Observations on China


By Dr. Lynn Reaser

Last week, I returned from China after leading a delegation of economists to meet with various government agencies and institutes.  This included the People’s Bank of China, China’s Banking and Regulatory Reform Commission, the Academy of Social Sciences, the Shanghai Stock Exchange, and the Chinese People’s Institute for Foreign Affairs, among others.

Some of my primary impressions follow:

China remains on a rapid growth track, with real GDP likely to see a sustained expansion of close to 9% per year during the next few years.  The country’s leadership is focusing on developing the country’s alternative energy sources, housing, consumer spending, technology, and the services sector with less reliance on exports.

The Chinese recognize their short-comings and are open with their self-criticism.  Many officials stress the need to reduce income inequality in the country and to develop the financial system.

The country is marked by sharp contrasts in both the philosophy and practice of an economic model. 

Several features demonstrate the continued move to a more open, capitalist-oriented economy:

  • A rapid growth of new businesses, supported by venture capital
  • The growth of various new financial market instruments, such as ETFs
  • The active participation of small investors in the equity markets (with the popularity of day trading)
  • The general profitability of firms, according to the CEO of Ford China Operations
  • The inclusion of free-market advocates in various institutions and the ability of them to speak candidly

Several elements demonstrate a continued strong role of government, state control, and intervention:

  • The lack of Central Bank independence, with political leaders largely dictating monetary policy
  • The unwillingness to let companies fail, with local governments propping up firms to avoid bankruptcy
  • Intervention to prevent sharp falls in equity prices, with firms requested to buy back shares
  • The requirement of foreign investors to form joint ventures with Chinese firms in order to establish operations in the country
  • The influence of the Communist Party, with company officers frequently members of the Party. 

These contrasts show that the concept of “a market economy with Chinese characteristics” is still to be defined.

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