FINANCIAL TIMES

August 20, 2015

No need to idolise China’s accident-prone technocrats

Michael Schuman

There is a widespread perception that the Chinese technocrat is some sort of superior being who can tackle policy conundrums that would make mere mortals rush for their Prozac. Such officials are more efficient and capable, we are told, than the mediocrities mismanaging the west.

China’s leaders “may have a more realistic and constructive assessment of the macroeconomic policy challenge than their counterparts in the more advanced economies”, Stephen Roach, the respected Yale economist, wrote in April. Donald Trump, the Republican presidential frontrunner, was even crisper in his judgment: “Their leaders are much smarter than our leaders.”  

But the average Chinese leader is just as adept at screwing up his economy as anyone else, perhaps more so. When executives and economists wake up to this reality, the fallout could be severe.

The fatal flaw of the Chinese policymaker is the primacy put on political imperative over economic reason. Legitimacy and public support for the often brutal Communist party regime are linked intimately with its ability to deliver rapid growth, good jobs and rising incomes. As long as the economy is proceeding as the party wishes, it turns a blind eye to potential dangers, only to be laid low by them later.

Take Beijing’s often-praised reaction to the 2008 financial crisis. By flooding the country with cash and credit, China pushed growth over 9 per cent through a historic recession. Only afterwards did China’s policymakers realise the potential catastrophe they had spawned. Debt exploded to 248 per cent of gross domestic product in 2014, nearly double the level of 2008, according to IHS Global Insight, a consultancy. Unsold apartments and useless factories stacked up across the land.

The same pattern took shape during the recent boom and bust on Chinese stock markets. The authorities encouraged Chinese to invest in stocks, and did not seem too bothered as share prices soared to bubble-levels, fuelled by an alarming build-up of margin lending. When shares tumbled beginning in June, the government scrambled to contain a self-inflicted crisis as inexperienced, debt-laden local investors vented their anger at state regulators.

The response — also politically motivated — was misguided. The government’s heavy-handed tactics to hold up the stock market — ploughing in cash, hunting for scapegoats, suspending trading for many companies — have tied the Communist party’s credibility to the Shanghai Composite index. Efforts to tackle the other problems it created — debt, excess capacity — are in their infancy. Optimists contend that Beijing has a long-term plan to fix the economy, approved at a 2013 party plenum, and short-term policy gyrations are to be expected. The past three decades of hyper-charged growth speak for themselves. But generating economic progress was easier when China was tossing its 1.3bn poor people into the global economy, unleashing productivity. With that low-hanging fruit picked, the choices between political and economic imperatives become more difficult, and the costs of getting things wrong higher.

It is worth recalling that in the 1970s and 1980s, when Japan was the rising Asian economic power, US experts characterised the Tokyo bureaucrat as a superman. Now Japan’s change-resistant bureaucracy is seen as one of the economy’s biggest problems.

If Beijing’s policymakers endure a similar reversal, that could be critical for China’s future. So far, global business has taken on faith that China’s leadership will steer the economy in the right direction. A loss of that confidence could convince investors and executives to spend their money elsewhere, further complicating the reform process, and perhaps even shake the Communists’ support among the Chinese people. The higher the pedestal, the harder the fall.

The writer is author of ‘Confucius and the World He Created’