Last week I attended the 24th Annual Conference of the Chinese Economics Society of Australia (CESA), a network of mostly Australian academics with research expertise in the Chinese economy.
At this conference I was struck by the difference between what most of those present thought were the key issues relating to China’s economy, and the topics that are most regularly discussed by the financial market economists and business commentators in the mainstream press.
For example, that week, the mainstream media had been preoccupied with real GDP growth in China slowing to its lowest level since the GFC and interest rate cuts.
But conference participants instead concentrated on the causes of China’s internal imbalances (high rates of savings and investment and low rates of consumption) and external imbalances (large current account surpluses), and the prospects of these being remedied in the medium and long run. (I’ll explain more about why both these things matter further down.)
Commentators tend to focus mainly on the short run cycle, ignoring institutions, history and culture; yet they could actually learn a lot from the academics at the CESA conference, who tended to emphasise these things.
One explanation for the disjoint could be that academic economists don’t have any money on the line that is vulnerable to a cyclical downturn, nor do they generally advise those who do.
I suspect, however, that there is a more fundamental reason – a lack of literacy amongst many public commentators regarding China’s economy.
Here’s a list of what I took from the conference that anyone with an interest in the Chinese economy ought to know.
1) The trend matters more than the cycle.
Like any country, China has quarters, and even years, when growth is less robust than in others. But what has led to China emerging as the world’s second largest economy, more people being lifted out of poverty than at any other time in history, and massive demand for Australia’s natural resources has been its trend (average) rate of growth.
Policies such as cutting interest rates do not impact on the trend rate of growth. Addressing structural imbalances does.
2) Institutions matter.
Focusing on interest rate cuts by the People’s Bank of China is readily understood in that it is familiar territory. Monetary policy is the primary stabilisation policy seen in Australia and adjusting interest rates is how the Reserve Bank of Australia implements monetary policy. However, in China it is a supplementary policy tool at best. This is because the main borrowers in China’s banking system are state-owned enterprises and their borrowing decisions are influenced more by government directives and the availability of credit rather than its price. Those who are sensitive to price adjustments, such as non-state sector firms and households, largely do their borrowing outside the formal banking system.
3) History matters.
A paper at the conference discussed the importance of “industrial clusters” to China’s economic success. Clustering refers to many firms producing the same good locating in a single geographical area. Clusters can be seen throughout China. In many cases, the reason why a particular locality plays host to a given industry can be traced back to a decision by a local government official or a foreign investor several decades ago. Without knowing the history, it would be impossible to explain the cluster’s emergence and subsequent success.
4) Culture matters.
One of the most common explanations of China’s high savings rate is the lack of a comprehensive social security system. However, another paper at the conference added to what is now a convincing body of evidence that pinpoints the Chinese cultural preference for having a son as being just as important, if not more so.
Combined with the One Child Policy introduced in the late 1970s, this cultural preference has resulted in a grossly distorted gender imbalance at birth. An implication is that competition in the marriage market has become intense and unless a young man (or his parents) has sufficient savings to buy a house, his chances of attracting a bride are greatly reduced. Such an explanation might sound far-fetched to the average Australian, but not to anyone familiar with the contemporary Chinese cultural context.
The fact that many commentators appear not to fully comprehend the importance of institutions, history and culture in determining economic outcomes is really not surprising. These elements have little place in the neoclassical economic theories that dominate the economics courses that are taught in our universities.
The plight of Asian languages in our universities has been widely discussed. Literacy with respect to China’s economy is perhaps even worse.
As far as I am aware, only two universities in Australia offer a dedicated course on the Chinese economy: the ANU at the postgraduate level and UQ at the undergraduate level. This is a shocking gap given the place that China now occupies in our macroeconomic dialogue.