Bret Stephens, The Wall Street Journal
It’s an insightful interview with Yang Jisheng, a longtime critic—and member—of China’s Communist Party, who discusses the many problems with China’s state-directed economic growth model.
Chinese policymakers seem to understand their model has limits—most aren’t as candid as Yang, but many of their slogans and policy proposals suggest they get it. Problem is, their sweeping reform plans often yield few concrete actions, and there’s a lot of give and take between the reform-oriented leaders and those who cling to more traditional, Maoist ideals. This give-and-take is likely a key reason Chinese stocks have underperformed the world lately despite China’s fine economic growth. Markets don’t move in lockstep with economies—often, over time, they move according to investors’ expectations of companies’ future growth and profitability. China may be growing fine now, but if officials don’t open the economy and financial sector and allow private firms to grow and thrive, growth might not stay fine for long.
I think reform will happen, but very slowly and likely in fits and starts—just as it has for the past couple years. For example, last year China decided to legitimize shadow financing in one city to test full nationwide financial deregulation. Officials believed formalizing private lending would help small businesses access easier, cheaper financing, which would help the region outgrow the rest of the country. But so far, they haven’t seen many results—because officials haven’t defined legitimate private lending and differentiated it from illegal fundraising (which carries the death penalty), many firms and lenders are scared of using these new channels. In order to get better results, China needs clearer laws. Officials have said they understand and plan to address this, but as usual, their plans are nebulous.
If China had a transparent, independent judiciary—heck, if it had a credible rule of law—its longer-term development would likely be smoother. But political and judicial reform, for now, are non-starters. So China will depend on the long-term success of fitful economic reform.
But that’s an academic issue—what happens in the very long term doesn’t impact stocks in the here and now. Now, investors are likely simply looking for China to enact policies that will help businesses compete and grow tomorrow.