There are many who discuss the Chinese economy, from apocalyptic collapse merchants to the China-hyping bulls. But one economic commentator seems particularly respected, with his opinion widely sought from the highbrow financial media through to local TV. Patrick Chovanec is professor at Tsinghua University’s School of Economics and Management, who through his media appearances and his forthright blogging at chovanec.wordpress.com offers the world insight into how the economy is really doing. He met Agenda to talk about where China is at, and where it needs to go.
What sparked your interest in economics, and if forced to label yourself (such as Keynesian or Freidmanite), which would you choose?
I had a great teacher in high school who really got me into the subject. But really my first interest was in politics, and like many people like that, I was a history buff. Reading histories of businesses and the way economic policy affected people, I realized that’s where my interest really lay. Everyone in China knows how central economic policy is to society and history – so much so that political debate here is usually done by proxy via economic debate – so it’s utterly central to what we do. I don’t like to label myself, because labels shut off what you can talk or even think about, but I’ve been influenced by the Austrian school of economists. They really focus on value creation – which I think is the central question. Keynes had great insights into modern economics, but omitted this central issue. If value creation is done right, the rest tends to follow.
How long have you been resident in China now?
I’ve been living in Beijing for four, having moved to Hong Kong in 2000. I first came to China in 1986, when from the day I landed it was like nothing I’d ever seen. That’s what caught me the China bug. It was all just beginning to change then. I came back in the early 1990s for half a year and could tell the differences. I went through Shanghai, Guizhou, Xian, back through Tibet and down the Yangtze river – and those places were a lot harder to get to then. There were no highways in Sichuan!
Is there truth to the phrase that the longer you’re here, the more you realize you don’t know?
China always surprises you; you should never assume you have it down. Even Chinese people don’t know everything that’s going on– foreigners here should have that humility, but like Americans back in the US, some people can assume they know it all. So of course the main thing is to keep asking and learning. There’s not one story, one narrative, in China. A country this big is always a multiplicity and often contrary.
What does your work at Tsinghua involve?
I teach a couple of courses: “US Business History”, where I compare business and development models, and “Doing Business in America”, which is about what Chinese companies need to do to go global, and how you function in a different legal, social and political environment. We look at the challenges facing CNOOC, Huawei, and Haier, for example. It’s a lot of fun.
Recently you’ve been blogging and tweeting about a potential severe downturn in the Chinese economy. What trends are driving this?
China has for thirty years had a successful growth model, which also worked for Japan and Korea. But it has imbalances: it depends on suppressing domestic consumption and channeling resources to exports. As long as the rest of the world can absorb this, it’s fine. This is easier for a small country but when you have the second largest economy in the world, this causes problems. In the last three or four years, the global financial crisis has shown the limit of this approach. But instead of changing it, officials here have pushed the model to the limit by maximizing investment. The trouble is that they are creating capacity (in real estate, production and so on) which has to be used. There’s not enough internal demand to run these, and the Chinese economy is geared to export. This knocks the legs out of current growth.
Thomas Orlik of the WSJ wrote a book about reading China’s economic indicators. How much of a problem is the opacity of the system?
The National Bureau of Statistics says China has a long way to go in statistical measuring. It’s something of a black box. Sometimes rules change and nobody is told, and they don’t revise the figures to take account of that – this has even happened with the monetary measure M2. A lot of statistics are fed to people from local officials with vested interests. So even if they’re trying to be honest, it’s difficult. You can’t take anything on face value; you have to see it all as a mosaic. Much of what I do is gather data points and extrapolate from that to form a story.
Are the recent incremental moves towards internationalizing the yuan having any effect on the overall economy? What further steps are needed?
The one meaningful way to internationalize would be to make the yuan fully convertible. Anything else is negligible. Some steps have been taken but this goal is far off. Some have said that it could be done in three or four years but that’s really unlikely. If China opens the yuan to be convertible, it loses control of either the exchange rate or interest rates: you can’t have all three. The impact on the closed banking system would be extremely difficult, too: all the bad debts would be exposed, as happened with Japan. So while the government likes the sound of having the yuan as an international reserve currency, when they see the implications, they back off.
Is it fair to say that vested interests have too much skin in the game for rebalancing? What’s preventing the change in economic course that everyone agrees is needed?
Partly, with the influence of state-owned enterprises. But even if not, the process of creative destruction is not so accepted here. Is China willing to accept industries fail as well as succeed? So rebalancing is painful to all, not just vested interests. There’s this notion that China plans for five to ten years ahead, but infrastructure development isn’t really intended for the long term but for immediate GDP numbers. Most leaders want the immediate highs and reform takes a backseat. Similarly, always pushing for surpluses is an entrenched mindset. The challenges and solutions that China is grappling are of a different order now, and are a result of its success, not its failure. But the challenge is to proactively recognize the change and the different ways required to progress now.
What data sources do you find most informative or telling?
You can’t get too fixated on one indicator. There are always multiple explanations, for example with electricity. What I’m trying to do is tell a story and there’s no limit to what you can find. Real estate is important because it’s a major driver of the economy and it plays a role in underwriting credit. The flawed data you encounter leads you to seek as many data points as possible. So you follow the story, even when that takes you to surprising places.
Martin Jacques’ book When China Rules The World presented a picture of China inevitably developing towards a modern market economy like South Korea or Taiwan. Is this likely or even feasible?
Jacques’ thesis that China and India will return to their preeminence of 500 years ago is right, according to broad historical trends. But growth is not linear. If you look at US GDP growth over the past hundred years, the Great Depression looks minor but of course it was a major event. It’s the same with China: what looks like minor blips have huge effects. The 19th century US went through great booms and busts with creative destruction stripping out the inefficiencies. So any correction here is likely to be more severe since such corrections aren’t ongoing. Sure, China will probably be more influential and powerful, but over five or ten or twenty years, it could easily be very bumpy. So it’s a bad reading of history of Jacques’ part.