China's always been poorly governed
I often get annoyed reading articles claiming that China has an economic model that others should emulate. China is a poor country, not just compared to the US, but even compared to Mexico. Even if you believe poverty reflects factors outside of policy, such as cultural difference, China does relatively poorly against most of its (Confucian) neighbors, obviously aside from North Korea. It’s always been poorly governed, not just relative to places like Denmark and Switzerland, but also relative to Taiwan and South Korea. Thus I’m gratified that the media if finally beginning to figure this out:
Stock market and currency turmoil has battered Chinese leaders’ reputation as shrewd economic managers and fed doubts about their willingness to push through more wrenching reforms.
And here’s the Financial Times:
China has set up a new cabinet office to co-ordinate financial and economic policy, a tacit admission that its ad hoc and disjointed policymaking is failing.
It’s unfortunate that it took a so-called “crisis” for people to see this point, as the government has been shoveling vast quantities of cash into inefficient state-owned enterprises (through state-owned banks) for decades.
People are often fooled by China’s growth rates. But when you start from a position poorer than sub-Saharan Africa, and an economic model similar to North Korea, it’s not hard to grow fast has you transition from horrendous Maoist policies to a mediocre mixed economy model. Most of the growth has come from the private sector, which thrives despite the Chinese government, not because of it.
Despite my negative view of Chinese policy, I am optimistic about China’s future, as their government continues to gradually reform, making their economy a bit more market-oriented each year. (They recently announced a plan to deregulate airlines.) But there is still a great deal of work to be done.
As in other large diversified economies, the year-to-year fluctuations in growth largely reflect changes in NGDP growth, i.e. monetary policy. The consensus calls for 6.4% growth in 2016, which is probably too optimistic. I think the consensus underestimates the drag caused by the Chinese reluctance to devalue the yuan, which I believe will drag growth down to 6%.