Who is the best pro-liberty candidate in Hong Kong Chief Executive election, 2017?

William Wang

Hong Kong elected its’ new Chief Executive Carrie Lam by a 1,194-member Election Committee two weeks ago. One of the hotspots from the media is that though another candidate John Tsang was supported by more than 50% of the Hong Kong people according to various polls before the election, the Election Committee still elected Carrie Lam, who was supported by less than 30% of the Hong Kong people. As the Election Committee, which is selected not vote by one person one vote of the Hong Kong citizens but in a complicated process, it is highly possible for the more than 50% of the pro-Beijing Committee members to elect the candidate who is more loyal to Beijing but is less popular among Hong Kong people.

The low support rate of the elected new Chief Executive Carrie Lam would make her harder to work at the beginning of her term of the office of the Chief Executive; especially the tension between Beijing and Hong Kong people was not eliminated after the Umbrella Movements in 2014. The uncertainty of the performance of Mrs. Lam has been concerned by a lot of political analysts, but what should be concerned more are her policies, especially her economic policies. Carrie Lam is called ‘C Y Leung 2.0’ and C Y Leung is the current pro-Beijing Chief Executive who is famous for establishing Hong Kong’s first minimum wage laws and promoting welfare state in Hong Kong.

In the perspective of economics, minimum wage law would cause unemployment, and welfare state would cause more problems such as economic inefficiency, increasing government debt and medical service incompetence, which are all completely against the sort of pro-free market economic policies in Hong Kong.  Besides, though the land transfer system of Hong Kong is a state regulated program which

Though Carrie Lam promises that she would still keep the low tax rate policy, we still doubt that this is just an impossible policy proposal. Mrs. Lam is going to devote 640 million US Dollars public funding in governmental, education programs, which would possibly be used as sending pro-Beijing’s ideological brainwashing to young people.

Carrie Lam’s loyalty to Beijing and her interventionist policies would hurt both the political and economic freedom in Hong Kong. It is hard to be optimistic, but Beijing could have another option, John Tsang, who is not only moderately pro-Beijing but also is very popular among Hong Kong People. He is a decent candidate who can be accepted by both Beijing and the Hong Kong people.

However, another more important reason why John Tsang is the best option in this election is that Mr. Tsang has a relative pro-liberty policy proposal. Not only being against high taxation and economic regulation, but Mr. Tsang also believes that government should maintain a low tax rate and oppose the expansion of social welfare measures. During his 10-year service as Financial Secretary, the fiscal measures have been based on the amount of revenue and expenditure. Mr. Tsang refused to blindly implement the comprehensive and long-term social welfare policy so as to avoid the long-term financial burden of Hong Kong. The living and study experience in United States model the relative pro-liberty ideas of Mr. Tsang.

Besides, one of the most famous libertarian writers Ayn Rand also influenced Mr. Tsang. He said,

When I was studying at the Faculty of Architecture at the Massachusetts Institute of Technology, the students contended to read Any Rand’s novel, The Fountainhead. The young architects in the story are totally uncompromising about society. Although the novel is from a personal interests perspective, the end of the book is to enlighten the wisdom of people.

Hardly to believe Mr. Tsang is completely pro-liberty, as his policy proposals still include some state welfare programs and do not plan to eliminate all the state intervention, but it is still better to say that Mr. Tsang is much better than Mrs. Lam. The less the state intervene individual’s free choice, the more individuals can be better off and the more prosperity the society will have. Mr. Tsang’s relatively better policies and good communication ability with Hong Kong citizens would reduce the tension between Beijing and Hong Kong citizens.

Unfortunately, Mr. Tsang would not serve as the Chief Executive in the next five years. Hong Kong is still in a very uncertain situation after the 2014 Umbrella Movement.

China: the Past, Present and Future

China: the Past, Present and Future

This article is the English version of the speech draft on the conference for Instituto Juan de Mariana on March, 25, 2017

William Hongsong Wang

1. Before the 1978 reform

Javier and Antonio illustrated both the liberal thoughts and the economic and reform situation of China. These parts are fascinating. China had not only liberal views in the epoch of 2000 years ago but also had other free market and free society oriented thoughts in the last 2000-year history. These thoughts, with the thoughts from Laozi and Confucius, like Javier has demonstrated, influenced Chinese economy. Before the trade ban in the early of Qing Dynasty, Chinese people were trading with the rest of the world for more than 2000 years. In the epoch of Emperor Kangxi, to control the whole country, Qing Dynasty started trade ban with foreigners. Meanwhile, the ideology control becomes more restrict than before. Literary Inquisition makes it almost impossible to produce new thoughts in social science. In 1776, Adam Smith published his famous The Wealth of Nations, who systematically studied economic science. Because of the trade ban and ideological control, China started falling behind the Western world.

The Opium War in 1840 broke the nature status of the old Chinese political and economic system. Qing Dynasty was beaten by the United Kingdom in the war and was forced to open some trade ports for international commerce.

For banking system, Chinese banking system was also not entirely monopolized by the state in the last 2000. George Selgin from Cato Institute studied the free banking system in the late 1800s in Fuzhou, Fujian Province of China, where people were using their currency without governmental currency intervention.

China ended its monarchy in 1912. After the Republican Revolution, China Republic of China was established. The period of the Republic of China was in War Time. For dealing with the wars, the Nationalists established China’s first modern central bank that started issuing fiat money in 1828. The establishment of China’s first modern central bank was also the research of my Ph.D. thesis. After the creation of china’s first central bank, China quickly suffered from hyperinflation. During the second Sino-Japanese War (1938 to 1945), the average inflation rate of China was 174%. In the period of the Communist Revolution, from October 1947 to the middle May 1949, the peak month and Rate of Inflation was 5,070% in April 1949.

Hyperinflation rate destroyed Chinese economy, and the Nationalist Government withdrew to Taiwan in 1949. In the same year, Communist Party of China established the People’s Republic of China, which started the separation between China and Taiwan.

As Antonio has demonstrated the period of Mao Zedong from 1949 to 1976, we will go deeply to explain the Chinese market reform, which started after the death of Mao. As Antonio has shown, the top political reformers, like Deng Xiaoping, played a critical role to eliminate governmental intervention in the economy and people’s daily life. But China’s market reform was started by ordinary citizens who wanted to use the free market to improve their life instead of the centrally-planned system. After people successfully restored the market, top politicians started to promote the rule of law.

