Journalist Ian Johnson interviews economist Arthur Kroeber, author of China’s Economy: What Everyone Needs to Know® on – among other subjects – China´s financial reforms and what has been derailing them in the New York Times. “The desire to control things has won out over the desire to reform and liberalize.”
The New York Times:
Q. Financial reform has been a key battleground under President Xi Jinping. Why is that?
A. Financial sector reform was looking promising but has fallen into disarray. The problem crystallized last year. Reformers wanted a more flexible exchange rate and a more vigorous stock market. But you had others who viewed the stock market simply as an index of economic performance and the exchange rate as an anchor of stability. When the stock market crashed, rather than allowing a bust — which you should, if you really want more market forces — the government opted to intervene, ordering state firms to buy shares to keep prices artificially high. Now it’s trapped, because the state firms that bought these shares can’t sell them without triggering a panic sell-off.
As for the exchange rate, the central bank wants a flexible rate that will help it set monetary policy in a more normal way, but the political leaders don’t want the volatility that comes with that. You’ve had a direct collision between the technocrats who honestly were trying to get a more market-oriented mechanism and those saying the key is for the exchange rate to be stable, because if it’s not stable, then people will think that China isn’t stable and that will be bad.
Q. That sounds like the hallmark of Xi’s government style.
A. Xi belongs to the group of stability-oriented people. In many other areas as well, the desire to control things has won out over the desire to reform and liberalize.
Q. Maybe from a broader perspective this could be seen as normal. When countries undertake major changes, they need breaks for people to catch up.
A. Economists who call for reforms often ignore the social and political costs of these reforms. So, yes, it may be reasonable for the government to take reforms slowly, so that society has a chance to adjust.
Another way to look at it is that after three decades of economic growth that was mainly about building stuff — infrastructure, housing, heavy industry — China is now entering the phase where economic growth has to come mainly from squeezing efficiency out of the assets you’ve already installed. That is always a tough transition and we should expect it to be rocky.
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Earlier we discussed with Ian Johnson his views on the return of politics in China, where economic development had been first on the political agenda for decades.