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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?

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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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.

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The end of Chinese false economic prosperity

William Hongsong Wang

Chinese stock crash

This January, my best friends in high school invited me to invest money in the Chinese stock market. Then I hesitated for a long time till this July, seeing the stock market crash and finally deciding to stay away from this place where one is apt to get into trouble. Earlier this year, they told me that I made a stupid decision, but now they praised my wisdom of not entering Chinese stock market to avoid loss and asked me how to analyze this stock crash from the perspective of the economic science.

Yes, the reason why I didn’t invest my little money into Chinese stock market is not that I don’t want to be a rich man, but that if I do this, I may become poorer than before. Why? Let us analyze Chinese economic situation generally at first.

According to media data, in the end of 2014, Chinese local government debt levels reached almost ¥ 25 trillion (US$ 4 trillion) [1]. And in many provinces across China, empty ghost cities are located there quietly. I calculated the investment sizes (due to lack of government transparency, I can only collect partial data) of the top-12 ghost cities from the news report, which reached US$ 8.38 billion [2]. Besides, many enterprises have been bankrupted because of over-investment induced by the ¥ 4 trillion (US$ 586 billion) stimulus plan in 2008. Those are just a tip of the iceberg. As seeing so many bad news which are worse than my imagination, now I have an illusion that maybe I’m in grace, not the strong and powerful China…

Another bad news is that, after the crazy Keynesian economic stimulus plan in 2008, in this March, Chinese central bank broke the silence and decided to lower benchmark five-year lending rate from 6.15% to 5.90% and started issuing more paper money in loan which meant that a new economic cycle will begin.

As an economic student with the knowledge of Austrian Business Cycle Theory, I don’t see this news being good for the future of the Chinese economy. I don’t see that there would be no economic bubble again in the Chinese stock market. That’s why I didn’t invest in my country’s stock market.

I’m lucky, because I don’t have any loss. But I heard not only one Chinese lost his millions and millions of asset in this turn of stock crash, then there’s no good news because the economic bubble has happened. This morning, the stocks in Shanghai Stock Exchange have dropped as much as 6% and this disaster is continuing. Sources have clearly pointed out that this is because of capital chain rupture and self-distrust from investors.

Economic common sense tells us that if this capital chain rupture extends to other economic sectors, China may face a very serious economic crisis, like the one in 1929 in United States. And the worse issue is, Chinese government has decided to devote more currency into stock market to save it. What will happen? Inflation and another turn of economic bubble. The more issuance of paper money by government and the fast expansion of fictitious economy caused by it will cause price signals’ disorder. Investors will say, if they don’t have the knowledge of business cycle, “wow, awesome! What a huge amount of loan, which I can apply for! Let me invest it and earn more!” Because of their optimism, more financial derivatives will be made to meet the need of blind investors, eventually causing mal-investment. Then if the capital chain cracks, we will see what we are seeing now in the Chinese Stock Market.

I don’t see that Chinese central government has the courage to stop making more economic bubble and it seems that Chinese deregulation reform has stagnated due to the obstruction from different interest groups. If I were to make a conclusion of this issue, I would say that we are facing the end of Chinese false economic prosperity.

 

Notes

[1] Zhang, Lianqi (2014) Chinese local government debt danger and opportunity. London:Financial Times Chinese. Available: http://www.ftchinese.com/story/001054454?full. [Accessed: 8 July 2015] Also see Wang, Yuguan (2013) The Warn on New Cities Plans from Chinese Central Government. Beijing: EnnWeekly. Available: http://www.ennweekly.com/2013/1012/12253.html.%5BAccessed: 8 July 2015]

[2]Those ghost cities are: Kangbashi New Area in Inner Mongolia Autonomous Region, Qingshuihe County in Inner Mongolia Autonomous Region, Bayannur City in Inner Mongolia Autonomous Region, Erenhot city in Inner Mongolia Autonomous Region, Zhengdong New Area in Henan Province; Hebi City in Henan Province, Xinyang City in Henan Province, Yinkou City in Liaonin Province, ChangZhou City in Jiangsu Province, Dantu District of Zhenjiang city in Jiangsu Province, Shiyan City in Hubei Province and Chenggong District of Yunnan Province.

