But the good news is that the first and the second reasons given by Paul Krugman, though not sufficient to compensate completely for the negative effects of the latter two, could at least partially offset them. From the present situation, indeed there is considerable room for the People's Bank of China to operate, for example by lowering interest rates and the deposit reserve ratio. Even if, as Krugman said, cutting interest rates is not sufficient to solve the problem, our long-term budget position is still in surplus; it still has a certain space to respond through fiscal stimulus to economic stagnation in Europe and the United States, even if the stagnation lasts for 4-6 years.
In addition, favorable factors also include the following points mentioned in 2008 by former Morgan Stanley Greater China chief economist Wang Qing (王庆):
First, China has become a net exporter of savings. It can be seen from the stability and considerable size of the current account surplus in recent years. Therefore, for an economy as a whole, its leverage effect is much lower than in other parts of the world, and this is reflected in the very low level of external debt.
Second, the rapid growth of foreign exchange reserves resulting from the persistent current account surplus is still causing liquidity flooding in the domestic banking system.
Third, due to the control of the capital account, the main form of cross-border capital flowing between China and other countries of the world is the foreign investment of the Chinese Central Bank in securities of high quality and liquidity. These securities are very suitable for direct investments by official foreign exchange reserves and domestic foreign capitals.
Fourth, the financial ties between the various economic sectors (such as the families, the businesses and the government) operate mainly through traditional commercial banks as a medium. They are very simple and clear, especially in comparison with the financial markets in the United States, which have a high degree of securitization.
Fifth, household and government balance sheets are very healthy. Household and government debt levels are so low that they account for only 13% and 33% of the GDP, respectively. In addition, the banks’ capital is adequate and awash with liquidity; the loan/deposit ratio is only 65%, one of the lowest in Asia excluding Japan.
While the above conditions have been affected by the double impacts of the 4 trillion yuan stimulus policy in 2008 and the worsening global economy, and have declined in quality, the five elements referred to by Dr. Wang are still in the controllable ranges. For example, concerning the current account surplus, although the World Economic Outlook released on April 17, 2012, by the International Monetary Fund (IMF) sharply lowered the expected proportion of the short-term and medium term current account surplus to GDP, the report estimated that in the medium term (2017) it can still be increased to 4 to 4.5 percent.
Let us further take a look at the household balance. The “2011 Chinese Consumer Financial Research Report” (《2011中国消费金融调研报告》) jointly issued by Tsinghua University and Citibank showed that buying a home was still the main purpose of household borrowing. The survey collected a sample of about 5800 families in 24 cities across the country. Among all the respondents, 18% of the households used bank home purchase loans and 15.4% borrowed funds from relatives and friends. Among them, the average annual after-tax income of the surveyed households in 2010 was 89,000 yuan, the average total assets were 716,000 yuan, and the average debt was only 46,000 yuan; the assets-to-liability ratio was 6.39%. In contrast, the average household assets-to-liability ratio of the American households for the same period was 20%.
Concerning the government debt, we have the “Estimates of National Balance Sheet of China” (《中国国家资产负债表的估算》) written under the supervision of the Deutsche Bank Greater China chief economist Dr. Ma Jun (马骏), and prepared by Fudan University Professor Xu Jiangang (徐剑刚), Associate Professors Zhang Xiaorong (张晓蓉) and Li Zhiguo (李治国), Executive Director of the Hong Kong Monetary Authority Ho Tung (何东) and other people. It showed:
The balance of government bonds was 6.75 trillion yuan in 2010 and the debts of the four asset management companies (AMC) were 1.3 trillion yuan. These two narrow government debts totaled 8.05 trillion yuan. According to the definition of narrow government debt ratio being the narrow government debt divided by the GDP, the ratio was 20.1% in 2010. But this was not a historical high point. The high point of the narrow government debt ratio occurred in 2003. That year the value reached 28.2%, and then began to decline. Especially since 2008, it remained steady at about 21% and decreased somewhat in 2010. It can even be said that it in recent years reached a historical low, namely, the already mentioned 20.1%. So, if we only consider the debts of the bonds and the four AMCs, the burden of government debt in recent years not only has not deteriorated, but it actually has been extremely stable.
