Does China Need More or Less Marketization?
I do not normally address other work primarily because a lot of Chinese work is higher quality than it used to be and I will not respond to everyone I disagree with. However, sometimes there are stimulating pieces that catch my attention and Tom Orlik of Bloomberg wrote a good piece on why China would be well advised to proceed very cautiously on market reforms.
Now before anyone expects a pro or anti-free market rant, as I always stress, these decisions or situations, especially with China, involve a lot more nuance and subtly than simple binary decisions. While I do have a general free market bias, I recognize the short comings and limitations of the market but consider it like Churchill considered democracy: the worst possible system except for all others.
Let us take a simple starting point. If the PBOC announces before market opening that the RMB is now freely convertible and that people can do whatever they want with the RMB, I think that using a conservative estimate the RMB would fall 20%, creating significant stress in both China and the rest of the world. (Side note: for everyone who says the RMB is fairly valued, ask them what it would trade at if it was allowed to float: then listen to the equivocation and excuses start.)
The problem is that both free and anti market people forget that economics is, among other things, the study of tradeoffs. Raising tariffs may protect jobs but what is the tradeoff in both direct financial cost and longer term economic organization and moral hazard costs? Consequently, there is almost no point in time on any analysis that we couldn’t claim that increased marketization will raise risks. Higher risk with increased marketization will almost always be true.
Even looking at this from a classical risk return payoff framework it will be true: if capitalism has generally proven to have higher growth rates that implies it is also assuming higher levels of risk. The United States had about 50,000 corporate bankruptcies in 2015 while China had about 1,000, there is on a very basic level a higher risk of overseeing a corporate bankruptcy in the United States than in China.
However, the debate about the role of the market turns on much more subtle issues that something as crude as say whether to allow the RMB to float in the next 24 hours. The reality of the debate of marketization in China focuses on two questions: whether or not to let have markets have complete dominion but whether markets will have anyinfluence and whether China is moving towards or away from greater market influence.
Right now I think the clear answer is that China continues to move away from allowing greater market influence. The RMB remains essentially pegged to the USD, financing remains almost entirely political, and the stock market acting as essentially a further way for the government to try and control prices. Even worse the Chinese government appears to be doubling down on the policies that brought them into the current state of affairs. For all of the talk about debt levels, China arrived in early 2016 with some of the highest debt levels in the world because of government policy not a market run amok and not only has it chosen not to address them but rather double down on the exact policies that brought it to this point. It is very difficult to see how in any appreciable way China is even moving in a direction that in anyway increases market influence.
Now before I get emails or comments about the growing number of defaults answer me this: what has ever happened to a company in default besides eventual bailout? A default in China essentially acts as a time out in sports and not a loss or end of season. That is not greater marketization if they always get bailed out.
I would actually be willing to be a Keynesian for China or anywhere else for that matter if it would assume its proper place and recede when appropriate. However, in China, like many places, government stimulus during slack periods becomes a narcotic that can never be pulled with people arguing about the increased risk of pulling it at any time. Consequently, every wave of the Chinese economy in the past decade has not witnessed any lessening of government influence, but rather a continual growth whether through financing channels or regulatory approval because there is always “risk” in reducing the role of the state. Whether the economy is weak or whether the economy is strong, well intentioned technocrats or risk averse commentators can always argue that reducing government support raises risks, which it does in some ways as already noted. However, the story of China in the past decade is not government responding to the needs of the economy but rather permanent domination.
The real risk is that the failed policies promoted by the never ending government support reach a tipping point that the government can no longer control. I actually agree that unleashing complete marketization on China right now would probably result in wide spread firm and bank failures as well as a currency crisis. However, given the state of political and financial oppression, I see little risk of that in the near future. What concerns me is that as China continues to double down on the failed policies that brought it to this point, it will reach a tipping point at which it will be unable to control the outcome. China is now one of the most indebted countries in the world, even using the narrow official data, with key measures continuing to grow much more rapidly than any other country. At the rate debt is increasing, there may come a time when it exceeds Beijing’s ability to control the outcome.
The debate about marketization in China is less about whether you should or should not have markets but what direction do you want the country to go and what risks do you prefer to accept. The answers seem pretty clear: Beijing wants greater control and accept the risk that it can control the outcome.