Andy Xie, renowned Chinese economist, considers that fundamental reforms are needed to curb deflation in China. Cutting interesting rates, for example, is not sufficient.
The People’s Bank of China has just cut interest rates again. It may support the stock market for a few days, but it won’t reverse the deflationary trend in the economy. It won’t even have much of an impact on lending rates. Political power, not market force, drives China’s credit system.
China can only ease deflationary pressure by increasing the share of household disposable income in the economy. Short of that, stimulus measures will only worsen the situation. Monetary easing will merely prop up insolvent companies and prolong overcapacity-induced deflation. Fiscal subsidies for distressed businesses or local governments will lead to the same outcome.
In the long run, China must reform to remove the system bias for maximising investment. Fixed-asset investment should be reduced to one-third of gross domestic product, from half, and disposable household income increased from 40 per cent to 60 per cent. As long as investment is bigger than what the economy can sustain, bubbles, deflation and financial crises will continue to haunt the economy.
In the long run, only limiting government power could set China’s economy on a healthy path. China’s competitive labour force is driving its growth by gaining market share in the global economy. Through monetary inflation, taxes, fees and forced savings in contributions to social funds, government power allocates a disproportionate income to investment, whether it’s necessary or not. The inefficiency from this will eventually overwhelm the labour competitiveness and trap the economy in stagnation. Without redefining power, economic reforms won’t lead to meaningful change.
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Dr Andy Xie 謝國忠, Shanghai-based independent economist, has just been named “ 50 Most Influential Persons in Finance”by Bloomberg, and is currently director of Rosetta Stone Advisors.Dr Xie is one of the few economists who has accurately predicted economic bubbles including the 1997 Asian Financial Crisis and the more recent subprime meltdown in the United States. He joined Morgan Stanley in 1997 and was Managing Director and Head of the firm’s Asia/Pacific economics team until 2006. Prior to that he spent two years with Macquarie Bank in Singapore, where he was an associate director in corporate finance. He also spent five years as an economist with the World Bank.
Dr Xie earned a PhD in economics in 1990 and an MS in civil engineering in 1987 from the Massachusetts Institute of Technology.