Page 67 - Bloomberg_Businessweek

Bloomberg Businessweek January 29, 2018

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