2. The start of the reform, in the case of Xiaogang Village

Now let me tell everyone the story of Xiaogang Village.

Before and during the Cultural Revolution, all of the lands, agricultural tools and harvest belonged to the government. Farmers were not allowed to eat the agricultural productions on the farms they were cultivating. Many times as the local government had to do greasiness in Cultural Revolution, impractical agricultural plans were demanded that made it impossible for farmers to feel incentivized to do their work, provide goods, and earn money. If the local bureaucrats wanted to get promotion or praise from their seniors, it’s’ better for them to report massive political and economic movements to attract attention from their bosses even these plans were entirely infeasible. Many farmers died from starvation, and many were executed or punished for not obeying the bureaucrat’s orders by eating the harvest from their land.

In the spring of 1978, to resist drought and extreme poverty 18 farmers in Xiaogang Village of Anhui Province began disobeying central plans from senior officials by farming for their needs and the needs of the local free market to make a living. They separated the public farms amongst every individual. All of these people were responsible for their farms and crops and tried their best to grow agricultural products based on their market information. Of course, it was illegal at that time, but people there were so hungry that if they didn’t enact the reform themselves, they would not have survived.

This spontaneous, organic change was growing in many villages in the Anhui Province because farmers found that planning their “own” lands could help them earn more money and eat more food which was better than waiting for centrally-planned orders. The economic situation in these rural areas changed rapidly in just a few months after the new free market tests. That year, the farming team of Xiaogang Village’s total grain output was 66.5 thousands kilograms, which was equivalent to the sum of the total food production from 1966 to 1970; total production of oil (mainly groundnut) was 17.5 thousands kilograms, which was equal to the amount in whole past 20 years. Due to the development of output, a total income of the people in Xiaogang Village was over 47,000 Chinese Yuan, which was 400 Yuan per person and was 18 times higher than the previous year. Famers called this new agriculture institution as “household responsibility system” (包產到戶). This agricultural reform started the famous Chinese “Reform & Opening up” nowadays.

At this time, the change was becoming a hot political argument in the Communist Party of China (CPC) itself. Some local politicians allowed farmers to do market reform, but some did not because they didn’t want to take the risk of losing their jobs or being put in jail for enabling reform without the permission of China’s political leadership. After hesitating for a few months against widespread resistance to deregulation reform among top leaders in the Chinese government, Wan publicly supported the agricultural reforms occurring in the Anhui villages.

Used with the permission of the Central Committee of CPC, other parts of China’s rural areas gradually started doing the household responsibility reform, which allowed every family of farmers to be responsible for their profit or loss on agricultural production. The consequence of the reform was evident. The year-on –year growth rate of gross agricultural output of China was 8.6% in 1979. The grain production was 33.12 million tons, which was also 8.6% higher than in 1978. The total grain yield increase in 1978 and 1979 was 49 million tons, which never happened after the establishment of Communist Regime in 1949.

Seeing the obvious result of the agricultural reform, China’s top leaders, like  Deng Xiaoping, who were taking a wait-and-see approach to the situation, finally decided to support the reform at the end of 1979. In 1980, Deng Xiaoping made a speech about that, “After we have introduced more flexible policies in rural areas, the result of the Household Response System was so obvious, which was changing the villages who had adopted the system. … The majority of the production teams in Fengyang County, Anhui Province who accepted the new system has totally changed their economic situation.”

At the same time, it was quickly promoted to other provinces over the next few years and resulted in rapidly expanding agricultural production. In 1982, a growth rate of the gross agricultural output was 33.4% higher than in 1978; the rate of increase of oil crops was 126.5% greater than in 1978; the growth rate of per capita income of Chinese farmers was 102.2% higher than in 1978. In 1982, the market reform in agricultural industry was finally made legal through the approval of Chinese Central Government and was officially named termed the Household Responsibility System.

Not only farmers were supporting themselves through market reform, but also the people from the major cities and towns. Many central planned local factories started to be managed by the local population themselves, which are called Township and Village Enterprises (乡镇企业). People near sea also began smuggling for surviving in the early 1980s. Besides, Special Economic Zones, which in some degrees copied the economic model of Hong Kong were also being adopted.

Doing business inside China and doing trade with foreigners were quickly legalized in the middle of 1980s. If the top Chinese politicians did not support the spontaneous reform, it would be impossible to legalize the spontaneous free market institutions. During the 1980s, Deng Xiaoping was the core of the reformers. Prime Minster Zhao Ziyang was reasonable for the economic reform part. General Secretary Hu Yaobang was reasonable for the mind emancipation movement. People were allowed to talk about politics again. Intellectuals were openly debating on which kind of political and economic system should China adopted. Their thoughts were even posted on the Party’s newspapers. In the leadership of General Secretary Hu, the Party was even trying to separate the management of the Party and the Government. Many famous free market-oriented economists, like Mao Yushi and Zhang Weiying, also participated the debate and the reform of economic institutions. The atmosphere of the liberty of free speech was obviously much better than the current China.

3. Crisis in China, in the Case of Real Estate Industry

As Antonio has demonstrated, the Tiananmen incident in 1989 ceased the political reform. Though in the urge of Deng in 1992, China restarted to reform the economic issues, but the majority of economic policies were Keynesian Economics-oriented, as Antonio has presented. The State Owned Enterprises owned by the Central Government were cut into only 138 in the April of 2016. But the majority of them controlled the majority industries of a military, telecommunications, oil, insurance, banking, tobacco, rail passenger and freight, postal, port, airport, radio, television, publishing, etc. Some local governments were even managing restaurants. Though the State Owned Enterprises were supported by the state, many of them are losing at least millions of money every year. As many of them are borrowing the money from Commercial banks, and because of the fiat money created by central banking system the bankruptcy of State Owned Enterprises will cause a systematic economic crisis in China.

One of the most suffered industries was the real estate industry. Antonio and I also made an empirical research on Chinese real estate industry based Austrian Business Cycle Theory. This study will be published on Proceso de Mercado this June.

