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3. The slower the reforms, the bigger the debt

February 16, 2018
Bill Overholt
AsiaStrat

China's Crisis of Success—3

'What the Chinese have effectively chosen is much slower reform in order to keep the economic growth rate up around 6.7%.'

Bill Overholt says, 'When they started to implement the China 2030 reforms, first, the leadership had a choice:

  • 'Rapid reform, which would mean much slower economic growth', or 
  • 'High economic growth, which would mean accumulating a lot of debt and slowing the reform process.'                                   

'What the Chinese have effectively chosen is much slower reform in order to keep the economic growth rate up around 6.7%.'

  • 'So, they've acquired a substantial problem of debt as they're trying to keep this engine moving really fast.'

How this works. 'Fast reform would, for instance, involve very rapid reduction of over capacity. Now, the Chinese are reducing over capacity, but not as fast as they might.'

  • 'These inefficient concrete and aluminum factories, and other things, accumulate more debt as they wait the reform process.'
  • 'Also, and very important politically, local governments have become incredibly indebted, and you can crack down on that quickly, or you can not allow them to work at all for a considerable period of time.'
  • 'It's all happening more slowly than it might have otherwise.' 

'The other political decision that has slowed reform is that in effect politics has been given priority over a lot of economic reform.'

  • For example, 'The government talks about putting these big State Owned Enterprises on a level playing field with others. It talks about putting them on completely market basis.'
  • 'Then they say, "we're going to strengthen the role of the party committee inside these enterprises." They make sure the party committee has control over corporate strategy.'
  • 'Well, is it really on a market basis if the party controls the strategy has been strengthened?'

Another example. 'We're going to have the rule of law. It's going to be one of the major things of reform.'

  • 'But we're going to strengthen the role of the party commission that oversees the courts’ decisions.'
  • 'Well, is it really rule of law if a political commission is ultimately making the decisions?'

'There's a whole series of such things I talk about in China's Crisis of Success as the "Ten Key Contradictions"' (page 248).

'Reform is going forward, but it's going forward at a considerably slower pace than it might have, and with much higher priority for political considerations than was expected when China 2030 was drafted.'

Bill Overholt

Bill Overholt

Senior Fellow at Harvard Asia Center
AsiaStrat
  • 21 years' experience running Asia research teams for Nomura, Bank Boston, and Bankers Trust
  • Former Asia Policy Distinguished Research Chair and Director of the Asia Policy Center at RAND

Channels

AsiaStrat
Granite Peak Advisory
Track Research
Trivium China
Gao Feng
Real Estate Foresight
China Beige Book

All Analyses by

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5. Has Xi gone too far?

China's Crisis of Success—5

Bill Overholt believes 'Xi Jinping may have gone well beyond what the consensus originally intended, and the politicization of the reform may not be exactly what some of the designers of the reform intended.

4. Enter Xi Jinping. The reformer?

4. Enter Xi Jinping. The reformer?

China's Crisis of Success—4

'Second, they realized that these reforms are painful, and so there's going to be a lot of pushback from all the important power groups of Chinese society. So, they used the Anti-Corruption Campaign as a hammer to push aside these groups who were resisting reform.

3. The slower the reforms, the bigger the debt

3. The slower the reforms, the bigger the debt

China's Crisis of Success—3

'What the Chinese have effectively chosen is much slower reform in order to keep the economic growth rate up around 6.7%.'

2. China 2030: 'It's hard to find a more impressive economic plan anywhere else in economic history.'

2. China 2030: 'It's hard to find a more impressive economic plan anywhere else in economic history.'

China's Crisis of Success—2

'Simple economies and politics have been replaced with immensely complex ones. And you gradually get to a point of complexity, where there is an economic and political crisis of some kind.'

1. 'A sense of terrible crisis was a prerequisite for an Asian economic take off'

1. 'A sense of terrible crisis was a prerequisite for an Asian economic take off'

China's Crisis of Success—1

'Why is this sense of terrible crisis a prerequisite for an Asian economic take off? Because it creates a certain political environment.'...'The counterpart, on the economic side, is an economic simplicity.' says Bill Overholt.

China's Crisis of Success

China's Crisis of Success

Bill Overholt and I recently had a discussion about the points he makes in his new book, China's Crisis of Success. Here are five key points, each corresponding to a section below.

The Rise of China: How Economic Reform Is Creating a New Superpower by Bill Overholt, published in 1993, was called 'nonsense' and 'too optimistic.' How did that work out for the reviewers? 

Now, almost three decades after The Rise of China, Bill believes that China's future has become 'much more uncertain.' And, he addresses his concerns in a new book, China's Crisis of Success.

Bill outlined some the key points from his book recently in an interview with me. And, I have conveyed these below. As you will see, I have let Bill speak for himself. 

Bill was right in 1993. 

Is The U.S. Ceding Global Leadership To China?

Is The U.S. Ceding Global Leadership To China?

Hard on President Trump's 'American First' inaugural address, Xi Jinping gave a rousing paean to globalism at the World Economic Forum. And, immediately the hot question became: 'Is the U.S. ceding global leadership to China?'

Yes and no, says Bill Overholt of the Harvard Asia Center. Yes, the U.S. is ceding global leadership. No, China won’t replace the U.S.

What will replace the U.S. is ‘G-Zero’, a world with no single global leader. Not China, not the U.S.

So, can his critics lay this outcome at President Trump’s feet?

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'What President Trump has done is to signal we are willing to move away from this formula that the North Koreans have to give up everything in their nuclear program before negotiations - only then we'll talk with them. I admire our U.S. negotiators, but that formula is simply absurd.'

Bill Overholt

Bill Overholt

Senior Fellow at Harvard Asia Center
AsiaStrat
  • 21 years' experience running Asia research teams for Nomura, Bank Boston, and Bankers Trust
  • Former Asia Policy Distinguished Research Chair and Director of the Asia Policy Center at RAND
AsiaStrat

AsiaStrat

Channels

AsiaStrat
Granite Peak Advisory
Track Research
Trivium China
Gao Feng
Real Estate Foresight
China Beige Book