 

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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State-owned enterprises, a failure of Chinese Keynesian experiment

William Hongsong Wang

IMG_20150223_082848

The chance of studying overseas is helping me become more and more international. That’s why I receive the same question all around the world, “William, do you think China will become a superpower in the 21st century?” Or I hear the compliment many times, “China has a strong market economy and it is becoming richer and richer!”

Unfortunately, due to the economic science and libertarian perspective, I ought to say “No. China will not become a superpower and there’s no ‘strong’ market economy in that country.” to my friends. I would like to ask them and myself a question, “In a society, if the government is killing people’s innovate ability by killing the liberty of free speech and NGOs, if authorities like your parents, bosses, teachers are strangling your entrepreneurship by their belief of patriarchy, would you still think that this society can achieve a long-term prosperity without respecting individualism?”

Maybe the whole countries with Confucian culture more or less have the similar problems. But the lucky issue for Japan, Korea, Taiwan and Singapore is, in a way, people in these countries have more liberty of free speech and more fair opportunities for managing small business than the ones in China. And what many Chinese people may envy them is the higher living standard in these countries, for which they are called “developed countries”.

To return to the analysis of the question and compliment I mentioned in the first paragraph, let us see a key problem in Chinese economy: the state-owned enterprises. Even there has a snack bar, the government would like to nationalized it! In my homeland Shanghai, there’s a snack bar named Qiaojiashan which was established in 1909 and was quite popular among local people. But after the communist regime took over Shanghai, it became a state-owned enterprise. It is still popular because of many delicious foods provided by it, though as a national-owned monopoly the service there is inefficient and poor. Even Chinese government restarted doing economic deregulation and hoped Shanghai could allow private sectors to do more, nothing changes in my homeland. These time-honored brands in Shanghai still belong to government.

If you are a Westerner and then count all other industries in China, things may become crazy for you. Chinese government almost monopolized the whole educational, medical, petroleum, telecom industries. And if you want to make contact with banks, only in a few circumstances can you avoid the four major state-owned commercial banks.

In the economic common sense, the more a government monopolizes industries in a country, the more inefficient an economy is, and more corruption the government has. The myth why the real living standard of Chinese people has improved is just because of market reform and deregulation, not the governmental monopolies in considerable industries.

If these big-government policies only bring us the consequences above, it seems not too bad. But remember, as what Lord Acton said in the 19th century, “Power corrupts, and absolute power corrupts absolutely.” Chinese government controlled almost all the important finance resources, i.e. the four major state-owned commercial banks, you will arrive at a conclusion by logical deduction: the government might issue many paper money for its own sake because it’s so power and wayward.

This is exactly correct. Chinese government issued paper money for infrastructure construction before 2008. As a natural outcome, malinvestment, brought by easy-money policy, the slowdown of Chinese year-on-year GDP growth was 5.7% in the first quarter of 2009, which was the lowest growth rate in the last 10 years. But it didn’t learn from the lesson of economic bubble created by the state-controlled credit management system, Chinese central government issued ¥4 trillion ($586 billion) to stimulus economy, then another term of false prosperity and economic depression happened again. The year-on-year GDP growth dropped to 7.3% in the fourth quarter of 2014.

This current Chinese central government indeed has done many deregulation measures to let the market spontaneous order work better, but I’m afraid that if it still owns many national enterprises and national banks, there will be no hope for the health of Chinese economy in the future. And there’s no evidence which can tell us that the government has the willing to destroy its own enterprises and banks. Surly if China still has a Keynesian big-government, rent-seeking, corruption, governmental malinvestment, inflation, economic crisis (as what Austrian Business Cycle Theory told us) will happen again and again. Then, China may face the famous “middle income trap”.

That’s my answer to the question and compliment referred to in the first paragraph: the failure of Chinese Keynesian experiment. We will not see a real Chinese superpower (For me, a real superpower means the system of the country respects individual liberty and there’s no governmental intervention neither in domestic nor foreign issues.) and a richer China if there’s no fundamental change happening in Chinese economic policy.

 

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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