On this basis, adding the debt of the local governments and the debt of the Ministry of Railways, the debt is called the general government debt. The local government debt was 10.7 trillion yuan in 2010 and the debt of the Ministry of Railways was 1.9 trillion yuan. Combining these two numbers with the narrow government debt gave the general government debt of 20.65 trillion yuan in 2010. Likewise, according to the definition of general government debt ratio being the general government debt divided by the GDP, the general government debt ratio was 41.6% in 2008 and remained stable when compared to the previous years. Likewise, according to the definition of general government debt ratio being the general government debt divided by the GDP, the general government debt ratio was 41.6% in 2008 and remained stable when compared to the previous years. However, in order to respond to the financial crisis, vigorous railway projects were started, which made the government debt burden rise sharply and the general government debt ratio rose from 41.6 percent in 2008 to 51.5% in 2010, rising as much as 10 percentage points. In contrast, as early as 2000, the U.S. narrow government debt was already as high as $ 6.9 trillion and its debt ratio was close to 60%.
But what has to be specially noted is that the above reasons are not sufficient to help us overcome the crisis and win the battle against recession. Their significance lies solely in gaining the precious time for us to overcome the crisis. Do not forget that in 2002 the four favorable elements cited by Paul Krugman were finally completely depleted by the U.S. government in a short period of 7-8 years. If we cannot recognize this, then our future will be very dangerous. So, we will inevitably repeat the mistakes made by Krugman and Americans due to their conceit.
China Is a Mixture of Contradictions
What really supports the Chinese economy to be independent from the world financial crisis has been the dual structure caused by isolating the Chinese political and economic systems, and the resulting contradictions, miscibility and backwardness.
This point is often overlooked. The result of this negligence frequently misleads us to make the following erroneous judgment. For example, Paul Krugman derived from the phenomenon of “soaring price and real estate speculation fever” alone a rushed conclusion that “we had a very similar experience a few years ago.” Paul's conclusion is acceptable if we are only concerned with the Chinese cities or the people living in the eastern part of China. But the arguments and conclusions of George Friedman cannot help but make us feel that his ideas are incredible. He concluded that China then was in a position like Japan’s before the great crash of 1989. However, one of the important reasons for him to believe that China was bound to collapse like Japan in 1989 was a bit far-fetched; namely, the daily incomes of 600 million families were less than $3, the earnings of 440 million people were less than $6 (but more than $3), and 1 billion people out of the 1.3 billion population lived like the African poor. The logic of China with an African-style poverty being end up with a 1989 Japanese-style collapse is indeed amazing.
As pointed out by the University of Hong Kong Professor Xu Chenggang (许成钢), the comparison of historical data between the problems which Japan faced since the 1980s with the problems of China today is nonsense. Very simply, in 1989, Japan's nominal GDP per capita surpassed that of the U.S., while China's per capita GDP is only eleventh of the U.S.’s. In other words, the problems faced by Japan in 1989 were the problems faced by the world's richest economies. And how is China today? As George Friedman said, among the 1.3 billion population more than one billion still live a poor life like the Africans. For this country, we feel rather embarrassed to simply use the real estate bubble to position ourselves as Japan in 1989, or the United States in 2006. How can we?
Of course, we can cover a longer period of history like Professor Xu Chenggang did. We can then, in accordance with international economic history of the last ten-some years, take for example a look at Maddison’s 2003 paper. In this paper he calculated historical accounting data of world nations and placed China's current position back to 1913. But I think this is also quite debatable. Based on total GDP variation of the world nations over the past 100 years, Xu Chenggang found that from the historical ranking of the total GDP, China’s ranking in 2010 really just resumed her international status in 1913. His important basis was that China’s GDP in 2010 was the second in the world and the total amount was roughly two fifths of the United States’, and “in 1913, the GDP of the United States was the world’s first, China’s was the second.” More importantly, China’s total GDP amount then was also roughly two fifths of the United States’.”