According to Austrian Business Cycle Theory, the new credit created by central banking would decrease the interest rate and prolong the industries, which would not be seen in production structures by the nature interest rate. Later as these newly created industries are credit oriented, consumers would possibly not buy these products. Then interest rate will raise, bankruptcy would happen in industries. As time is very limited, we are not going to demonstrate the details of Austrian Business Cycle Theory.

From September 2005 to January 2009 was the first cycle. In the first reporting period, the growth rate of salary is almost in the same trend, which means people still could buy the houses. But as we know, once central bank uses monetary stimulus to accelerate real estate industry, the gap between the growth of average wages and growth of average real estate price would become bigger and bigger. The duration of this cycle was three years and five months.

The length of the second period was three years and two months. Now we find that in this sub-economic cycle, after the decreasing of the year to year housing price happened in 2010, PBCO immediately issued more credit in both the developers and consumers part of CREI in 2011. It seems that the monetary stimulus plan was useful, but we should understand the economic process is not a static process, but a dynamic one, which consists of different productive stages. As the artificially low-interest rate appears in CREI, investment goes into there instead of other industry, which causes discoordination and destroys productivity in the full productive stages. Besides, in those productive stages, because the value is subjective, dynamic and implied, it was impossible for governments and central banks to know what people want to produce and consume, and any governmental intervention would cause chaos in society, so as the same as the investment in CREI.

The malinvestment posed by the fractional central banking credit did have its effect during this sub-economic period. According to news reports, China already had at least 40 ghost cities where had built houses, hotels, schools, roads and other public facilities but almost nobody lives there.

From February 2012 to January 2015 was the third business cycle in real estate industry. According to news report, there are 12 empty cities appeared in 2013 because of the former economic stimulus plan

From January till now are the fourth business cycle. According to the news report, there are at least 50 ghost cities in China in 2015 constructed by new real estate in recent five years, where the population of each city is less than 5,500 / sqr km. The top 10 ghost cities which have the population less than 3,900/ sqr km.

Besides that, there are at least three real estate enterprises bankrupted since 2015. They owned more than 880 millions debt.

4. Suggestions

As China has a lot of problems, we have to reform China. Here are some tips in the Austrian perspectives.

Concepts lead to actions. And actions lead to change. First, China should focus on the education of free market and property rights. We have to realize that even though China has achieved a very great market reform driven by market rules, the country has a long tradition of absolutism, which makes the people nowadays still believe that China needs one party political system and central planning.

Besides, in China, if you want to do business, especially big business, you have to have connections in the government. There is a particular word to describe this Chinese character crony capitalism, Guanxi. If Chinese people do not understand the rule of law and the principles of economics, they will continue using guanxi for their benefit.

Second, we propose the privatization of SOEs, which is the primary concern of China’s economy. We conclude from our study that the inefficiency of SOEs reduces the credit to private enterprises and provoked problems to commercial banks. SOEs are also invading property rights, which should be eliminated entirely.

Thirdly, China needs to abandon the capital controls and the fixed exchange rate policy and welcome free banking. The free flowing of money and the liberalized interest rates would increase the competition in Chinese industries. Of course, finally China has to adopt free banking to avoid the systematic economic recession and cycle caused by central banking, but the current proposal is more practicable and would make it easy to take free banking in future.

Fifthly, China has to build an independent judicial system. An independent legal system could avoid the collision, or guanxi, between the officials and entrepreneurs, and provide a fair judgment for ordinary citizens.

Finally, China should decentralize the political power. The diversity of culture and custom makes impossible to keep a central planning system in a more and more pro-market Chinese society in the future, which means a decentralized and a federal democratic system is becoming more and more necessary.

The Other Great Leap Backward

The Other Great Leap Backward

Antonio Vegas García

150708154405-china-economy-780x439

Recently, we have been exposed to a barrage of news from China: the rising worries about its economic growth, the recent plunge in the Chinese stockmarkets, the devaluation of the yuan, the announced drops in interest rates, as well as in the cash reserve bank ratios, the Purchasing Managers’ Index (PMI) fell, etc. [1]

Nevertheless, the bad news is not the economic indicators, but the government’s reckless interventions in these days. The government seems risking the initiated path by the Economic Reform towards the development, a movement in the bad direction that could become the next Great Leap Backward in the Chinese economic history.

In order to make it clear, we should build up a general idea about the Chinese economy to be able to put together all the pieces of the Chinese puzzle. The chinese economy is huge and extremely diverse (even we can name it as a dual economy in Lewis terms) but we can state that the Chinese prosperity looks like more a mirage than a reality. Of course that double-digit growth has permitted that China has lifted 600 million people out of poverty during 1981-2004 [2], but at the same time, it has sown the seeds of the future economic problems, the shadow of the Chinese prosperity.

Which are those flaws? Mainly the heavy-handed and commanded economy, through the financing part of the economy, whereby the government extract wealth from the people (mainly controlling the interest rates and the exchange rate of the currency), that is used afterwards to prop up the banks that have chunks of bad loans, thereby allowing them to carry on lending money to the unprofitable SOE (State Owned Enterprises). In short, the government has built a system in order to control every single aspect of the economy, which is generating long-term problems, such as shadow banking (even though the term includes a myriad of different non-conventional institutions).

This financial repression can be illustrated with the example of drug prohibition. When the government attempt to forbid the drugs what it gets is a black market where the people can sell and buy drugs according to human necessities (that are subjective), but the black market is not regulated and it is not safe enough for the users, thereby damaging the health of the participants. The more important (and the more repressive is the prohibition) is the forbidden necessity for humans, the more serious will be the suffering of the population. In the case of China’s financial repression it’s exactly the same: given that chinese people neither can take credit freely nor save their money, a black market pops up to satisfy the necessities, with credit of bad quality, thereby jeopardising the long-term perspective of chinese economy.

Under this outlook, the recent headline-grabbing news about china are not surprising whatsoever, but they are showing that the government is doing whatever it takes in order to shore up the binge. That government disposition is a helpful information, since in China everything is depending on the government. Until when the binge will last? Until the government desire unless it runs out of money, like once Larry White told me very cleverly. After all, it looks like that the government does not want to stop it.

With a slumping housing market, with an entire year of steadily lowering housing prices (see figure 1), the Central Bank of China has been lowering the interest rates one after another (see figure 3), jointly with the cash reserve ratio.(see figure 2), in a last attempt to foster the Chinese economy up to the promised 7% growth rate.

