Dr. Wei Zhang is currently executive director and CEO of Mingly Corporation in Hong Kong. Before he joined Mingly Corporation in 2011, he was Lecturer of Economics and Director of Cambridge Research Unit at University of Cambridge. His main research interests and publication include theory of economic growth, international trade and economic development, regional disparity and policies and others. He is also a columnist for Financial Times, the BBC, RFA, and other media, and has written more than 800 commentaries on the Chinese economy since 1998. In the 1980s, he worked as a government official in China and served in a variety of positions, including Director of the Mayor’s Office in Tianjin, Secretary of the Municipal Committee of the Communist Youth League, Chairman of Tianjin Economic and Technological Development Zone (TEDA), and Chairman of Committee of Foreign Trade and Economic Relations of Tianjing Municipal Government. He was also a member of the 13th National Congress of Chinese Communist Party. He resigned from all official posts in the summer of 1989. He later studied at Harvard and Oxford University. He received his B.A. in economics at Peking University, Master of Public Administration degree at Harvard, and Ph.D. in economics at Oxford University.
China’s four costly mistakes in macroeconomic management
By Wei Zhang
The annual session of China’s National People’s Congress formally ended on March 16. Compared with previous years, this year’s gathering was marked by an unusual degree of press control and self-censorship. Consequently, those attending the annual parliamentary session all shied away from sensitive topics, especially those related to the poor state of the Chinese economy. The dark mood about the Chinese economy could also be seen in a rare public display of displeasure by Xi Jinping, the general secretary of the Chinese Communist Party (CCP) and the country’s president. After Premier Li Keqiang delivered his work report on the Chinese economy, Xi did not even applaud. Some western media reports described him as “grim-faced,” fueling speculation that Xi was publicly showing his unhappiness with Li and his economic team.
While Xi may have good reason to be angry about China’s economic performance, a more important question is who actually should take the responsibility for the mess in China’s macroeconomic management. Two top leaders are in charge of economic policy. Xi Jinping is the head of two leading groups: the central finance leading group and the reform leading group. In the Chinese system, all major economic policies must be approved by the central finance leading group. Li Keqiang, the premier of the State Council, is technically the head of the economic cabinet. It is not our business here to settle which one of them should be held responsible for China’s disappointing economic performance. Nevertheless, the facts are well-known: since the second half of last year, the Chinese government has repeatedly made disastrous mistakes in macroeconomic management.
Today, the consequences of these mistakes are inescapable. Tragically, these mistakes could have been avoided by policy-makers with even a little economic commonsense.
The first obvious mistake was the Chinese government’s high-profile and foolish attempt to use political and administrative measures to save a collapsing stock market bubble. But instead of stopping the fall of stock prices, Beijing’s intervention severely damaged investors’ confidence and resulted in new lows in China’s market indices. After peaking in June last year, Chinese stocks have since fallen more than 30 percent. Without any evidence, Beijing claimed that such a plunge would result in a systematic financial crisis, and implemented heavy-handed measures in a futile attempt to resuscitate the market. Chinese officials publicly accused foreign investors of engaging in a conspiracy to destroy China’s stock markets. Beijing even banned large share-holders from selling their shares and forced state-owned security firms to purchase shares and pop up prices. State-owned banks also generously provided trillions of yuan in credit to these security firms for their stock purchases.
To ensure that no efforts were spared in achieving its objective, the Chinese government demanded that senior executives of state-owned enterprises expend their precious cash on stock purchases whenever the Shanghai Stock Exchange Composite Index were trading in a range of between 3500 and 3700. This administrative fiat not only destroyed the credibility of the Chinese government’s recent pledges of allowing the market to allocate resources, but also resulted in total execution failure. The outcome of Beijing’s ill-fated intervention was predictable: the Chinese government’s effort to keep stock market indexes at a certain level was a complete flop. Today the Shanghai Stock Exchange Composite Index has fallen below 2900. However, in this process, government officials in charge of regulating the stock and senior executives of state-owned enterprises have taken advantage of Beijing’s ill-considered policy to enrich themselves – at the expense of small retail investors who had placed their trust in the Chinese government.
The second major mistake in China’s macroeconomic management was the devaluation of the Chinese renminbi last August. To be sure, currency devaluation is a common instrument of economic stimulus when a country faces downward growth pressure and loses export competitiveness. But China devalued its currency at the wrong time and used the wrong method. At the time of Beijing’s announcement of the devaluation of the renminbi, it had been insisting that there was no basis for currency devaluation. In the meantime, the Chinese financial markets were in turmoil because of financial deleveraging and the bursting of the equity bubble. Beijing’s action, again, hurt its credibility and investors’ trust, confounded market participants, and exacerbated financial panic and capital flight.
The third costly mistake China made in managing its economy in recent months was the roll-out of a stock market “circuit breaker” at the wrong time and in the wrong form. At the beginning of the new year, Chinese stock market regulators launched a new “circuit breaker” designed to stabilize market volatility. Unfortunately, the effect was just the opposite. Chinese stock markets were suspended twice in four days due to the “circuit breaker.” Amidst the carnage in the stock market, small investors again lost their shirt. The debacle forced the China Securities Regulatory Commission (CSRC) to abandon the circuit breaker in total humiliation. In retrospect, one has to wonder how top Chinese officials could implement a complex and far-reaching policy with so little thought. Although the chairman of the CSRC had to resign in disgrace, everybody knows that a policy of such consequence could not have been approved without the wise leadership of the CCP Center and the State Council.
The fourth mistake made by Beijing is to allow Chinese financial institutions to relax requirements on leverage in housing purchases to artificially stimulate the prices in first-tier cities. The thinking behind this move is to revive China’s sagging property market and create an appearance of prosperity. This short-term step, taken at the expense of structural reform and financial deleveraging, instantly pushed up the housing prices in first-tier cities such as Beijing and Shanghai up by more than ten percentage points. Consequently, the systemic risks in China’s financial sector have risen, not fallen. The economy, at least in these cities, is excessively dependent on the real estate. Of course, while we cannot rule out that local governments attempt again to rely on land-based financing to tide over their current economic difficulties, it is impossible not to blame the Chinese central government for its short-sightedness and incompetence.