China's Visible Hand: an Analysis of the Chinese Government's
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China’s Visible Hand: An Analysis of the Chinese Government’s Intervention in its Economy During 2015–17 Kerry Liu University of Sydney, Australia Author Note Kerry Liu, Associate at the China Studies Centre, University of Sydney, Australia The author would like to thank Xiaoming Feng, the Managing Editor Scott Jeffrey, and three anonymous referees for helpful comments. This research did not receive any specific grant from funding agencies in the public, commercial, or not-for-profit sectors. Correspondence concerning this article should be addressed to Kerry Liu, [email protected] Abstract While the Washington Consensus supports limited government involvement in economic life, the new structural economics holds that government can play a facilitating role. This paper contributes to this debate by examining examples of the Chinese government’s intervention in its economy during 2015–2017. The Chinese government’s intervention has been generally successful, including significant reduction in overcapacity in the steel and coal industry, reduced liquidity of Chinese real estate as an asset class, and change in investment style through direct intervention in stock markets. Under President Xi Jinping, the governance model of China Inc. resembles family ownership and family management; thus, with Xi Jinping as an owner–manager, it is expected that the current government would outperform its predecessors, under presidents who were mainly managers. This study is the first of its kind to examine the performance of Chinese government intervention from the perspective of financial economics. Keywords: Washington Consensus; new structural economics; China; government intervention; overcapacity; real estate market; stock market; family ownership; Xi Jinping 36 CHINA’S VISIBLE HAND The rise of China is one of the most important events in world economic history since the Industrial Revolution, and the Chinese government is believed to have played a highly positive role in the process (Wen, 2015). For example, China has a capable mercantilist government with both highly centralized command power and a highly decentralized administrative structure. The Chinese government can mobilize, organize and manage its national economy through both central planning and decentralized intra-national competition among local administrative regions for economic growth and governance; and it can self- correct major policy errors through controlled nationwide experiments and pragmatic institutional innovations at both the upper and lower administrative levels (Wen, 2015). These aspects of the Chinese government are aligned with the new structural economic framework, which recognizes a facilitating role of the state in the process of industrial upgrading (Lin, 2011; Lin, Monga, Velde, Tendulkar, Amsden, Amoako, & Lim, 2011). The China Model’s powerful state has a hand on the levers of capitalism (The Economist, 2009). This contrasts with the focus of the Washington Consensus on open markets and limited government involvement in business (Williamson, 1989), an approach that has been criticized for resulting in economic collapse and stagnation in many transition economies and “lost decades” in other developing countries in the 1980s and 1990s (Lin, 2015), and for exacerbating inequality and unleashing violence (SCMP, 2017). China is trying to export its development model, such as by helping the government of Grenada prepare a national development plan (Chen, 2017). For all these reasons, the role of government in economic development is a hot topic. This paper contributes to the debate on the role of government – especially the Chinese government – in economic development by examining evidence from 2015–17. The first section presents recent evidence of government intervention in the Chinese economy during 2015–17, with respect to overcapacity in the steel and coal industries, the property market and the stock market. The second section presents some theoretical analysis of the performance of Chinese government. The third section concludes this paper. Chinese government intervention in the economy, 2015–17 Xi Jinping was elected as the President of China on 14 March 2013. During the early stages of his first 5-year term, he gradually consolidated his power through an anti-corruption campaign, and by 2015 had assumed responsibility for the Chinese economy, which was traditionally the responsibility of the Premier. At the Third Plenary Session of the 18th Central Committee of the Communist Party of China (CPC) held in November 2013, it was stated that China would let the market play the decisive role in resource allocation. However, few noticed the following statement; that China would also let the government play its role (Xinhua News, 2013). At the 19th Central Committee of the CPC held in November 2017, these two statements were reiterated (Xinhua News, 2017). They imply that China’s visible hand has been playing and will continue to play a significant role in Chinese economy. In this section, three examples from 2015–17 are examined: interventions in the property market, the stock market, and the steel and coal industries. Overcapacity in steel and coal Capacity utilization is defined as the ratio of an industry’s actual output to its estimated potential output. China’s National Bureau of Statistics (NBS) assesses aggregate capacity utilization by surveying over 90,000 industrial firms (NBS, 2018). Starting from early 2016, 37 CHINA’S VISIBLE HAND China’s NBS also began to publish capacity utilization by sub-sector. Various government departments such as the State Information Centre also sporadically publish such information through news reports, articles and conference proceedings. Since the 1990s, the Chinese government dealt with five separate overcapacity problems – in 1999–2000, 2003–04, 2006, 2009–10, and 2013 (Yu and Cui, 2016). The industries that most often experienced overcapacity were steel, coal, cement, electrolytic aluminium and flat glass, but primarily the steel and coal industries (Yu and Jin, 2017). In 2015–17, a 6th program sought to resolve overcapacity in the steel and coal industries. During 2011–15, China’s annual steel output was around 1.13 billion tons. However, capacity utilization for crude steel declined from 79% in 2010 to around 70% in 2015. The whole steel industry had been running at low profitability, and experienced an overall loss in 2015 (Y. Liu, 2018). Similarly, the coal mining industry had been struggling for a long time as the result of overcapacity. Its gross profit margin, defined as the ratio of revenue minus cost of goods sold to revenue, reached its peak level of 31.1% in November 2008, and continuously declined to an historic low of 14.2% in August 2015. During the same period, the growth rate of industry-level profit declined continuously from 91.9% to negative territory in mid-20161. There are multiple and complicated reasons for industrial overcapacity in China. As Yu and Jin (2017) argued, while structural factors and restructuring can cause overcapacity and fluctuations in capacity utilization are part of the economic cycle, Chinese economic characteristics are also important. First, Chinese firms tend to invest in industries which have been successful in more developed countries. However, many Chinese firms made investment decisions based on incomplete information, forming a "wave" that resulted in concentrated investment in particular industries. Product prices dropped, leading to overcapacity (Lin, Wu and Xing, 2010). Second, Chinese governments play a significant role in driving overcapacity. For example, local governments vie to attract investment to increase local GDP, taxes and employment. Accordingly, low-cost land supply and tax relief have become main methods of promoting investment and have boosted capacity expansion. Some local governments even set up bankruptcy exit barriers to help firms reorganize in order to protect local investment and employment, which have further increased the difficulties of resolving overcapacity issues (Yu and Jin, 2017; Zhou, 2004). Furthermore, the Chinese central government played a significant role in the 2008–09 global financial crisis (GFC), launching a massive economic stimulus program characterized by heavy investment in infrastructure projects, which significantly expanded the capacity of upstream industries including steel and coal (Zhang, 2014). Third, the incompleteness of the entire market mechanism in China is an underlying driver of overcapacity. The pricing mechanism for the factors of production is very distorted and the market is not fair and competitive. The exit channels for overcapacity are premature. For these reasons, overcapacity in China has worsened over time (Yu and Jin, 2017). The Chinese government has been very concerned about the consequences of overcapacity, such as downward pressure on product prices causing deflation, restricting economic growth and discouraging further investment (Yu and Jin, 2017). Capital formation is a major contributor to Chinese GDP growth, accounting for 41.6%, 42.6% and 32.1% in 1 Data Source: Wind Info, National Bureau of Statistics 38 CHINA’S VISIBLE HAND 2015, 2016 and 2017 respectively2. Overcapacity has become a major factor suppressing economic growth. Yu and Jin (2017) also argued that overcapacity can increase corporate debt, potentially triggering systemic financial risks. Also, overcapacity can trigger international trade disputes. China is facing numerous international anti-dumping cases related