Figure 1: China newly built house prices YoY (Year on Year) change (%) Jan 2014-Jul 2015

chinese-housing

Source: Tradingeconomics.com

Figure 2: China cash reserve ratio big banks (%) 2011-2015

chinese cash

Source: Tradingeconomics.com

Figure 3: China interest rate (%) 2012-2015

chinese rates

Source: Tradingeconomics.com

I remember that the summer of 2013 was when I really opened my eyes about the Chinese economy, it was the Shibor (Shanghai Interbank Offered Rate) shock. After an increase of the lending in the first 13 days of June never seen before in history, the interest rates in the interbank market soared to a 12% rate for the seven-day repo [3]. The central bank forced the big banks to lend money to the small banks (with the argument that the overall liquidity within the system was enough), thereby rejecting the inquiry of the financial institutions of injecting more liquidity. One month later, the central bank had to inject a massive amount of liquidity in the system, at the time that the interest rates were lowered as well as the cash reserve ratio. The yield curve (an indicator that it’s used to foresee financial problems in an economy) has not stopped flattening ever since.

The recent plunge in chinese stockmarkets is anecdotal. From the early 2014, the stock indexes reached a high level without any reasonable explanation and mainly driven by credit financing (9% of market capitalization according to Credit Suisse). The price earnings ratio or PER (that is calculated dividing the price of a share over the ratio between the earning of the whole company over the number of shares, namely, the earnings per share, EPS), was in median terms 64 in Shenzhen stock exchange, whereas it is considered that a PER higher than 25 is expensive [4]. The Shenzhen case was paradigmatic. A clear indicator that the Shenzhen Stock Exchange was flying too high.

Therefore, the recent drops in those indexes have been obvious and they have been noticed in advance by Bloomberg or The Economist. And the drops will likely continue for a time. Even though, they are not so troublesome for the Chinese economy in the short-term (because the stock market is not so developed in China as in western countries; its relative size to the economy is small, 40% of the GDP whereas in USA is more than 100% of GDP and the financial culture in chine is still limited) but they will be crucial in the long-run. What is true is that it shows more than ever the shadow of the Chinese prosperity, the financial flaws of the Chinese economy. And the recent actions of the Chinese government are the most burdensome. Let’s see why.

Firstly, in China is urgently needed a complete financial liberalisation, where the bank interest rates can be fixed by the market, with more share of private banks in the economy and the banks being able to give lending according to market criteria and not with political criteria. This will bring the second opening of Chinese economy (the financial opening) and will push the world to a new level of financial globalization. Moreover, it would foster the SOEs to a new level of competitiveness, would give more resources to Chinese private companies and would reduce the power of the government. In other words, it would bring more freedom to Chinese people at a time the shadow of Chinese prosperity shrinks. However, as the recent actions of Chinese government tends to broaden the influence of public sector over stockmarket, the financial liberalisation has fallen to bits.

Chinese stockmarkets were always seen as not so trustworthy but nowadays more so than ever. The government introduced a curb in selling Chinese equities and also it undertook and equities purchasing programme, spending public money in order to prop up the stockmarket bubble. That is added to the enormous requirements that the companies have to fulfil, the daily limitation that a share cannot raise or drop more than a 10%. That is undermining the last bit of  truth on Chinese equities.

Secondly, as the equity financing is necessary for Chinese economy in order for the companies to be able to diversify their financing portfolio (debt and equity). Investors were always wary about the Chinese economy and at the time they were surprised that the Chinese economy was resilient to every kind of damage or bad indicators. Investors finally concluded that in China, everything is about its government.

Overall, it looks like that, even though China has advanced until now quite rapidly, a recession would be a necessary step towards China’s development, since the goverment is reluctant to reduce its grip in Chinese economy and it will do whatever it takes to prop up its power, influence and command in Chinese economy. It’s a necessary step that the government runs out of money and the crisis in that sense could be an opportunity. The last government interventions illustrate the government’s disposal to maintain the statu quo, even if that requires to risk the trust of international investors in China or risk positive results of the economic reforms.

Obviously, Chinese economy also has advantages, and it is reducing the importing of inputs to produce the goods that China exports, showing that China is improving in capital accumulation and the economy is more capable to design new products rather than buy them abroad. The attention is in the government’s side. The government still have weapons to shore up the financial mess and its influence on the market, but the money and the time are running out nowadays. What will be the next episode? The crisis in China, will force the government to another set of economic reforms.

Notes:

[1] Bloomberg (2015) China’s Official Factory Gauge Shrinks Available:http://www.bloomberg.com/news/videos/2015-09-01/china-s-official-factory-gauge-shrinks [Accessed: 31 August 2015]

[2] CNTV (2014) China has lifted 600 million people out of poverty Available:http://english.cntv.cn/2014/10/18/VIDE1413584528072923.shtml [Accessed: 31 August 2015]

[3] The Economist (2015) Flying too high Available: http://www.economist.com/news/finance-and-economics/21579862-chinas-central-bank-allows-cash-crunch-worsen-shibor-shock [Accessed: 31 August 2015]

[4] The Economist (2013) The Shibor shock Available:http://www.economist.com/news/leaders/21652326-long-term-consequences-chinas-coming-stockmarket-correction-are-ones-fear-flying [Accessed: 31 August 2015]

Antonio Vegas García is a researcher from the Shalom Institute and has graduated with a masters degree of finance from the Universidad Carlos III de Madrid (Carlos III University of Madrid).

In memory of Wan Li, Chinese market reformer and the agricultural reform in 1980s

In memory of Wan Li, Chinese market reformer and the agricultural reform in 1980s

William Hongsong Wang

Wan Li

On July 15, 2015, Wan Li, a Chinese market reformer in the 1980’s and former Chairman of the Chinese National People’s Congress died at the age of 99, Xinhua News Agency reported.

Like many Eastern countries, China’s market reform was started not by politicians and common people who have a clear theoretical background about free market knowledge but by those who believed that the free market could work better than a centrally-planned system. Wan Li was on of them. After serving in the Chinese Communist Revolution and suffering during the Culture Revolution, top leaders in the Communist Party like Deng Xiaoping, Hu Yaobang, Zhao Ziyang, and Wan gradually acknowledged that the Soviet central planning system was destructive to China. In an effort to escape the disaster and poverty of the Soviet system, these leaders decided to implement market reforms for the country.

