JMU Talk

Published on Author Mike

I posted a link to the pdf of my powerpoint slides for my JMU talk on the menu bar. Here it is again: JMU China Issues Lessons from Japan v2

I made two main points. One is to present the challenge of enhancing farm incomes in a developing country. This leads to a political economy puzzle: why would an urban-based supposedly autocratic political system care about rural residents – Mao certainly didn’t!

The second is to think about some of the tensions that will arise as China’s “headline” GDP growth diminishes. Here I examine Japan’s experience, and posit that China too will see private investment fall faster than private savings, leading to pressure for the government to serve as a borrower of last resort, by running large budget deficits. Most discussions of rebalancing assume that it will be a shift from a high investment macroeconomic regime to a high consumption one. I’m not so sure things will work out that smoothly; won’t the rebalancing be from investment to government??

6 Responses to JMU Talk

  1. Is it possible for China to impose regulations on its shadow banking system? You mentioned in class that Japan’s policies should not be followed with regard to subsidies, but if China were to legitimize shadow banking it seems that this could assuage some of the economic grief that will come with such macro rebalancing.

    • Good point — one I raised but did not answer.

      Yes, I think what happened in Japan is that the government offered incentives for “shadow” financing to turn legit. For example, for deposit-taking institutions they extended deposit insurance, and (I need to verify!) access to interbank markets. Among other things, the government pushed a cooperative movement, not in the Chinese sense of firms pooling assets, but rather firms joining a cooperative that could provide financing to members, and the coop could then in turn borrow from the government bank for cooperatives.

      But the timing (1950s? 1920s? post-1927 financial crash?) and other details! — that’s hard. The standard histories of Japanese finance focus on the formal bank side, which dates back to the 1880s, when the peers [former daimyo] were encouraged to set up financial institutions, using the government bonds they were given to buy out their feudal rights as the initial capital. Various existing financing operations [not even firms at that point in time!] turned formal in that era. Note my phrasing: there was no shadow finance because there were no formal financial institutions of any sort — Japan didn’t have a single currency until 1871, and that didn’t diffuse instantaneously.

      I need to hunt to find that “hidden” history, perhaps no further than a chapter in something on my bookshelf, but I really don’t remember ever seeing a good history (or any history!) of that end of the financial system, as opposed to business histories of individual firms [I have ? 3 in my office, a starting point, though all are in Japanese so I can’t readily turn to students to help].

  2. As I discussed in my post this morning, Li Keqiang did outline a commitment to reform in his recent speech to parliament. Will these reforms extend to the government’s role as a lender of last resort? Judging from the crucial role the Federal Reserve played in the 2008 crisis, it is clear that having a lender of last resort is essential in coping with economic downturn. As China’s growth rate falls, and it is forced to deal with the negative socioeconomic consequences that come as a result (the example of closing steel mills is outlined in a recent post), will it embrace the role of the lender of last resort in times of need?

    • Many years ago, when an investment house in Guangdong failed spectacularly, the government did step in. The government likewise stepped in to take over the bad debts held by banks for SOEs that were closed down. There’s plenty of precedent, therefore, so the People’s Bank of China (the central bank) is clearly positioned to serve as a lender of last resort. At the same time officials are very aware of the multiple dilemmas posed by “too big to fail” financial institutions. As we saw in the US with AIG, these can turn out to include non-banks.

  3. Also, considering Miller’s argument in “China’s Urban Billion,” it does seem that rather than a shift from investment to household consumption, we will see a shift from investment to government expenditures. As reforms to the hukou system take place, and urban areas attempt to integrate their migrant populations, government expenditures will increase greatly. However, if they are successful in their reforms geared toward integration, there should be an unambiguous increase in household consumption as well.

    • Yes, it’s one thing to talk about stimulating consumption, it’s another thing to find concrete, practical tools for doing so. Precautionary savings is big; a robust retirement system and healthcare system would alleviate that. Neither will happen quickly. Getting firms to pay out dividends? — maybe, a small step, but doable. (I don’t like stock buy-backs, I don’t believe they’re transparent and I think dividends guarantee that all shareholders actually end up with something in their hands.)