Sinophrenia #5: Voracious Learner

We tend to think of China’s economic rise as a relentless one without any road bumps along the way. Until now, that is. Nothing could be further from the truth, says Thomas Orlik in China: the Bubble that Never Pops.

 

Based on China’s relentless growth starting from 1978:

“China’s early reform trajectory appears clear and policy choices consistent.”

In reality, the path was bumpy. In the early days, reformers clashed with conservatives within the party. When the reforms worked, the reformers got the upper hand. But when growth slowed, or inflation rose, the conservatives would take back control. When growth stalled again, the reformers would be back. China was oscillating. It was in one such cycle of economic slowdown that things spilled onto the streets, ultimately leading to Tiananmen Square in 1989.

 

China’s rulers survived that critical moment. And decided that big-bang reforms were dangerous. Slow and steady was the new name of the game. During downturns and upturns. That approach continues till today. The connection to China’s present-day problems? Don’t expect China to move fast, and rip any band aids quickly. It’s too risky…

 

The other thing about China’s leadership is that they learn from everyone else’s troubles. When the USSR collapsed, China concluded it was caused by Gorbachev’s “stupidity” in attempting political and economic reforms (glasnost and perestroika) simultaneously – it left no single aspect stable when problems occurred. China’s learning? Focus on economic reforms only.

 

In 1997, the Asian financial crisis started in South East Asia (Malaysia, Indonesia, Thailand, Philippines) and soon spread to Hong Kong, South Korea and Japan. This came too close for comfort for China. They paid attention to the root causes: one, foreign money ran for the door at the first signs of trouble. And two?

“If relations between banks, businesses, and government in Thailand, Indonesia, and Korea were too close for propriety, China’s state-owned family was positively incestuous.”

China’s learnings were applied quickly. State-owned firms needed to be cut from life support, and pushed to work towards profits. And while China would be OK with foreign money as long-term investment in projects, they would strictly curtail “fast” money that only went into stock markets.

 

Remember how Japan looked like it might match the US in economic power? Until the 90’s became the “Lost Decade” for Japan, and they’ve just stagnated ever since. China was determined to not let that happen to them. So what went wrong in Japan? When it looked like the economy and stock/property markets were overheating in 1989, Japan’s central bank tried to deflate the situation gently. Instead, their measures ended up pricking the bubble altogether and sending the country into a tailspin. China learnt to be uber-careful in its handling of overheated markets. Like Japan though, China decided to keep its currency undervalued wrt the dollar (it made exports cheaper, and imports costlier). Japan though, had ultimately caved into US pressure to devalue its currency massively. Unfortunately, this coincided with the self-inflicted pricking of the bubble, adding to Japan’s troubles. China’s learning? It would devalue its currency gradually, one small step at a time, and certainly not the way the US wants.

 

South Korea is another country China has learnt from. The two countries have a near incestuous government-bank-industry nexus, and a shadow banking system. Korea let it run for too long, and thus the Asian financial crisis drove Korea into recession. Even worse, they needed an IMF bailout with strict terms and conditions, allowing Western companies to buy up Korean assets at cheap rates. China, on the other hand, as mentioned earlier, has taken proactive steps to reduce the government-bank-industry nexus, and at the shadow banking system, without waiting for a crisis. And lastly, China is ensuring something more:

“(Western companies) might have been able to gobble up Seoul. They would not be able to so much as nibble at Shanghai.”

 

Whatever its flaws and risks, China has no reluctance to learn from others. And that can only be a good thing for them.