This analogy made by Professor Xu rested on dealing statistically with two important data: the "second" and "two fifths." He did not place this set of values into a dynamic, living situation. Based on the logic of the Chinese-style "public knowledge," we will put aside China here and only focus on the United States. For those who understand modern world history, they for sure know that as early as the late 19th century, the total economic output of the United States had already surpassed Britain’s and became the world’s highest. But then the world leader was not America but Britain. The role played by the United States in the international arena was at best an emerging country with a rising economy, but with no right to speak in politics. Such a role was more akin to Japan in the 1970s and 1980s. One hundred years later, although America is still the first, can you say that during these 100 years, regardless of form or quality, the U.S. has not changed? This absurdity of Professor Xu is like saying that, since my name was Pierre A. Hanson when I was 1 year old and, when I become 80 years old, I’ll still be called Pierre A. Hanson, he would conclude that Pierre A. Hanson has not grown during the 80 years. No, his reason was only that, because I was called Pierre A. Hanson at 1 year old, I will also be called Pierre A. Hanson at age 80.
So, what will be the proper position of the real China? As discussed above, it is neither the China of 1913, nor the Japan of 1989, nor the America of 2005. The reality is that the backward Africa is in China, the wealthy Japan and even the United States are also in China. China is such a binary mixture of contradictions. It is this contradiction that makes China face the problems of the world's richest economies as well as the problems of waiting for development like the least wealthy economies. If you do not recognize this, and instead only compare China with China in the early last century or with Japan in the late 1980s, you are either ignorant or misleading.
Getting Rid of the Dual Structure Is the Key
China's long-term implementation of wrong policies has strengthened the country’s dualistic structure, which led to both a rich side like Japan and also a backward side like Africa. It is this contradictory duality and backwardness that have actually decided that, in response to the crisis, China has in her hands many more cards available than Japan then and the United States today. Japan, for example, is very difficult to compare with China whether in land area of the country, population size or natural resources. Secondly, the social security system of Japan had long been gradually established and perfected in the national income doubling plan of the 1960s. Along with the implementation of the national income doubling plan, many problems plaguing the original Japanese economic development and social stability such as urban and rural areas and the binary differences between regions were gradually narrowed. The domestic market including investment and consumption has been saturated and there is no room for further investment. Thus, this has determined Japan’s heavy dependence on international markets and the externalities of economic development are more vulnerable. By comparison, not only does China have a population of about 1.4 billion but, more importantly, China's per capita GDP is only one eleventh that of the U.S.! Even more important is that we still have a lot of room for reform. Our cities and villages show huge differences, the developments of eastern and western regions show an extreme imbalance, and the dual structure of state-ownership and private-ownership is worsening.
Japan in the late 1980s faced the problems of the world's richest economies. Today's China, of course, is also facing this problem, such as the severe real estate bubble. But at the same time China is also facing development problems like the poor African countries. The difference between the two national conditions (although the cause for these national conditions is government-enhanced) determines the different nature of the problems faced. In this regard, we first need to have a dialectic understanding: of course these are problems, but why can’t they also be opportunities? If we respond properly and handle any one of the problems successfully, we can make our economy once again have a qualitative leap. The saying “Maybe it is a blessing in disguise” (“塞翁失马，焉知非福”) from a story in “Lessons from the Human World” of Huai Nan Zi (《淮南子•人间训》, compiled by Liu An (刘安) in the West Han Dynasty) will in reality find the latest and the best interpretation.
Of course, if the response to such an obviously artificially enhanced binary difference is inappropriate (namely making no change, and simply continuing to follow the established policy), China's problems will also worsen in comparison with today's Europe and the United States and the troubles will become many times larger. The whole country will no longer only show the current huge difference between the urban and rural areas, and the conflicts due to the extreme imbalance between the eastern and western regions. Instead, the entire country will follow the current rift of the dual structure to break apart and fall in complete disarray.
Pierre A. Hanson (Han Heyuan) is a Senior Research Fellow of the Guangdong Research Association of Productivity Development (GDRAPD).
Mailing Address: 628 Guangzhou Road Central, Guangzhou City, Guangdong Province, China.
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References (listed in the Chinese version)