After the Cultural Revolution ended in 1976, Wan was nominated in 1977 as the Communist Party of China’s 1st Secretary and Governor of Anhui Province, one of the major agricultural provinces in China. After the devastation of the Cultural Revolution and the centrally-planned system, farmers in Anhui Province were poor, hungry, and inefficient which caused a steep decrease in agricultural productivity. Wan recalled, “In the first year when I arrived in Anhui, only 10% of the production terms had the minimum level of food to eat.” [1]

Before and during the Cultural Revolution, all of the lands, agricultural tools and harvest belonged to the government. Farmers were not allowed to eat the agricultural productions on the farms they were cultivating. Many times as the local government had to do greasiness in Cultural Revolution (If the local bureaucrats wanted to get promotion or praise from their seniors, its’ better for them to report huge political and economic movements to attract attention from their bosses even these plans were totally infeasible), impractical agricultural plans were demanded that made it impossible for farmers to feel incentivized to do their work, provide goods, and earn money. Many farmers died from starvation, and many were executed or punished for not obeying the bureaucrat’s orders by eating the harvest from their own land.

Seeing this as a serious situation, Wan didn’t forbid farmers in Anhui Province from implementing agricultural reform. In the spring of 1978, to resist drought and extreme poverty 18 farmers in Xiaogang Village of Anhui Province began disobeying central plans from senior officials by farming for their own needs and the needs of the local free market in order to make a living. They separated the public farms amongst every individual. All of these individuals were responsible for their own farms and crops and tried their best to grow agricultural products based on their market information. Of course, it was illegal at that time but people there were so hungry that if they didn’t enact the reform themselves, they would not have survived.

This organic spontaneous reform was growing in many villages in the Anhui Province because farmers found that planning their “own” lands could help them earn more money and eat more food which were better than waiting for centrally-planned orders. The economic situation in these rural areas changed rapidly in just a few months after the new free market tests. That year, the farming team of Xiaogang Village’s total grain output was 66.5 thousands kilograms, which was equivalent to the sum of the total food production from 1966 to 1970; total production of oil (mainly groundnut) was 17.5 thousands kilograms, which was equivalent to the sum in whole past 20 years. Due to the development of production, total income of the people in Xiaogang Village was over 47,000 Chinese Yuan, which was 400 Yuan per person and was 18 times higher than the previous year. [2] Famers called this new agriculture institution as “household responsibility system” (包產到戶). This  agricultural reform started the famous Chinese “Reform & Opening up” nowadays.

At this time, the reform was becoming a hot political argument in the Communist Party of China (CPC) itself. Some local politicians allowed farmers to do market reform but some did not because they didn’t want to take the risk of losing their jobs or being put in jail for enabling reform without the permission of China’s political leadership. After hesitating for a few months against widespread resistance to deregulation reform among top leaders in the Chinese government, Wan publicly supported the agricultural reforms occurring in the Anhui villages.

Used with the permission of the Central Committee of CPC, other parts of China’s rural areas gradually started doing the household responsibility reform, which allowed every family of farmers to be responsible for their own profit or loss on agricultural production. [3] The result of the reform was so obvious. The year-on –year growth rate of gross agricultural production of China was 8.6% in 1979. The grain production was 33.12 million tons, which was also 8.6% higher than in 1978. The total grain yield increase in 1978 and 1979 was 49 millions tons, which never happened after the establishment of Communist Regime in 1949. [4]

Seeing the obvious result of the agricultural reform, China’s top leaders Hua Guofeng and Deng Xiaoping, who were taking a wait-and-see approach to the situation, finally decided to support the reform in the end of 1979. In 1980, Deng Xiaoping made a speech about that, “After we have introduced more flexible policies in rural areas, the result of the Household Response System was so obvious, which was changing the villages who had adopted the system. … The majority of the production teams in Fengyang County, Anhui Province who adopted the new system has totally changed their economic situation.” [5]

At the same time, it was quickly promoted to other provinces over the next few years and resulted in rapidly expanding agricultural production. In 1982, growth rate of the gross agricultural production was 33.4% higher than in 1978; growth rate of oil crops was 126.5% higher than in 1978; the growth rate of per capita income of Chinese farmers was 102.2% higher than in 1978. [6] In 1982, the market reform in agricultural industry was finally made legal through the approval of Chinese Central Government and was officially named termed the Household Responsibility System.

In 1980, Wan was nominated as one of the vice-premiers of China who continued to support the agricultural reform, market reforms in urban areas and Emancipating of Minds Movement. In 1988, Wan was nominated as the Chairman of National People’s Congress (NPC) to continue to play the role of a reformer in China. However, after the Tian’anmen Square protests of 1989 and the house arrest of Wan’s ally, former General Secretary of CPC Zhao Ziyang, Wan stopped discussing topics related to political freedom such as the liberty of free speech and the democratic reform in China. But instead, as the President of NPC, he devoted more of his time to the legalization of free market activities until his retirement in 1992.

From a libertarian and economic science perspective, comments on politicians should be made unprejudicedly. For promoting liberty, the correct issues Wan Li did for China was to allow spontaneous reform in Chinese rural area even though he was taking a high risk of losing his political future (in the late 1970s and 1980s, market reform was still an unwelcomed and dangerous issue in political agenda and many top CPC leaders were against that), [7] support other market reform and thought liberalization in 1980s, especially devoting more time on passing the laws for protecting market orders when he was in the position of the Chairman of the Standing Committee of the National People’s Congress. Regretfully, Wan Li didn’t do his best to avoid the casualties in Tian’anmen Square protests of 1989 and the further thought liberalization after 1990s. After Wan’s visiting for foreign countries, on May27th, 1989, he made a statement showing his support on Deng Xiaoping’s decision on using force to suppress the student movement in Tian’anMen Square which was different form his former support on Zhao Ziyang, who sympathized on student movement. [8]

What we can learn from Wan Li and the agricultural reform?

