A birdcage economy: understanding China

The world will not be stable until China becomes a balanced economy but the Chinese government is unlikely to let that happen.

Economist Andy Xie told FundForum Asia that the global outlook was currently uncertain and economies looked set to remain volatile for some time.

He said because of global trading, economies had become closely interlinked, and the solution to global stability lay in China.

“If we want to change the world, we have to change China, but people don’t understand the China story,” he said.

Xie pointed out that the Chinese economy was already bigger than the US economy on a purchasing power parity basis, but he added that the Chinese system was very different to the US’s because of its strong government.

He explained that since 1998, the Chinese government had been investing strongly in infrastructure projects.

China has now built 130,000 km of highways, and continues to add 10,000 km every year. This compares with 100,000 km of highways in the US.

But he warned that China was becoming unproductive because it was not making a return on this infrastructure spending and the household sector was getting squeezed.

Xie said household disposable income had been rising at a rate of 6% to 7% a year, which was a lot slower than the economy.

Once inflation was factored in, households were still seeing real income growth but consumption was not growing in China.

He said: “The reason for this is that the government is turning the economy into a casino, trying to get money from the people.”

A property market bubble

Xie said the main area in which this was seen was the property market, but he added that the property bubble in China was not like ones that had built up in other places.

He explained that if people borrowed money to buy property in China, the money went to the government, rather than back into the economy, as developers used their profits to buy more land from the government.

“The model is that people buy property, the money goes to the government, the government invests that money in infrastructure projects,” he said.

He added that when the Chinese economy suddenly picked up again in the third quarter of last year, this was because of state investment funded by money from the property market.

“But you don’t have productivity, so the economy is slowing down,” Xie said.

He explained that because the Chinese government was so powerful, with control over all resources and state ownership of the financial system, it was very difficult for market forces to change the economy.

“The distortions in the Chinese economy cannot be corrected by market forces,” he said.

A pause in reforms

Xie said the government had started to make the right noises about reforming the economy in 2013, but then they had stopped.

“The communist party wants to stay in control. Whatever reforms you see about opening up, don’t believe them.

“There is a cycle of people being optimistic about reforms, but then 12 months later they are disappointed,” he said.

He added that market reforms would lead to freedom, and freedom would mean losing control for the government.

As a result, he said the government had compromised by creating a ‘birdcage economy’.

“In a bird cage, birds may think they are free but they are not,’ he said.

“When the government feels good, they make the bird cage bigger, but when they are uncomfortable they make the cage smaller.”

Xie said in a market economy, when people felt uncomfortable, they took their money out until the economy collapsed.

“But you can’t do that in China because they just make the cage smaller,” he said.

Xie added that the election of Donald Trump had been unsettling for the Chinese government, and because they were unsettled, they had stopped reforming.

“The currency is not going down any more because capital controls have been tightened. Interest rates are going up. The stock market is going down,” he said.

But he added that the government did not want to raise interest rates too much because the property market would collapse, so instead it was cracking down on leveraged finance.

“The objective is to slow down the money supply without raising interest rates,” he said.

Xie said the Chinese economy behaved the way it did because of the political system.

He said if China became a balanced economy it would be more stable, but it would be two or three times bigger than the US economy.

He said many people in the West did not want China to succeed and were predicting it would have a financial crisis, but he said such a crisis would force change.

“The only hope for the West is that the Communist Party goes on wasting money so China never fulfils its potential,” he said.