Who is winning the battle of economic ideas in China

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http://www.economist.com/node/21562903

Hayekon the standing committee【常委会】

Whois winning the battle of economic ideas in China?

WENJIABAO, China’s prime minister, this week gave one of his last big speechesbefore retiring from the Politburo’s powerful nine-member standing committee. He vigorously defended China’sbold response to the 2008 financial crisis—and conspicuously failed to promiseanything similar in reaction to the economy’s present woes. Mr Wen described China’s 2008stimulus as a “scientific response” to that year’s crisis, which prevented“factory closures, job losses and return of migrant workers to their home villages”.It would have delighted John Maynard Keynes, an economist once denounced as“anti-science and anti-people” by China’s Communists.

Somepeople claim that China “paidan undue price”【支付了不适当的价格，过度的价格】 for thisstimulus, Mr Wen noted. Herejected their criticism. But even he seems reluctant to pay that priceagain. Despite the sharpest slowdown in the Chinese economy since 2009, Mr Wendid not announce anything spectacular. Instead, he emphasized the government’sexisting “adjustments and fine-tuning”【调整、微调】, including some tax reform, and a couple of cuts in interest ratesand reserve requirements.That was in keeping withtwo recent announcements by China’s planning body, which briefly raised hopesof a second stimulus. The announcements highlighted a number of infrastructure projectsthat will add over 2,000km to China’s road network and multiply the length ofChina’s subway systems. But most of these projects were conceived and approvedmonths ago. Only the announcement was new.

Ratherthan Keynesian economics, a different economic science seems to be governingChina’s response to this slowdown. Whereas Keynesfeared shortfalls in investment spending, his intellectual antagonists worriedabout misallocations of that spending【支出不当；支出分配失误】. Inadequate investment, Keynes argued, would leave the economydeprived of demand and workers bereft of employment. But malinvestment, argued Friedrich Hayek, an Austrian economist, would leave the economy poorly co-ordinated and workers stranded inthe wrong jobs.

In the past year, the spirits of Keynesand Hayek have done battle for the minds of China’s policymakers. Thismonth Andrew Batson of GK Dragonomics, a research consultancy in Beijing,argued that Hayek seems to be winning. China’sleadership is now keen to avoid the “Hayekian risk” of wasted investment, hewrote, even if that increases the “Keynesian risk” of inadequate demand andweak growth.

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关键词：Economic Winning Battle econom IDEAS his one vigorously committee economic

This Hayekian risk looms large, someargue, because China has already invested heavily in everything it normallystimulates when trouble looms. They point to disturbing examples ofghost cities, white elephants and bridges to nowhere. One example is theJiaozhou Bay Bridge, which connects the Huangdao district of Qingdao with therest of the city, two locations already connected by a tunnel. The bridge isthe longest overwater bridge in the world, but only because it does not followa straight line.

Othersare less convinced about Hayekian risk. Francis Cheung of CLSA, a broker,argues that China suffers from excess capacity in some parts of infrastructure,but not all. Cities like Beijing and Shenzhen are congested, faring worse onIBM’s “commuter pain” index than Delhi or Nairobi (see left-hand chart). Thatwould suggest China has scope to invest in Shenzhen’s metro, one of the projectsannounced last week. Infrastructure demand will eventually catch up withsupply, Mr Cheung concludes, as long as infrastructure spending remainsdisciplined.

Moreover,investment that adds little to a society’s stock of productive assets is notnecessarily malinvestment. Michael Buchanan and Yin Zhang of Goldman Sachs saythat some Chinese investment is best seen as “quasi-consumption”. In thiscategory they place things like earthquake-proof schools and more comfortablemetro lines. Instead of adding to the economy’s productive capacity, theseassets provide a flow of services (such as reassurance to parents and relaxedtravel) directly to consumers. In this respect they are more akin to consumerdurables, like washing machines or cars, than to iron-ore mines or steelplants.

As arough gauge of the size of quasi-consumption, the Goldman economists add upChina’s investment in house building and “social infrastructure”, such asutilities, transport, water conservation, education and health care.Reclassifying this spending as consumption would increase China’s householdconsumption to 53% of GDP last year, compared with only 35% in the officialstatistics (see right-hand chart).

截图

Hayek thought that badly conceivedinvestment would only result in a worse bust later. This belief is shared bymany bearish commentators on China’s economy. But China’s high investment isbacked by even higher saving. As a consequence, China does not needits investment to generate high returns in order to pay back externalcreditors. China has, in effect, already set aside the resources that will belost if its investments turn sour.

The real cost of malinvestmentlies elsewhere【失误投资的真实成本处处存在】. It squanders【白白浪费】 thehard-earned saving of China’s citizens, leaving them with empty malls【空荡的商场】rather than much-needed clinics【急需的诊所】; vacant villas【空置的别墅】alongside overcrowded dormitories【拥挤的宿舍】; sewers【下水管道】 that cannot cope with downpours【大暴雨】;and buildings【建筑】 that collapse like tofu. If China is tolimit this waste in the future, it will have to improve the way it matchessavers and borrowers. It will have to liberalise its financial system further,and allocate a bigger share of credit to private entrepreneurs rather thanstate-owned enterprises.

This points to a different, betterlesson to take from Hayek, who never won his battle against Keynesian stimulusin the 1930s. His later works praising the price mechanism andfretting about economic planning are what turned him into an intellectual star.Mr Wen’s successors will inherit an economy less susceptible to planning andever more in need of deregulation. The later Hayek is the one China’spolicymakers would do well to heed.