What can the current CPC leaders should learn from Wan? Leadership can learn to be more courageous with market reform initiations for China. What we see is, in the last 30 years, free market reform gives more Chinese an opportunity to take their own responsibility on their own life, liberating their entrepreneurship to create more goods and ideas for exchanging and improving different people’s life. What we also see is, the remaining part of central planning system, such as the economic monopoly of state-enterprises, too many administrative examinations and approvals for opening private sectors or non-profit mutual help organizations are disrupting different individual Chinese to seek for their own dream and happiness, which also influences the stability of Chinese societies. As the new Chinese leaderships have admitted for many times, market reform should be continued and they are really doing this such as cancelling many administrative examinations and approvals for private business. [9] Besides, it’s also necessary to deregulate the non-profit mutual help group to let the self-governing function among different individual be smoother which could also help government to reduce the burden on governing. And for Chinese people, they should learn from the courage from the 18 farmers in Xiaogang Village and trust that they themselves can take care of themselves much better than government and gradually understand the benefit from market process by themselves.

Notes:

[1] Wan, Li (2009) How did the agricultural reform start? Beijing: Guangming Online. Available: http://www.gmw.cn/02sz/2009-02/01/content_919690.htm [Accessed: 25 August 2015]

[2] Yi, Jing (2008) The change of people and land in Xiaogang Village. Beijing: People’s Daily Online. Available: http://house.people.com.cn/GB/98384/99155/99181/8174533.html [Accessed: 25 August 2015]

[3] Deng, Xiaoping (1994) The Selected Works of Dang Xiaoping (Volume II). Beijing: People ‘s Publishing House, pp 315-317.

[4] Yao, Yilin (1980) Report on the Work of the Government (1980). Beijing: the Central People’s Government of the People’s Republic of China. Available: http://www.gov.cn/test/2006-02/16/content_200778.htm [Accessed: 25 August 2015]

[5] People’s Daily Online (2004) The household responsibility system opened the door for agricultural reform. Beijing: People’s Daily Online. Available: http://www.people.com.cn/GB/shizheng/8198/36907/36908/2732004.html [Accessed: 25 August 2015]

[6] Griffin, Keith (1987) The structural reform and economic development of Chinese rural area. Hong Kong: The Chinese University Press, pp.222-224.

[7] In 1980s, Chinese leadership was separated into two camps. One is for the innovationists leaded by Deng Xiaoping, and Hu Yaobang, Zhao Ziyang, Wan Li, and son on were the members of it who supported market reform and a certain degree of political reform such was the freedom of speech and more political election; another is for the conservatives leaded by Chen Yun, Li Xiannian and so on, who supported central planning economy with only a few factors related with economic regulation and strongly disagreed with political reform. After the stepping down of the former Chairman of the Central Committee of CPC, Hua Guofeng in 1981, Deng Xiaoping totally became the most powerful leader of China. But as Chen Yun and Li Xiannian also had a strong influence in the party, the market reform was disrupted by the conservatives many times. More information see: Zhao, Ziyang (2009) Prisoner of the State: The Secret Journal of Premier Zhao Ziyang. New York City: Simon & Schuste, pp.91-94.

[8] Zhao, Ziyang (2009) Prisoner of the State: The Secret Journal of Premier Zhao Ziyang. New York City: Simon & Schuste, pp.8-14.

[9] More in formation about Chinese market reform, see Zhang, Weiying (2015) The Logic of the Market: An Insider’s View of Chinese Economic Reform. Washington, DC: Cato Institute.

William Hongsong Wang is a researcher from the Shalom Institute and has graduated with a masters degree of Austrian Economics from the Universidad Rey Juan Carlos in Spain (King Juan Carlos University).

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Why Renminbi is in devaluation?

Why Renminbi is in devaluation?

Dr. Zhu Haijiu

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On August 11st, China Central Bank, the People’s Bank of China (PBC) declared to downturn the central parity rate of Renminbi (RMB) against foreign currencies, then the exchange rate of RMB decreased 4.4% from August 11st to August 14th. World market was shocked by this devaluation. Chinese Austrian economist Dr. Zhu Haijiu was interviewed by Chinese media about why Renminbi is in devaluation.

The large devaluation of exchange rate shows the earlier devaluation of RMB in Chinese domestic market

The price of a country’s currency should be the same whether you use the domestic or foreign commodity to measure it or not. So the large devaluation of exchange rate of RMB shows the earlier devaluation of it in Chinese domestic markets.

Journalist: After PBC decided to adjust the central parity rate of RMB on August 11st, the exchange rate of RMB has dropped several points in a day. How do you see the drop of RMB’s exchange rate?

Zhu Haijiu: The drop of the exchange rate is the inevitable result from the former inflation, which also represents the Chinese economy is shifting into the period of crisis. On one hand, inflation advanced labour cost, which makes investment unprofitable; on another hand, the high asset price caused by inflation cannot maintain itself, which is on the ways of dropping. This prompts capital to outflow, which makes the drop of the valuation of domestic currency and makes the exchange rate depreciation become inevitable.

The price of a country’s currency should be the same whether you use the domestic or foreign commodity to measure it. But when Chinese people are touring in foreign countries, they can find that the price of many commodities in China is higher than the price of the same goods in foreign countries. And it is unreasonable to use the same amount of RMB for buying more goods in foreign countries. Market will let the two prices be at the same level. So the large devaluation of exchange rate of RMB shows the earlier devaluation of it in Chinese domestic market.

“Inflation” and “currency stabilization” cannot be got at the same time

It’s very easy to understand, the more goods an economy has, the more it will devalue, so as the same situation as in currency supply.

Journalist: The opinions as to why this devaluation of RMB happens is that China is facing both economic downturn and decline of foreign exchange reserve (for example, report from PBC today says in this July, funds outstanding for foreign exchange declined for ¥308 billion), but meanwhile the supply of basic currency will still keeping growing, which makes the devaluation of RMB inevitable. What do you think about this opinion?

Zhu Haijiu: According to economic theories, if the foreign exchange reserve declines, the supply of basic currency should also decline. But in the past year, on the contrary, the supply of basic currency was increasing, which meant that credit expansion didn’t stop but was growing stronger if we consider this offset the decline of basic currency caused by the decline of foreign exchange currency. During the past, I’m afraid that the overvaluation of RMB was kept artificially. So the sharp fall in the value of RMB is both the error correction for the overvaluation and the error correction for exchange maintained artificially.

