Interview with Professor Gary Jefferson
Carl Marks Professor of International Trade and Finance and a Specialist in the Chinese Economy
By Sungtae Park
1. SP: Will the Chinese economy have a soft landing or a hard landing?
GJ: Either could happen. My expectation is that, to the extent that China’s economic growth slows, and as a rapidly developing country, surely it will slow, I doubt there will be so-called a hard landing in the immediate future. I would say that probably is the result of three factors. You might call them cushions. One is that China presently has a substantial amount of slack in the execution of its monetary policy. That is, it is able to substantially relax its monetary policy and allow more of its credit to circulate throughout the economy as needed. The second factor is that it is fairly fiscally robust. It’s not running an excessively large deficit. In the wake of the financial crisis, it was able to mount a stimulus program that in relation to its GDP was substantially larger than that of the United States. If necessary, it could do that again. And probably the most important factor in comparison with the U.S. is that the fiscal balance of the households, its families is in much better shape than in the U.S., and that’s because the household savings rate has been so exceptionally high in recent decade. Households have a substantial safety cushion and are unlikely to dramatically cut back ontheir spending as occurred here in the U.S.
2. SP: How would you define a hard landing for the Chinese economy?
GJ: Well, its growth has been consistently above eight percent. If it were to fall to less than that, half of that, say four percent, I suppose that would constitute a hard landing by Chinese standards. Over the next ten to twenty years, the growth rate of China’s economy will most likely slow to the range of four to six percent, which will occur as a result of the reduction in the rate of migration of underemployed from the rural sector to the urban, industrial, service sectors. That’s been the great growth driver over the last two decades. But of course, the number of people migrating as a proportion of the overall economy and overall labor force is diminishing over time. The second factor is that many industries in China, ranging from textile to telecommunications equipment, are approaching the international technology frontier. The economic growth in coastal areas has indeed slowed down. So China’s overall growth will slow. If, over the next year or so, China’s growth were to fall precipitously to four percent, I would construe that as a hard landing.
3. SP: You mentioned China’s 2008 stimulus package which was indeed a great success. It also spurred massive inflation and the real-estate bubble we have been seeing the past two years or so, however. Is it ok for the Chinese government to become so heavily involved in its economy?
GJ: Of course, it creates some serious inefficiencies. Indeed, recessions do perform some economic functions in being able to flush out more inefficient parts of the economy. Arguably, China has been deferring that kind of cleansing activity by virtue of sustaining high growth. On the other hand, it has allowed for the reentry of new technologically dynamic industries. The market share has clearly tilted towards more industries and companies that have been relatively efficient, but there is no doubt that there has been a great deal of inefficiency and perhaps also some latent danger in sectors of the financial sector and in banking in particular. But China continues to exercise a substantial amount of control over state-owned enterprises. It has upsides and downsides. The upside is that China is emerging as a global leader in certain frontier industries, particularly renewable energy. The downside is that it does not have political oversight, as we have in this country (the United States), that can monitor, criticize, and control the government’s inefficient spending on so-called strategic pillar industries, such as renewable energy resources.
4. SP: How would an economic downturn, small or big, affect China’s social and political stability?
GJ: I think this is the biggest challenge in China - making its political transition. In many ways, people underestimate the extent to which China has made a political transition. Many think that China has achieved great changes in the economic sector but not in the political sector. In fact, China’s economy has largely transformed from a centrally planned economy, with socialist ownership, to a market economy with private ownership. It’s essentially a capitalist economy now. The essential function of the political system is no longer to manage the development and the execution of the central plan. The central function of the political system now is to oversee the functioning of a capitalist economy. What that means is that the whole range of property rights, concerning human capital, including the ability to move between companies and negotiate work conditions, has been transferred to individual Chinese residents. This extensive transfer of property rights from the state to individuals also includes the ownership of corporate assets, land, housing, intellectual property.
Now the principal challenge to the government is to oversee the development of institutions that are able to clarify these property rights, mediate conflicts among individuals and private groups that are actually exercising these property rights. There’s a much more active role for the electoral process, local village governments, and the National People’s Congress. It doesn’t mean that open and transparent choices are being made but they are much more so than they were twenty, thirty years ago. There is a much greater role for the court system. There is a much greater role for non-governmental organizations, which, five to ten years ago, hardly existed. Now there are millions of them. Most of them are not registered, but as long as they stick to advocating their economic rights, generally the government allows them to function.
Even protests serve a function. As I recall about four years ago, when I was in Wuhan, in Wuchang, I encountered a protest of about a hundred people demonstrating against the taking of their housing by the Wuhan City government. Now interestingly, one branch of the Wuhan government authorized the razing of their homes. Another branch actually authorized the protests. This was a well-choreographed protest. There were banners hanging across the streets. There were no police there, trying to break it up or anything. I took photographs of it, with my thumbs up, waving and so forth. What the protesters wanted, they had been offered 1,000 RMB per square meter for their razed homes. They protested and were demanding 2,000 RMB per square meter. My understanding is that the dispute was finally resolved with the government paying each resident 2,000 RMB per square meter plus a one-time 10,000 RMB payment for relocation.
