Hello everyone!
Several milestones have been passed recently, not least the second anniversary of the launch of Beijing Baselines. Thank you all for staying the course, including a little health blip several months ago, now fading from concern.
Beijing, and the China it governs, have not run out of crisis factors and vectors in this time. Global headlines have been locked into ‘catastrophise or perish’ mode. We at Beijing Baselines have been at this point too often: the critical factor is the capacity for suffering of the Chinese people of all nationalities. China Policy, the Beijing-based information and advisory start-up of which I am deemed Senior Associate, has just wrapped up a series of deep dives commissioned by the Asia Society Australia. You can read our culminating dive here.
I introduced the monumental op-ed series of Liang Jing some time ago. This former reform think-tanker recently completed a triple on the concept of a the PRC economy as a Ponzi scheme. Bear in mind that warring tribes of economists—say, Keynesians and Friedmanites—often lay such charges at each other, this may not seem too extreme. But Liang springs a surprise in Part 3 of the triple, speaking of a Chinese proclivity for self-deception, a now-familiar topic for readers of this Substack:
…this incident shows us that China’s political culture, which is strong in self-deception, can create both great tragedies like the coronavirus and comedies like the Rocket Army.
As stressed in previous episodes of Beijing Baselines, I doubt Chinese culture can be shown to be ‘stronger’ in self deception than any number of others. What is of interest is that Liang should say that it is. A venting of emotion rather than a proposition of social science, no doubt, but highly interesting for all that.
The following is my translation of Part 1 (in parallel format here). Liang referes to a 2010 op-ed, where he first broached the ‘Ponzi scheme’ image; you can read it in parallel format here.
Parts 2 and 3 will follow in coming days.
Liang Jing
The China Model and Ponzi schemes revisited (1)
Today I’m revisiting my 2010 op-ed on ‘The Chinese Model and Ponzi schemes’.1 On the one hand, I’m finally seeing this scheme start to collapse; but I want to comment, and express some new experiences and judgments on how a scam of such unprecedented scale could have gone on so long.
In cognitive terms, many people, not least (previous Party leaders) Hu Jintao and Wen Jiabao, have long realised the China Model would be unsustainable. Inviting George W. Bush to the Beijing Olympics, Hu privately admitted that China had many problems making it difficult to compete with the US. Wen even publicly stated that the PRC growth model was unsustainable. Old friends of mine, who know the inside story, told me repeatedly twenty years ago that the PRC economy was ‘about to collapse.’ The Ponzi scheme hallmarks of its growth model were in other words no secret. What is really hard to grasp is the mechanism, above all the monetary mechanism, by which this pattern could last for many years.
The Netherlands ‘Tulip Bubble’ displayed the financial mechanism of a Ponzi scheme as early as 1637. That of the China is however unique: not only a financial phenomenon, it is a numismatic innovation in mainstream monetary theory, and not limited to the West. Its uniqueness lies in coupling the monetary policies of two superpowers, the US and China, to provide the financing means for an unprecedented financial scam. This insight is not my own, but was clarified by a paper published by the well-known historian Niall Ferguson and a collaborator as early as 2009.2 Yet, while Ferguson knew then that this monster would not live long, I would argue that the end was later than he imagined.
Why was this the case? Many economists and historians are now and will keep analysing this, I think. Prior to reform, runs a basic explanation of mine, the PRC had a social and financial arrangement unlike that of the Soviet Union and Eastern China: a politically centralised hierarchical rent-sharing system, the core of which was the urban-rural duality and regional identity discrimination. This system maximised the concentration of agricultural land rent in a physical form, to promote heavy industrialisation. The freedom of peasantry, not only as regards agricultural development but urbanisation as well, was sacrificed to this end. Household and financial contracting in the early reform stage monetised this materialised hierarchical rent system via decentralising economic decision-making. This triggered interregional rivalry in property rights arrangements, promoting great development of town and village enterprises, and providing real incentives for the PRC economy to exit its troubles in the 1980s; but it failed to solve the major problem of underemployment of the rural labour force.
The economy was again in trouble following the Tiananmen massacre. Deng Xiaoping seized the olive branch extended by Bush Sr. in 1992, and through his southern tour, channelled the incentives of local competition into opening to the outside. Local rivalry thus shifted to the rivalry between foreign capital and foreign talents. China was opening up to the outside world and foreign investors made huge profits. What was the secret? Everyone knew it was related to the legions of migrant workers, but there were few in-depth analyses of why migrant unions accepted such low wages. The reason they accept far less than the ‘labour reproduction cost’ cited by Marx was that household contracting not only rapidly improved agricultural efficiency, but also induced equalisation of monetary land rent. When peasants went out to work, they could at once increase family per capita income and consumption, despite their wages remaining insufficient to support their families.
The super ‘exploitation’ opportunities provided to PRC migrant workers by international capital gave huge impetus to the urgings of financial globalisation. Mainstream Western scholars, ignoring the advice of Keynes, vigorously promoted financial globalisation at the 1997 World Bank Annual Meeting in Hong Kong, paving the way for the historic coupling of US and Chinese monetary policies. As the saying goes: ‘Where there is benefit, just go for it.’ The relations between this temptation and the formation of China’s Ponzi scheme will be the content of my next op-ed.
Liang Jing, "The China model and Ponzi schemes”, Ziyou Yazhou diantai, 6 April 2010 [梁京:“‘中国模式’与庞氏骗局”,自由亚洲电台,2010年4月 6日 (in Chinese).].
Niall Ferguson Moritz Schularick, ‘The End of Chimerica’, Harvard Business School Working Paper 10-037 (October 2009), in English.