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Tyler Cowen: The Rise and Fall of the Chinese Economy

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

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Video Language:
English
Team:
Marginal Revolution University
Project:
Everyday
Duration:
12:25

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