My sense is that, from the government’s perspective, if your protest focuses on economic issues, seeking clarification of economic property rights, and doesn’t conspicuously spill over into the political realm, although there is a narrow distinction here, the government views protests as feasible instruments for the way in which it manages conflict. My sense is that the political system has changed dramatically. What you don’t have are national political parties that are contesting with each other the way we are familiar with. But you do have a lot of debate nationally. We have been seen the apparent political demise of Bo Xilai, the party secretary of Chongqing, who is very much an advocate of the old line Maoist approach, reinvigorating state-owned enterprises, and representing labor rights against capitalist interests. Whereas the main line, in terms of Xi Jinping, the president-designate and others, is much more actively reformist. There are numerous national debates, in part reflecting contending divisions within the Party. As compared with the past, these differences are capturing far more media and popular participation than in the past. Those who are actually involved in the decision making are a fairly large number of persons. It’s not a dictatorship by any means as it was arguably thirty years ago.
5. SP: How much will the current crisis in the EU affect the Chinese economy?
GJ: I suspect that whatever impact the EU crisis has had on the Chinese economy or will have on the Chinese economy has largely manifested itself. It is likely that there will be more slowdowns in the EU. That means less import demand from the EU, fewer exports from China. But China is trying to compensate for this in some way by expanding its foreign investment in EU countries, notably in Ireland but also in Southern Europe. Doing so will open markets more to Chinese exports. I don’t know what the net effect will be, but unless the EU really tanks and causes the U.S. economy to tank, and some of the emerging economies tank, I suspect the impact on China will not be huge. I can be a bit of an optimist, and I have been over the last twenty years and more. Crises will certainly happen. We see it in the U.S., and we are certainly seeing an economic crisis in the EU. That’s the nature of capitalism. It certainly will happen in China, but I don’t think it will reflect the failure of China’s development model and create an irreversible condition. There will be adjustments. China’s leadership probably has the capacity to respond effectively in the economic realm. The issue will be their ability to orchestrate the political system in the face of growth of political dissent, if the economy weakens substantially. That’s the big challenge, to make the political transition thoroughly. In many ways, the infrastructure for political reform is there with the National People’s Congress, with local elections, with court systems developing, and with NGOs. The political infrastructure is there to take one or two large steps further, meaning holding elections at the municipal and provincial levels, to allow for more open debate. We will have to see if that can happen.
Carl Marks Professor of International Trade and Finance and a Specialist in the Chinese Economy
By Sungtae Park
1. SP: Will the Chinese economy have a soft landing or a hard landing?
GJ: Either could happen. My expectation is that, to the extent that China’s economic growth slows, and as a rapidly developing country, surely it will slow, I doubt there will be so-called a hard landing in the immediate future. I would say that probably is the result of three factors. You might call them cushions. One is that China presently has a substantial amount of slack in the execution of its monetary policy. That is, it is able to substantially relax its monetary policy and allow more of its credit to circulate throughout the economy as needed. The second factor is that it is fairly fiscally robust. It’s not running an excessively large deficit. In the wake of the financial crisis, it was able to mount a stimulus program that in relation to its GDP was substantially larger than that of the United States. If necessary, it could do that again. And probably the most important factor in comparison with the U.S. is that the fiscal balance of the households, its families is in much better shape than in the U.S., and that’s because the household savings rate has been so exceptionally high in recent decade. Households have a substantial safety cushion and are unlikely to dramatically cut back ontheir spending as occurred here in the U.S.
2. SP: How would you define a hard landing for the Chinese economy?
GJ: Well, its growth has been consistently above eight percent. If it were to fall to less than that, half of that, say four percent, I suppose that would constitute a hard landing by Chinese standards. Over the next ten to twenty years, the growth rate of China’s economy will most likely slow to the range of four to six percent, which will occur as a result of the reduction in the rate of migration of underemployed from the rural sector to the urban, industrial, service sectors. That’s been the great growth driver over the last two decades. But of course, the number of people migrating as a proportion of the overall economy and overall labor force is diminishing over time. The second factor is that many industries in China, ranging from textile to telecommunications equipment, are approaching the international technology frontier. The economic growth in coastal areas has indeed slowed down. So China’s overall growth will slow. If, over the next year or so, China’s growth were to fall precipitously to four percent, I would construe that as a hard landing.
3. SP: You mentioned China’s 2008 stimulus package which was indeed a great success. It also spurred massive inflation and the real-estate bubble we have been seeing the past two years or so, however. Is it ok for the Chinese government to become so heavily involved in its economy?
