Is China literally reinventing the theory & practice of macroeconomics?

by Rashmee

Posted on August 11, 2018



Did you know China hasn’t had a recession in 25 years? Me neither.

Did you know that it has grown at least six per cent in that same period? Me neither.

It could be that this is Chinese government propaganda –Qinghai, Yunnan, Chongqing, Guizhou, and Shaanxi are supposed to have the most questionable growth data of China’s 23 provinces – but what if it were true?

Noah Smith on Bloomberg View suggests that all the skepticism in the world shouldn’t obscure one important fact. “… a number of independent observers have constructed their own measures of Chinese growth, relying on data like electricity usage to supplement the official numbers. But almost all of them conclude that China hasn’t seen growth fall below zero in recent years, despite a mild slowdown in 2015.”

That’s a pretty remarkable claim and it goes some way towards explaining Mr Smith’s apparent admiration for the way China is running its economy. It doesn’t rigidly adhere to the three basic macroeconomic stabilization philosophies used in the western developed world –

** Keynesianism, which centers around fiscal stimulus, mainly in the form of increased government spending

** Monetarism, which gives central banks the big job of easing countries out of a recession

** The recessions-are-healthy school

But China it seems, mainly looks to a fast-acting credit policy to stabilize its economy, says Mr Smith. It encourages banks to lend more when there’s a risk of recession as in 2016 and this year. Just days ago, China’s Central Bank injected 502bn yuan ($74bn) into the financial system in a sign it is easing monetary policy to help support the slowing economy.

And China turns off the credit tap if there are housing bubbles as happened in 2011, 2013, and in 2017.

Mr Smith says this “novel approach to macroeconomic stabilization…focuses on asset prices, bank finance, real estate and administrative control of banks.”

He should know, as a former assistant professor of finance.

 


Rashmee has lived and worked in several countries in the past decade, including Afghanistan, India, Haiti, Tunisia, the UAE, UK and US