It is one of the great particularities of post-2008 economic thinking that when China pours money into its economy for infrastructural updates, this is referred to by many in the US as “communist meddling in the market”. And yet, when the US Federal Reserve creates money out of thin air in order to prop up objectively failed financial institutions, it is referred to as “quantitative easing”. However, now that the world is facing a potential new recession after the post-Great Recession recovery built largely on borrowing and its uglier cousin inflation looks to correct itself in one potentially shocking form or another, it is interesting to see that at least some voices in both China and the US are looking for solutions other than runaway spending and inflationary measures.
Yesterday in the US, the moderate minded Federal Reserve Chairman Jerome Powell stated the obvious when he proclaimed that he has severe worries about the long term state of America’s massive debt as well as the country’s widening deficit. He further stated that rather than increase the Fed’s assets as was practice during the money printing addicted years of Ben Bernanke, Powell instead has preferred to decease the Fed’s balance sheet in pursuit of a comparative (key word) tightening of the money supply. This along with what by post-2008 standards is moderately high interest rates, makes it clear that Powell’s attempt at devising a solution to the deficit crisis is to make it less attractive to continue the cycle of easy money which in the past has proved to be little more than a short term bandage on a gaping wound of long term losses in the value of the dollar.
While China’s economy is still projected to grow more than that of the US in 2019, 2018 was a year that caused Chinese economists, market watches and industry experts to pause for thought. While the Trump trade war has been detrimental to both sides, what for the US has led to the exposure of weak political principles at home, has for China been a chance to reflect on the market diversification and innovation initiatives that were set in motion prior to the trade war. The trade war however has nevertheless made China collectively realise that innovation in respect of new technologies and production techniques are ultimately going to be more important than mass production using existing supply chains and production techniques which no longer look as stable or profitable as they once did.
To understand how China’s pro-growth and fiscally moderate strategy differs from the standard US solutions of recent years which amount to little more than cutting interest rates while the dollar printing presses go into over drive, one must examine the thoughtful suggestions of Zhang Junkuo that were recently published in China’s deeply influential Global Times. Zhang’s article is a strong admonition against spending boosts and instead recommends the following action steps to create sustainable growth:
“First, the role of the government must be further transformed to focus on improving the social environment, which should be conducive to resource optimization and structural upgrading. The most crucial thing is to reduce the government’s direct intervention in economic activities, especially in terms of the direction and mode of industrial upgrading, the industrial mechanism for selecting the superior and eliminating the inferior, and reorganization.
Entering a high-quality development stage means that economic growth will rely more on innovation, thus technological progress and industrial development will face greater uncertainty. Which technology, industry or company has more promising prospects or needs to be eliminated can only be tested by market competition. Excessive direct intervention by the government will not only distort market signals and reduce market efficiency, but will also cause new losses and accumulate new risks.
Second, based on actual situational changes, it is necessary to update and upgrade standards for quality, environment and safety in a timely manner and enforce them strictly. A common problem in many industries is that the national standards are too low and they are not strictly implemented.
Third, efforts need to be made to build a market environment for high-quality products and for selecting the superior. From the supply-side perspective, the key to promoting high-quality development is to greatly improve the quality of products and services.
Fourth, the institutional environment needs to be further improved to facilitate innovation and change. The importance of innovation to promote high-quality development is surely beyond doubt.
Fifth, some key or major reforms that are of vital significance and fundamental to supporting high-quality development as well as enhancing the overall economic vitality and competitiveness must be accelerated. These include reforms in such areas as land system, State-owned enterprises, finance and taxation, social security, and the personnel system for officials”.
In each of these suggestions lies a clear understanding of the fact that in order to make growth genuine rather than inflationary, and sustainable rather than merely creating an artificial boom whose subsequent correction will be worse than the initial problem, it is crucial to make the most of existing talent pool, innovation and situational flexibility. Implicit in all of this is that China is going to push harder in the direction of reform, rather than retreat behind shibboleths of the past.
Zhang’s proposals conform to the long term thinking that underscores one of the most essential Chinese cultural characteristics. In this sense, China’s philosophical history has an important role to play in shaping its overall collective economic mindset.
Confucius once said, “It does not matter how slowly you go so long as you do not stop“. In this sense, China has learned that while Donald Trump is aiming for a kind of industrial self-sufficiency that is incompatible with modern inter-connected supply chains, China is actually working to make its economy less dependant on the whims of foreign governments and central banks by strengthen a rules based global economic order in which Chinese innovation is able to complete on the basis of innovative strength rather than purely price competitiveness. This will in turn open up new supply chains based on inexorable rather than flippant demand trends among consumers.
By further opening up the Chinese economy in terms of both directions, China is ushering in an age where foreign products will be able to compete in an open Chinese market, while Chinese products designed with quality and innovation in mind, can complete in a global market based not purely on cost-effectiveness but based on delivering a much needed unique durable good to an increasingly informed global consumer base.
In this sense, while the moderate monetary disciplinarianism of Jerome Powell has US markets frazzled, the long term fiscal discipline and commitment to sustainable rather than short-term growth that underlies the next stage in China’s economic development, looks set to put China onto a path where booms are due to genuine innovation in the marketplace and busts are limited in their effect by a commitment to stay the course rather than resort to flooding the public and private sectors with an excess of cash.