What Is China＇s ＇Supply

Views of a heavy weight on China's economy (https://www./commentary/china-economic-policy-debate-by-joseph-e--stiglitz-2016-01), which have been shared by many on LinkedIn. Can't argue with Stiglitz's arguments, but the basis of his arguments is, well, off-base. It’s a safe bet that he based his arguments on what he learnt about China’s economy by talking with China’s government economists.

First off, when the Party talks about 'supply-side reform', in Chinese, it's different from what 'supply-side' economics is understood in the West. If one reads the contents of China's 'supply-side reform', it's really just a rephrasing of 'economic restructuring' that the Party has tried to implement for the better part of the last ten years, which has failed. “Supply-side reform” is old wine in a new bottle.

Just like the “One Belt, One Road” and “Mass Entrepreneurship and Innovation” initiatives, “supply-side reform” is just another phrase that the Party has picked up in order to show that something is being done to revive the economy. It is just one more piece of evidence that economy is much worse than what the Party has portrayed it to be.

The context, of course, was the Party’s frustration with consumption still contributing less than 40% to GDP. Some wise economists believe that China consumers’ demand is weak not due to government’s failing policies, but because of lack of good products that people want to spend their money on. The main impetus of their “supply-side reform” is to produce “better” products. They even attacked Keynesian economics altogether, dismissing it as unfit for China’s economy with “Chinese characteristics”. They actually argue that the consumption/GDP ratio is flawed and should simply be ignored. Yet, they want people to consume the “better” products. They are just torturing themselves in their logic to no end, just another indication that they have run out of “tricks”.

Stiglitz casually mentioned China’s “demand-side measures adopted after the 2008 global financial crisis”. Those measures were decidedly not demand-side measures. All of the 4 trillion RMB from the central government, plus more than twice that amount from local governments, most of them in the form of debts, went into infrastructure projects including housing, and expansion of “Yang Qi”, or Central Government-Owned Enterprises (such as expansions of steel mills: Bao Steel in Zhanjiang of Guangdong Province, WUSCO in Fangchenggang of Guangxi Province, and An Steel in Bayuquan of Liaoning Province, each new expansion at least twice the size of their parent companies, and none of them in Hebei Province which has higher steel-making capacity than any country in the world. See The Real China). Even privately owned enterprises of all stripes, with easy loans from the banks, began “diversifying” into real estate, pushing housing prices to the stratoshere. Those measures blew the bubble to astronomical proportions and sowed the seeds for today’s economic abyss. The Party went through several phases of “interpreting” the fiasco of its response to the 2008 global financial crisis. At first, it portrayed itself as a decisive and wise economic leader, deftly preventing an economic downturn in China. Then, sensing that things didn’t go as well as they had hoped, the Party began saying that China was making a sacrifice by injecting all those liquidity into an already unsustainable economy, for the good of the world. When Li Keqiang became Premier, he readily admitted that the 2008 measures were a mistake and vowed not to stimulate the current economic doldrums. Yet, last year, he rolled out a 7 trillion RMB stimulation package earmarked for 7 designated fields, all of them in infrastructure. In doing so, he was merely delaying the inevitable to another day. Of course, there is no shortage of “experts” trying to explain why the current 7 trillion were different from the 2008’s 4 trillion.

That the Party keeps changing its position to suit its agenda of the time is nothing new either. Thirty years ago when the Party started the one-child policy, families would kill new born baby girls in order to have ONE boy, as the boy is considered to be able to take care of his parents when they become old (while a girl is “married away” to another family). The Party exhorted parents to 'count on' the government to take care of them when they become old. Now with an aging population (as a result of the very one-child policy) and insufficient social security funds, the Party exhorted people NOT to rely on the government for retirement benefits. It all sounds almost comical, except that it real, and often so tragic, consequences of life and death. The case of the self-taught lawyer, Chen Guangcheng, who is blind, had to do with his defense of villagers’ rights to raise more than one child, before the one-child policy was officially abolished. Chen’s escape from house arrest, his dash to Beijing in a speeding car at night, evading the police on hot pursuit, rendezvousing with a US embassy car in Beijing, and being whisked into the embassy, and then causing a tense diplomatic brawl between China and the US involving the US Ambassador Gary Locke, Secretary Clinton and Assistant Secretary Kurt Campbell, had all the ingredients worthy of a Tom Clancy thriller.

 Assistant Secretary of State for East Asian and Pacific Affairs Kurt Campbell with Chen Guangcheng at the U.S. Embassy in Beijing, China, on May 1, 2012. U.S. Ambassador to China Gary Locke is also pictured. [State Department photo/ Public Domain]

 

There have NEVER been any real and genuine demand-side reforms in China, unless one calls the institution of “Golden Holidays” to spur tourism and spending spree as reform. The National Office of Holidays established as a result of the “Golden Holidays reform” has been the subject of satire almost like a national pastime. Stiglitz’s prescription of “reducing inequality, stemming environmental degradation, creating livable cities, and investments in public health, education, infrastructure, and technology” is nothing new. Many “Chinese economists with a conscience” have been advocating the same prescription for years. Today the Chinese people are under the weights of “Three Big Mountains”: healthcare, education, and housing (some would call retirement as another mountain). Take healthcare as an example. The amount and severity of bloody violence in healthcare in China are unprecedented in the history of humankind. “Special police” (SWAT teams) are routinely dispatched to hospitals to protect doctors and nurses.

How true that “Markets invariably take on a life of their own; they cannot be easily ordered around”, as Stiglitz put it. But the Party didn’t believe it. They bulldozed around, and succeeded in building China’s economy to 67.67 trillion RMB (let’s assume it is a credible figure). And now we are seeing the consequences of that “bulldozed” market.

The truth is that the Party is trying every which way to jack up the economy – they want to prove that their “China economic model” is real and works, and they want the world to believe it as well – except the one way – the only way – that will truly work: reform of the system itself. Instead, we are seeing the opposite: more centralization of power, more suppression of freedom of speech, and stronger effort to cultivate personal cult. They are all indications of a new emperor in the making. This is an invariably natural result of a deteriorating economy in a totalitarian country: deteriorating economy invariably leads to social discontent which threatens the ruler’s power, and then control on the society tightens.

Alas, so many economists and business elite forget the simple fact that China is still ruled by totalitarian communists. They talk about China’s economy as if it were Germany’s or Britain’s.

How the China economy is managed has huge implications to the world, way beyond just economics. If the world does not recognize what’s really happening in China, it may suffer unspeakable consequences, in more ways than one. The history is not without precedents.