Nobody Except China: The Only Country That Hasn't Seen a Crisis in 40 Years

© AFP 2023 / STRAn investor checks stock market prices at a securities firm in Fuyang, in eastern China's Anhui province
An investor checks stock market prices at a securities firm in Fuyang, in eastern China's Anhui province - Sputnik International
China is the only country where there hasn't been an economic crisis in 40 years. Prof. Lin Yifu, director of the Institute of New Structural Economics at Peking University and former Senior VP of the World Bank, told Sputnik that fears regarding the Chinese economy were unjustified and that its problems have been greatly exaggerated.

There has been talk about the Chinese economic miracle for more than a decade now. The comparison of Chinese gradualism and Russia's "shock therapy" has been discussed in the work of many Russian scholars and analysts since the beginning of Russian reforms.

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Late last week, a joint conference with the Institute of New Structural Economics at Peking University was held at the Institute of Asian and African Studies (IAAS) to discuss the economic reforms of the two countries.

The gradual transition from a centrally planned economy to a market economy, the preservation of the political system, state-controlled reforms and managed market institutions is the so-called "gradualist" approach which China has been pursuing for 40 years. Chinese reforms have been, as most experts agree, highly successful. Unlike Russia, where market reforms and price liberalization took place immediately, in China this transition happened without social shocks.

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The ideologists behind Russian market reforms of the early 1990s believed that the USSR could not follow the Chinese model. Industrialisation was already complete in the country, 98% of people worked in state-owned enterprises, and apart from by "privatisation from above," the problem could not be solved. The economic situation was so grave that full price liberalisation could not be postponed.

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However, neither officials nor ordinary Russians were ready for such a quick breakdown of the economic system. Overnight some became very rich, while others were reduced to abject squalor.

State institutions, including fiscal mechanisms, hadn't been established. As a result, economic growth was much lower than its potential and the treasury experienced huge tax losses. In the space of six years this led to the 1998 crisis, when the state defaulted on government short-term bonds.
China never experienced such shocks.

There was no instant ten-fold or hundred-fold increase in prices. The division (gap in) of the population did happened, but gradually. At the same time, some economists argue that a complete transition to a market economy is impossible without unpopular socio-political reforms. They note: indeed, in contrast to the USSR, China was able to secure for itself a double-digit growth rate for a many years without a drastic liberalisation of markets.

However, a planned economy and state intervention by themselves create structural imbalances, which each year only increase. China, as they insist, has just come to the conclusion that without serious reforms, growth cannot be sustained.

Chinese conference participants, however, criticised the model of full and one-stage market liberalization. They argued that countries with transitional economies in such situations immediately lose all their competitive advantages. Thus, only other economically strong states earn from their liberalization.

In China, there's a fundamentally different model for public investment than in the West. This makes China less vulnerable to external shocks, according to former World Bank Senior Vice President, Professor Lin Yifu.

"The advantage of the Chinese authorities is that they have a mature understanding of the economic situation, and all trends are monitored every month in order to understand the real situation," the scholar said adding that every quarter, every six months and every year dynamic data is updated.

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He continued that, therefore, measures were taken as soon as any changes are noticed citing an example of the problem of local government debt.

"When the Chinese authorities announced a company to deal with leverage, they also announced a structural reform of the proposal, which consists of five points: the elimination of excess production capacity, overstocking, the fight against leverage, cost reduction, and the strengthening of weak points. Deleveraging means a reduction of the credit burden of local governments. Here we must beware of so-called "black swans". If earlier local governments borrowed through special investment platforms, now they are allowed to issue construction bonds themselves, and then directly exchange them for a loan from a bank. What is good here? Loans are short-term, and construction bonds are long-term. Thus, you have to constantly refinance debt. Of course, if local governments conducted long-term borrowing, this would significantly reduce credit risks. But the Chinese authorities are closely monitoring the real economic situation," Lin Yifu stated. 

Western experts say that China, using its old methods, will no longer be able to stimulate its slowing economy. During the 2008 crisis, the Chinese authorities pumped credit into the economy. Moreover, the central authorities did not accumulate much debt.

The main burden fell on local governments, which were responsible for social and infrastructure projects, and had to account for the growth rates of the economies of the territories under their jurisdiction. However, now the credit level has grown to such proportions that many local governments are not able to service the existing debt, let alone talk about increasing the credit load. Lin Yifu believes that the local government debt problem is artificially exaggerated by Western economists. According to the expert, the debt burden in China is significantly lower than in many Western countries.

"I think, the problem of local government debt is greatly exaggerated. The debt of the central and local authorities combined do not exceed 60% of GDP, which is very small by global standards. At the same time, central government debt is only 17% of GDP. The debt of local governments, including borrowings of local governments through private companies, accounts for 40%.

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China has a fundamentally different investment model from those of the Western countries. There, governments borrow to spend on social needs such as unemployment benefits and social protection.

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In China, these loans are for infrastructure investments: highways, high-speed rail, airports and urbanisation. That is, these investments are secured by assets that generate income. Additionally, such investments stimulate economic growth.

Therefore, if we consider the value of assets, then net debt without taking into account their value will be lower than 57% of GDP, and taking asset value into account, it will be less than 30%. I am not saying that you need to borrow as much as possible.

Of course, this needs to be approached wisely. But to create tension, as foreign media are doing, and to say that the level of debt in China is too high shouldn't be done."

There's no single recipe for growth, of course, and if the Chinese economists are right, only time will tell. As Nobel Prize-winning American economist Paul Krugman wrote in a recent column, everyone predicted the collapse of the Chinese economy even six years ago. But it still hasn't happened. Therefore, one must pay attention to the problems in China, but at the same time treat any reports of troubles with some skepticism.

Views and opinions expressed in this article are those of the speaker and do not necessarily reflect those of Sputnik.


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