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- [Prof. Tyler Cowen] So why is the Chinese economy
in so much trouble right now?
Well, actually, this shouldn't come as a surprise.
If you've been watching China over the last several decades,
you can understand how the current problems
actually fall out of a lot of their earlier successes.
The story starts in 1979.
And in 1979, you have Chinese reformers
starting to do a good deal to put the Chinese economy
on a sounder track.
At that time, Chinese per capita income
was only a few hundred dollars a year,
almost everyone was very poor,
people would ride bicycles rather than driving cars,
and even starvation was still a possibility.
So China introduces more private property,
more capitalistic incentives,
it privatizes some of its agriculture,
it allows more manufacturing, more exporting.
Overall, China starts moving toward being a modern economy,
a normal economy.
And once these reforms are underway,
China is growing at really an astonishing pace.
For a lot of the last 35 years,
China has been growing at around 10% a year.
That's amazing!
The American economy typically
doesn't grow at much more than 2% a year.
At 10% a year growth,
that means that living standards double about every 7 years.
So if you go back, you keep on visiting China,
it's as if every 7 years, every 10 years,
you get to see an entirely new country.
For me personally, China is the most interesting country in the world
to visit as an economist.
They have grown at a pace
that no other place has matched.
Imagine about 10% a year growth for almost 35 years.
That has transformed everything.
So even year to year,
parts of a city or a neighborhood can simply change before your eyes.
So you see human progress at work,
you see what took some parts of the world centuries to achieve,
happening in decades or even years.
You see human hope and faith and progress,
and a deep underlying optimism about what is possible.
So the Chinese economy during these years of rapid growth --
it had some very notable features.
It had high levels of savings,
it had super high levels of investment,
and they built lots and lots of infrastructure.
And those were all very positive.
It's wonderful how good the infrastructure is in China.
I would much rather ride on a Chinese high-speed rail train
than take the Amtrak from Washington, D.C.
to New York City.
The Chinese train is quicker, nicer,
and it's far more likely to be on time.
But here’s the thing --
for a long time China has been investing
almost half of its GDP every year.
Half! That's astonishing.
When you think about it,
it is remarkably hard, every year,
to invest half of your GDP and to invest it well.
In the early years of China's economic growth,
the required investments were pretty simple and straightforward.
They needed to build more homes,
they needed to put in more train lines,
they needed to build more roads,
they needed to equip their urban centers
with all of the normal features of everyday modern life.
And the Chinese government did a really good job
at all of those things.
It's a big reason why, actually, China's growth has been so strong.
But the problem is this --
the way decision-making in China is set up --
it's very good for achieving things with a kind of checklist --
known tasks that require a lot of resources and a lot of effort,
and you throw everything you have at getting it done,
and you get it done pretty quickly.
China has been great at that.
But now, a lot of that low-hanging fruit is gone.
A lot of the infrastructure which China needs
already has been built,
but now their economy needs more complex investments.
They need a better healthcare system,
they need better retail services, they need more startups.
And in these areas,
there’s not a simple checklist way to get it done.
It's not just a question of throwing resources at the problem.
You need more trial and error, more experimentation,
you need more of a market discovery process
to figure out which are the profitable investments
and which are the unprofitable ones.
And it’s hard to plan and manage those
the same ways that the Chinese did that
with all of their infrastructure.
Here is another problem with the Chinese economic model.
If your economy grows 10% a year or so for so long,
businessmen and also your governments --
they start thinking there isn't much risk.
At 10% growth, there's so much forward impetus.
You can have a business plan with a lot of mistakes,
you can have a lot of debt, you can be very poor on execution,
but a lot of those investments are still going to make money
at about 10% growth.
So what happens is, the underlying economy
loses some of its discipline.
People get sloppy, they overextend,
they become too optimistic.
They think they can make any investment or any decision
and somehow it will pay off or be validated,
just because everyone else
is pushing on that 10% rate of growth.
A turning point for the Chinese economy
comes in 2009
when there’s a significant recession in many other parts of the world.
At the time, a lot of observers thought,
"Well, there’s going to be a big recession in China too."
But there wasn't.
The Chinese government undertook some very special steps
to avoid or maybe just postpone that recession.
So the Chinese government
spent a lot more money on infrastructure
at a time where maybe
less infrastructure investment was called for.
The Chinese government, the state-owned banks,
the state-owned companies,
acted in concert to encourage a lot more borrowing,
a lot more debt.
And it's true -- this did spur spending,
it boosted investment,
kept the economy running at a higher level,
but actually debt rose to the point
where it was too high
relative to the rates of return available on those projects.
