numerical reality has to come to bear. Maybe China
can escape a financial crisis others could not, but as debt
mounts, it drags down potential growth. And there is an
unavoidable cost, too. Someone will have to pick up the
tab for the bad loans at Chinese banks, many of them still
likely unrecognized because of a lack of transparency.
Another downside of continued state meddling is the
stunting of productivity gains, without which sustaining
healthy growth will prove almost impossible. Maybe my
rules of economics will hold firm after all. But thanks to
China, I’m prepared to edit them.