“Inflation” and “currency stabilization” cannot coexist at the same time, so the devaluation of RMV is an unavoidable result from inflation. It’s very easy for understanding, the more goods it has, the more it will devalue, so as the same situation as in currency supply. The inflation has resulted in excess capacity in the real economy: productions cannot find buyers, the asset prices of real estate and stock raised and then dropped. Neither could currency avoid that situation. The drop of valuation of RMB happened just after the stock crash last month. The currencies of the countries that heavily rely on product factors exporting, such as Australia Dollar, Brazilian real and Russian ruble all have a large fall, so we can say RMB has held on firmly for a while.

For a period of time, PBC tried to maintain the price of assets by issuing more currency to avoid capital outflow. But this devaluation of RMB proves this way doesn’t work, which means we cannot avoid economic downturn by using currency. Sooner or later market rules will function which China Central Bank PBC has no choice but to follow. We can say this devaluation of RMB is “the winning of market but the failure of central bank ”. Economic crisis and the devaluation of currency are the inescapable results both from fiat money system and the currency manipulation from central bank.

Fiat money is unstable, which has the tendency of collapsing by itself. The increase of fiat money will surely accumulate debt, and debt should always be returned as obligation. When government tries to issue new fiat money to return the former debt, the devaluation of fiat money happens. If a government issues huge amounts of money, so the people in that country only need to use these money to buy foreign goods. You don’t need to work hard then you can live in a good life by those money. Will a good life suddenly fall into you lap? If it’s possible, the richest country on earth may be Zimbabwe. In the situation of inflation, the devaluation of currency must be discovered by market, which makes it impossible for government to cover and forcibly maintain the value of the domestic currency. In the 1990s, British government was beaten by George Soros is a good case for that.

Currency wars are bad for economy

The devaluation of currency artificially only increases the assurance of money and increases the price, not increasing the real wealth.

JournalistSome people say, the devaluation of RMB this time is the currency war against the devaluation of currencies of other countries. What do you think? Is currency war a real matter?

Zhu Haijiu: As what has been said above, the devaluation of RMB was caused by market rules, not the currency way that should de faced. Any idea that wants to use currency wars to improve economic situation should be abandoned. Fight for currency wars will disturb the process of market, which is harmful for economy. What we need to worry about is not the devaluation of currency, but to not let it devaluate.

The named currency wars cannot increase the wealth of a country. The thought that if a country has more foreign currency, then it will be richer is an idea of  the outdated mercantilism. The chief economist of Industrial Bank Co., Lu Zhengwei said after the devaluation of RMB, China’s economic growth can easily achieve 7.5%. It seems that economic situation will become better if the currency devaluates. This point of view is untenable. The devaluation of currency artificially only increases the issuance of money and increases the price, not the real wealth. Of course, if the devaluation is conforming the market rules, things will be different.

Currency exchange rage is just a rate of exchange, which cannot presents the change of wealth. If you buy more products in foreign countries, more currency will flow to these places, then the price increases; in the condition of free trade, this money will flow back to your goods, because your products have become cheaper. The creation of wealth doesn’t rely on central bank, but on the free movement of commodities, currency and personnel. Over issue of currency or manipulating money artificially all are harmful to the creation of wealth. So in this perspective, central bank is the crime culprit which disrupts economy. It is very hard to achieve the marketization of exchange rate if central bank exits. Of course, what PBC is doing this time is conforming to the marker process, which is advisable.

The change of currency rate is a signal of economy, like the temperature fluctuation of thermometer is the signal of temperature. The way you put the thermometer into water and reduce the temperature artificially in water cannot reduce and present the real atmospheric temperature. Likewise, manipulating currency artificially and starting currency wars will never improve economic situation and make the pricing signal become a failure and let economy get more troubles. The entire world should give up currency wars and make free market and free trade their goals.

Translated by William Hongsong Wang. This translation is cooperated with TBI Translation.

Dr. Zhu Haijiu is the professor of School of Economics of Zhejiang Gongshang University and the researcher from the Shalom Institute.

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WHEN COMPETITION MEANS COLLABORATION

Antonio Vegas García

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Nowadays the “sharing” or collaborative economy is a headline-grabbing concept, with widespread examples all over the world. From numerous apps for second-hand sales to some disruptive companies like Uber and Airbnb. According to Forbes, a magazine, the revenue for participants of peer-to-peer systems will surpass $3.5 billion this year, with growth exceeding 25%. Many think that this is the beginning of the end of the competition capitalism movement and the inception of the capitalism of collaboration. They cannot be more wrong.

Economic theory states that the more competition the better for the economy. Moreover, Ludwig von Mises, a well-known Austrian economist, wrote that capitalism is a mix between both collaboration and competition and furthermore that competition is a way of collaboration. Currently the rise of the collaborative economy has spotlighted his ideas.

The concept is quite simple. Consumers are able to get what they need from each other instead of always going to large organizations. That means that the mere collaborators are a competitor in the market, thereby increasing the competitiveness of the whole market and very likely increasing the efficiency.

Sharing economy take a variety of forms, often leveraging information technology to empower individuals, corporations, non-profits and government with information that enables distribution, sharing and reuse of excess capacity in goods and services. A commonly accepted premise is that when information about goods is shared, the value of those goods may increase, for the business, for individuals, and for the community.

A good example that illustrates the deepness of the changes caused by the peer-to-peer economy is the dialectic between crowdfunding and venture capitalist industry. With the rise of the crowdfunding many firms can get funds more easily than before, which, prima facie, could decrease the market for venture capitalists, who are the ones that use to provide liquidity to disruptive companies. Unlike the venture capitalists, crowdfunders do not take ownership, thus ceteris paribus the companies are keen to get funds from crowdfunders. However, venture capitalists not only provide monetary capital but also intellectual capital, like networking, good managers, thereby avoiding some first-comer mistakes. That is the reason there are plenty of firms receiving fund from venture capitalist. Even more, the sharing economy of the crowdfunders makes it harder for venture capitalists as they have to enhance their services, thereby increasing the overall efficiency.

The increasing importance of the sharing economy doesnt means the fade of competition, what it means is the high extent of the development of market competition.

Antonio Vegas García is a researcher from the Shalom Institute and has graduated with a masters degree of finance from the Universidad Carlos III de Madrid (Carlos III University of Madrid).