So now, we don't have very exact measures,
but it seems that total Chinese debt of all kinds
is well over 200% of GDP --
possibly as high as 300% of GDP.
And maybe that can work
when your underlying rate of growth is 10%,
but as your underlying rate of economic growth falls,
it's harder and harder for that debt to be sustainable.
So how much is China growing today?
Well, it depends who you listen to.
The Chinese government, circa 2015,
is claiming China is still growing at about 7% a year.
But not many external observers believe this,
because they’re looking at other pieces of data.
No one is sure what the real rate of economic growth is,
but what we know is that it is probably sharply lower
and China is now entering a great recession.
To track this recession,
we can keep in mind five issues or problem areas --
the real estate bubble, the stock market bubble,
the excess level of municipal debt,
excess capacity among Chinese businesses,
and finally, the risk of capital flight.
The first of these is the real estate bubble.
Chinese property prices
became too high in many Chinese cities
and China overbuilt.
I took a train trip from Beijing through the center of the country --
a six hour train trip.
And along the way, I kept on seeing city after city
with dozens and dozens of apartment blocks.
You would see so many buildings, but so few people,
so few retail stores, so few cars.
Many of those cities are grossly overbuilt,
relative to what can be supported.
The Chinese stock market bubble is another potential problem.
For a while, Chinese stock prices were rising rapidly,
but then they fell rapidly too.
Too many people were encouraged to buy stocks on margin,
the ratio of prices to corporate earnings
has been extremely high,
and probably those stock prices will continue to fall
at a pretty rapid pace.
That will depress consumer spending, lower confidence
and it also will be a problem for some Chinese banks.
The third problem is municipal debt.
No one really knows exactly how big a problem this is.
We do know that Chinese municipal governments
were not supposed to be able to borrow money --
they were supposed to run balanced budgets.
But in fact, a lot of them ended up borrowing money off the books,
and in fact they were encouraged by the central government to do this,
to keep up that expenditure on all the infrastructure.
But what’s happened is,
they borrowed a lot more than right now they are able to pay back.
And the central government in Beijing is feeling the need
to try to bail out these municipal governments.
Another big problem in the Chinese economy
is what I would call "excess capacity".
That is, in too many sectors you have too many firms,
you have too much overconfidence,
too much stimulation of investment,
and a lot of those companies probably are not profitable --
they're being kept afloat by cheap credit
from Chinese state-owned banks,
or they may be Chinese state-owned companies themselves,
which have political privileges of various kinds.
But a lot of those companies right now --
they’re not making really productive investments
in the kinds of things that Chinese consumers want.
If you look at price indices,
if you look at the index for producer prices in China --
that's one measure of this excess capacity.
That index actually has been falling now
for over three years running, falling every month.
That's a sign that too many producer goods have been built
for what can be sustained profitably.
So maybe the biggest potential problem is capital flight. There’s a risk that capital within China,
foreign capital, but specially domestic capital, seeks to leave the country out of fear of China's economic problems.
But if too much of this capital leaves the country, that actually makes the problems much worse. As we saw with the Asian financial
crisis in the 1990's for other countries. The big danger in China is simply that
capital flight accelerates. But in the meantime, think of the problems the Chinese government
has trying to manage all of this. There are a lot of firms which are no longer profitable,
but the government’s reluctant to let them go bankrupt because of fear of unemployment
and also alienating special interest groups. There’s too much credit and too much borrowing in the economy,
but if that bubble is burst, well then economic activity will fall all the more.
There's been too much investment in real estate, there’s too much continuing reliance on infrastructure,
and somehow the government is supposed to juggle all of these balls at once
and stop the recession from getting worse. When you put all of those issues together,
it is indeed a very complex picture, very difficult to understand. But what we see
is that the world's number two economy really is running a very serious risk of a recession
which will be deep, and also may last really quite some number of years.
My personal view is that, at this point, these problems are so deeply baked into the Chinese economy,
there is no way to set this all right. But still there are some major reasons
to be optimistic looking forward. First, the most important source of wealth in any economy is
human capital. The Chinese have done a fantastic job investing
in their own human capital. So from the economist’s point of view, which values
human capital above all else, as the most fundamental source of national wealth. When we look at the future
of China in the medium-term prospects, we really should be optimistic
or even cheery. Because China has invested very well in human capital.
Those investments will survive the current recession intact, and we have
every reason to believe that China will be extending the talents, energies, drives, and ambitions of its people,
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