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How Should the World Deal With China’s Lack of Concern With Waste?

Posted by on 2009/08/09. Filed under Opinions. You can follow any responses to this entry through the RSS 2.0. Both comments and pings are currently closed.

By Liang Jing
Aug 9, 2009 – 1:48:20 PM

Last week, China’s Internet reprinted an article by Stephen Roach which appeared on the UK’s Financial Times website on July 30, entitled “I’m starting to worry about the Chinese economy.” It was an unusual article. As Roach himself said, “unlike most people, I have been firmly optimistic about the Chinese economy. But now I’ve started to worry.”[1]

Roach’s worries are typical of many people. Last Wednesday, when the central bank sent a fuzzy signal about “dynamically fine-tuning credit,” the stock market panicked and fell for three days. The decision-making authorities couldn’t hold out. On August 7, the National Development and Reform Commission, the Ministry of Finance and the Central Bank held a joint press conference, issuing a very clear signal that China’s macro-policy orientation couldn’t be changed in the near future; the credit environment would continue to be relaxed. Some experts had anticipated this reaction. In his economic op-ed in Southern Weekend on 6 August, Zhong Wei [Director, Finance Research Centre, Beijing Normal University] pointed out that the Chinese decision-making authorities had missed a good opportunity for adjusting credit, and the inertia of injecting credit so rapidly meant that reducing it would be more difficult. This year, “holding credit between 9 and 10 trillion is difficult enough, but a tougher challenge will be, how to control credit growth in the next two years? The overall scale of investment in new and ongoing projects is so great that ever more loans can be serviced only by new borrowings.” [2]

In that case, will China’s economy have a major disaster or even collapse, as is feared by the pessimists whom Roach has now joined? Zhong Wei, who represents the judgment of the majority of Chinese economists, doesn’t see it this way. He predicts that “(China’s) GDP growth rate is likely to exceed 9% in 2010” and price rises will be “quite moderate.”

He doesn’t see this situation of high growth and low inflation as a good thing, however, because it means that the Chinese economy will carry on with its extensive and wasteful growth model.

So, everyone is facing confusion for another year or more. Pessimists often predict that the inefficient and inequitable Chinese economy will soon collapse. The facts, however, have not only proved them wrong again and again—more ironically, before China’s crisis-ridden economic could collapse, the seemingly impregnable Western financial system itself collapsed. China’s economic rise seems to overturn not only mainstream economic theory, but indeed mainstream common sense.

How should the new world situation brought about by China’s rise be understood? I think that many people ignore an important factor, namely that a feature of the Chinese economy is that it is unafraid of waste, which, added to the rapid expansion of China’s economy with the expansion of trade, has brought new challenges to the world economy.

China’s economy is dominated by bureaucratic authoritarianism. The biggest difference between bureaucratic authoritarian and democratic capitalism is that the interests of bureaucratic autocracy are not in maximising profits, but in maximising costs. The more resources consumed in bureaucratic handling the greater their power, and the more their chances to profit. The Chinese bureaucracy’s love affair with GDP is justified, in that the latter doesn’t take waste into account.

The bureaucratic economic does not reckon it costs is not new, what is novel is for such a huge bureaucratic economy to enter totally into the global trading system. As a result, the China bureaucratic economy, unafraid of waste is no longer subject to constraints of resources or the market, but is on the contrary imposing its preference for waste and its economic shocks on the entire world economy.

Ferguson’s Chimerica model in fact reveals the mechanism whereby China’s bureaucratic capitalism transfers its preference for wasting resources to the world. It has two major parts, one to suppress the exchange rate and prices of domestic resources and encourage export expansion; the other is to export domestic savings by means of low interest rates, typically by buying vast amounts US Treasury bonds.

Due to the enormous size of China’s economy, a result of the above-mentioned mechanism is to increase overall global demand for resources, thereby raise their price. What is the advantage to China’s bureaucratic class of rising global prices of resources? Rises in international resource prices means a substantial increase in domestic resource rents, and in China, resources are completely monopolized by the state, and therefore the direct beneficiary of rising international resource prices is China’s bureaucratic class.

Most puzzling to the world, why China’s bureaucracy seeks to profit by such an approach of distorting economic balance? Why would they rather subsidize foreign consumers than allow their own people to share in their rents by raising wages and social security?

The answer is that the current approach saves the authoritarian bureaucracy effort. Not only is there no need to define property rights or establish the rule of law, there is no need for complex income distribution or a public service system, but only, like the lords of a slave manor, effective control of slaves, to safeguard the monopolistic receipt of rents.

Can China’s modern slave economy endure? No one can answer this question, just as no one could answer whether the slave economy of the American South would have endured had it not been for the Civil War. So what Roach really needs to worry about should not, I think, be the Chinese economy, but how the world is to deal with a Chinese economy that is unafraid to waste human and material resources.

Liang Jing, “Zhongguo bu pa langfei, shijie heyi yingdui?” [How is the world to deal with China’s lack of fear of waste?], 9 August 2009 [梁京: “中国不怕浪费,世界何以应对?” 2009年8月 9日.].

[1] Stephen Roach, “Wo kaishi danyou Zhongguo jingji le” [I’m starting to worry about China’s economy], , 31 July 2009 [斯蒂芬·罗奇: “斯蒂芬·罗奇:我开始担忧中国经济了”, ,2009年7月 31日 ( here).].

(Original: Stephen Roach, “I’ve been an optimist on China. But I’m starting to worry,” Financial Times, 29 July 2009 [ here] — trans.).

[2] Zhong Wei, “Yijing qi wan yi, ranhou ruhe” [It’s seven trillion now, what will it be later?], Nanfang zhoumo, 5 August 2009 [钟伟: “已经七万亿,然后如何”, 南方周末,2009年8月 5日 ( here).].

Translated by David Kelly
China Research Centre
University of Technology Sydney

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