Privatization with Chinese Characters

Christopher Lingle

Gavle, SWEDEN

SINOPEC

Since China’s economic reforms began in the late 1970s, there has been considerable focus on transforming and restructuring state-owned enterprises (SOEs). Several encouraging signs indicate that steps are being taken in the right direction.

In the first instance, there has been a dramatic shift in the dominance of state enterprises. China’s non-state sector now produces about 70 percent of GDP. This sector has about 30 million enterprises employing over 70 million workers. Non-state enterprises produce nearly 40 percent of all traded goods, up from 1990 when they only accounted for 19 percent.

To date, more than 6,000 SOEs have been transformed to shareholding companies, even if not fully privatized. Communist orthodoxy has encouraged obfuscating language whereby equity diversification is applied in place of privatization.

Although PetroChina, China Unicom and Huaneng Power were partially privatized by selling shares on overseas stock markets, the largest and most valuable SOEs are controlled by Beijing. But all trading on the Chinese stock markets involves enterprises where the government holds at least 51 percent of outstanding shares, even though this is a reduction from government control of 75 percent of traded companies.

Now the bureaucracy that supervised most SOEs will control fewer than 200 of the largest ones. The smaller ones will be given to local authorities that can dispose of them after a new set of rules grants them full shareholder’s rights.

This round of “privatization” will be decidedly different from the first wave of sell offs in the late 1990s. In this current wave, local government bodies will be selling off their share of around 174,000 state-owned enterprises with combined asset valuation of about $500 billion.

Since most of these SOEs are relatively small, their sale may only have interest for domestic investors. Even so, potential foreign buyers would face considerable risks since China’s SOEs do operate differently from their counterparts in industrialized economies, making it is difficult to gauge their true condition.

Altering accounts and providing false impressions about the profitability of enterprises is commonplace in China. And with declining domestic spending and falling export growth, overall economic losses for state enterprises will expand and will have distorting knock-on effects for other sectors in its economy.

While bankrupt SOEs divert scarce resources from other enterprises that might be more productive; their most damaging effect is the weakening of the financial sector. When funds are provided to insolvent enterprises, the day of reckoning when inefficiencies have to be resolved by massive shutdowns is merely delayed. State banks have over a trillion yuan in non-performing loans making a mass default in the banking sector very likely.

Meanwhile, much of the hard-earned savings of the peasantry and workers has been squandered and the credibility of government banks as prudent managers has been shredded. Official estimates admit that at least one-quarter of total savings that the Chinese people have entrusted to state banks has been wasted, although the true figure almost certainly much higher.

At the same time, much of the capital initially raised on the domestic stock markets and abroad to finance the renovation of state-owned enterprises was paid out in salaries and for purchase of raw materials rather than invested. Shares issued to the public were for partial ownership in SOE factories that continued to be managed by many of the same people with many of the same bad habits. Unable to earn profits, they do not pay dividends to shareholders.

In keeping with the intent to lessen state control over its economy, China’s constitution has been amended to validate private enterprises through assigning them a legal status. However, it is one thing to declare the sanctity of private ownership and another thing to establish an independent judiciary to defend it and a competent legal system to enforce it. Claims about property rights are extremely complex and become more so when individual rights come into conflict with public interest.

Resolving contract disputes requires attorneys and judges that can refer to established case or common law guided by a constitutional framework. Like other former communist countries, China must build such institutions from scratch. It is not enough merely to change the incentives for people who have lived within a system that does not encourage initiative or penalize idleness.

While much of the non-state sector is owned or controlled by local or provincial governments, these enterprises do not operate under the same competitive conditions as private firms. And managers in local government enterprises have less accountability and shoulder less of the burden for failures.

China’s domestic private sector suffers from a myriad of problems. These include vague property rights, uncertain ownership structures and limited access rights to stock markets. At the same time, many of these also have weak corporate governance mechanisms and their financial records are shoddy, at best.

The economy suffered from a bias that favored state-owned enterprises by providing them preferential access to markets and financing. A real market economy requires that there be a shift away from a discretionary regulation and taxation towards a nondiscriminatory policies based upon general rules. This includes strengthening private property rights with an independent judicial system capable of enforcing them.

There must also be greater access to investment funds. As it is, a very small portion of bank credit goes to private firms that must rely heavily upon self-financing for expansion. And but a small fraction of the listings on the Shanghai and Shenzhen exchanges are truly private enterprises.

Unfortunately, socialist bureaucracies are exceedingly reluctant to relinquish ownership of government property to private investors or corporations, (unless to themselves or their cronies). In the first round of de-nationalization, the transition process resembled that of the former Soviet economies whereby “spontaneous privatization” meant that the most valuable assets were stripped by current managers and transferred to themselves or to friends or family.

Despite these risks, steps towards complete privatization of the Chinese economy must be undertaken, and the sooner the better. Unless there are gains in productivity from shifting more assets to more efficient and competitive private enterprises, China’s economy will not generate high enough growth rates to keep unemployment from rising or standards of living from falling.

Under the direction of Zhu Rongzhi, Beijing began to privatize smaller state-owned enterprises and shedding workers to improve operating efficiency. Up to 27 million state sector jobs were shed in the five years from 1998 while the number of SOEs was slashed. Even so, as indicated by a World Bank report, about 51 percent of SOEs were loss makers as of the end of 2000.

A new strategy for the reform of state-owned enterprise involves reconfiguring the relationship between the government and the enterprises it owns. As a first step, ownership of state companies will be transferred from the current ministries and commissions to a State Assets Supervision and Administration Commission (Sasac).

So far, the ownership and supervision of 196 enterprises with assets worth Rmb6,900bn ($834bn) had been transferred to Sasac. It remains unclear as to how many of China’s 174,000 state enterprises would be transferred to Sasac.

The state sector’s contribution to GDP fell from about 100 percent in the early 1980s to roughly 30 percent in 2000. China’s remaining 180,000 state-owned enterprises account for about one-quarter of industrial production. Officially, the state sector still employs about 70 million people and the valuation of Beijing’s assets is around 12.1 trillion yuan ($1.5 trillion). In the past five years, 27 million workers were laid off from SOEs.

Christopher Lingle is Professor of Economics at Universidad Francisco Marroquín in Guatemala and Global Strategist for eConoLytics.com. His E-mail address is: CLingle@ufm.edu. Shalom institute publishes this article written in 2011 by his authorization.