The use of the word “myth” to characterize an error is something we’ve become accustomed to through repeated usage although a better definition might be something which while not literally true reveals a greater truth. Consequently, when I read Eswar S. Prasad’s piece in the Washington Post, “5 myths about China”, I expected to have some errors revealed. Imagine my surprise when three of the “myths” are actually true. Here are the five:
- China’s stock market losses reflect an ailing economy. that’s false or, at the best, misleading. China’s stock market losses and its ailing economy share a common cause: bad policy.
- China’s economic growth is driven primarily by cheap exports. As it turns out this is true as reflected in the piece itself:
The main economic driver has been investment in physical capital, including factories and infrastructure such as roads and railways. Such investment has accounted for more than half of China’s growth in the past decade.
When investment is driven by borrowing as has been the case in China and exceeds the actual productive capacity of the economy, it does not produce growth. It produces a bubble as is also the case in China. Most of China’s non-frothy growth has been produced by, in the words of the article, “cheap exports”.
- China is actively manipulating its currency. That’s true, too. What is offered in the article as a refutation:
Except that this recent fusillade from Capitol Hill was prompted by China doing exactly what the United States has been asking it to do: ease up on management of the renminbi’s exchange rate, relative to other currencies, so that its value can be more freely determined by market forces.
does not contradict the assertion. And in recent months China has been selling dollars ferociously. That is by any definition “active manipulation”.
- China cooks the books to make its economy look stronger. That’s also true. And the article confirms it:
Reported GDP growth is usually suspiciously close to official growth targets. And although China’s official growth rate is 7 percent, some Western economists estimate it at 3 percent or less.
There’s some handwaving in the article about short term about short-term and long-term prospects but the Chinese authorities reporting 7% growth this year where 3-4% is probably what is supported by the facts this year is cooking the books by my standards. Unless the author has turned to the “revealing a greater truth” definition of a myth?
- The renminbi’s new status threatens the dollar’s dominance. That’s false. It has always been false and it’s not even vaguely true. I don’t know what all the hubbub has been about.
There are other myths about China I wish the author had explored. For example, the myth that China has transformed itself into a free market economy. You can’t be a free market economy with 70% state-owned enterprises. Or China’s economy is now the most influential in the world. We’d better hope that’s not the case or China’s problems, mostly induced by bad policy over which the rest of the world has no influence let alone control, will spread.
On point 1, I like Tyler Cowen’s quip: Since China has made it increasingly harder to legally sell stock, what can stock prices even mean at this point? “A barometer of which kind of PR hit the government feels like taking on a given day?” Given that I think the point WaPo is making is a relative one, i.e., the stock price drops are not that bad, who knows how bad they are? All one can tell from stock prices is that the economy is ailing enough for the government to take a hit.
I think they’re trying to balance the “hits”, as you put it. They can take a hit for a falling stock market or for a falling economy or for their lousy policy responses to either of the above. Or, said another way, “Please, sir, may I have another?”
My concern is that they’ll get tired of it all and turn the Chinese people’s attention elsewhere. Like the South China Sea.
However, if they’re looking for a place to turn, I can think of a place they might want to focus on. Now, let’s see, who just detonated a nuclear weapon without permission?
PD, didn’t you just explain TARP & QE?
I still assume the Chinese obfuscate so much about their economy that we don’t really know for sure what is going on. I’m just not sure that they know either.
Steve