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The Middle Kingdom has lots of room to grow if it could sort out economic distortions and optimise capital allocation. The tweaking of the one-child policy might also help
In a presentation at the recent Ho Bee Professorship in Chinese Economy and Business lecture titled “China’s Paradox and its role in the global economy”, Dr. Jin Keyu of the London School of Economics posited that China’s various economic issues – excess savings and capacity, high leverage and debt, low consumption etc. – should not be treated as disparate issues but instead as developments interlinked by “a common thread and reflect common roots”.
Jin referred to a ‘vicious circle’ that contained four elements that reinforce one another:
- Financial repression + wage suppression;
- Suppression of households and households’ share of GDP;
- Subsidising firms; and
- Low consumption, high investment and exports
“Over 2000 to 2014,” Jin explains, “real GDP grew by over three times in China. If you’re a saver in China, and you held bank deposits, you would have lost about 21 percent. If you held stocks over that period, you would have lost 38 percent. No matter how you saved, you’d have lost money.”
To put it in economic terms, Chinese see children as investment goods. I raise them, I invest in their education, and they get better jobs and higher wages, and they pay back on that investment. It’s like an investment portfolio.
There are many reasons for the stock market’s underperformance. The Shenzhen and Shanghai Stock Exchanges were created at the end of 1990 with the initial purpose of helping State-Owned Enterprises (SOEs) privatise. Listing criteria were not as stringent as those in developed economies, and Jin wrote that firms with “connections to regulators are more likely to be listed”.
Additionally, bad firms do not delist as soon or as frequent as they should. According to Jin, only about one percent delist every year compared to 10-20 percent on average in other countries, with poor performing firms lingering on the exchanges and contributing to poor stock performance.
Making matters worse are distortionary government policies that “subsidise corporates and exports, because that was the national economic strategy.
The end result was a suppression of households as reflected by the declining household share” of GDP, which dropped to about 60 percent in the late 2000’s from 70 percent in 1990 despite China’s breakneck economic growth during the same period.
“On top of that, subsidies to the firms mean that there’s going to be low consumption and high investment and high exports,” Jin explains, rounding out the vicious circle. “So what do you do to keep high GDP targets…