GJ: Of course, it creates some serious inefficiencies. Indeed, recessions do perform some economic functions in being able to flush out more inefficient parts of the economy. Arguably, China has been deferring that kind of cleansing activity by virtue of sustaining high growth. On the other hand, it has allowed for the reentry of new technologically dynamic industries. The market share has clearly tilted towards more industries and companies that have been relatively efficient, but there is no doubt that there has been a great deal of inefficiency and perhaps also some latent danger in sectors of the financial sector and in banking in particular. But China continues to exercise a substantial amount of control over state-owned enterprises. It has upsides and downsides. The upside is that China is emerging as a global leader in certain frontier industries, particularly renewable energy. The downside is that it does not have political oversight, as we have in this country (the United States), that can monitor, criticize, and control the government’s inefficient spending on so-called strategic pillar industries, such as renewable energy resources.
4. SP: How would an economic downturn, small or big, affect China’s social and political stability?
GJ: I think this is the biggest challenge in China - making its political transition. In many ways, people underestimate the extent to which China has made a political transition. Many think that China has achieved great changes in the economic sector but not in the political sector. In fact, China’s economy has largely transformed from a centrally planned economy, with socialist ownership, to a market economy with private ownership. It’s essentially a capitalist economy now. The essential function of the political system is no longer to manage the development and the execution of the central plan. The central function of the political system now is to oversee the functioning of a capitalist economy. What that means is that the whole range of property rights, concerning human capital, including the ability to move between companies and negotiate work conditions, has been transferred to individual Chinese residents. This extensive transfer of property rights from the state to individuals also includes the ownership of corporate assets, land, housing, intellectual property.
Now the principal challenge to the government is to oversee the development of institutions that are able to clarify these property rights, mediate conflicts among individuals and private groups that are actually exercising these property rights. There’s a much more active role for the electoral process, local village governments, and the National People’s Congress. It doesn’t mean that open and transparent choices are being made but they are much more so than they were twenty, thirty years ago. There is a much greater role for the court system. There is a much greater role for non-governmental organizations, which, five to ten years ago, hardly existed. Now there are millions of them. Most of them are not registered, but as long as they stick to advocating their economic rights, generally the government allows them to function.
Even protests serve a function. As I recall about four years ago, when I was in Wuhan, in Wuchang, I encountered a protest of about a hundred people demonstrating against the taking of their housing by the Wuhan City government. Now interestingly, one branch of the Wuhan government authorized the razing of their homes. Another branch actually authorized the protests. This was a well-choreographed protest. There were banners hanging across the streets. There were no police there, trying to break it up or anything. I took photographs of it, with my thumbs up, waving and so forth. What the protesters wanted, they had been offered 1,000 RMB per square meter for their razed homes. They protested and were demanding 2,000 RMB per square meter. My understanding is that the dispute was finally resolved with the government paying each resident 2,000 RMB per square meter plus a one-time 10,000 RMB payment for relocation.
My sense is that, from the government’s perspective, if your protest focuses on economic issues, seeking clarification of economic property rights, and doesn’t conspicuously spill over into the political realm, although there is a narrow distinction here, the government views protests as feasible instruments for the way in which it manages conflict. My sense is that the political system has changed dramatically. What you don’t have are national political parties that are contesting with each other the way we are familiar with. But you do have a lot of debate nationally. We have been seen the apparent political demise of Bo Xilai, the party secretary of Chongqing, who is very much an advocate of the old line Maoist approach, reinvigorating state-owned enterprises, and representing labor rights against capitalist interests. Whereas the main line, in terms of Xi Jinping, the president-designate and others, is much more actively reformist. There are numerous national debates, in part reflecting contending divisions within the Party. As compared with the past, these differences are capturing far more media and popular participation than in the past. Those who are actually involved in the decision making are a fairly large number of persons. It’s not a dictatorship by any means as it was arguably thirty years ago.
5. SP: How much will the current crisis in the EU affect the Chinese economy?
GJ: I suspect that whatever impact the EU crisis has had on the Chinese economy or will have on the Chinese economy has largely manifested itself. It is likely that there will be more slowdowns in the EU. That means less import demand from the EU, fewer exports from China. But China is trying to compensate for this in some way by expanding its foreign investment in EU countries, notably in Ireland but also in Southern Europe. Doing so will open markets more to Chinese exports. I don’t know what the net effect will be, but unless the EU really tanks and causes the U.S. economy to tank, and some of the emerging economies tank, I suspect the impact on China will not be huge. I can be a bit of an optimist, and I have been over the last twenty years and more. Crises will certainly happen. We see it in the U.S., and we are certainly seeing an economic crisis in the EU. That’s the nature of capitalism. It certainly will happen in China, but I don’t think it will reflect the failure of China’s development model and create an irreversible condition. There will be adjustments. China’s leadership probably has the capacity to respond effectively in the economic realm. The issue will be their ability to orchestrate the political system in the face of growth of political dissent, if the economy weakens substantially. That’s the big challenge, to make the political transition thoroughly. In many ways, the infrastructure for political reform is there with the National People’s Congress, with local elections, with court systems developing, and with NGOs. The political infrastructure is there to take one or two large steps further, meaning holding elections at the municipal and provincial levels, to allow for more open debate. We will have to see if that can happen.
