“Almost Comical Ineptitude”

One additional concern about Chinese economic performance over the last couple of years is micromanagement.

The lessons macroeconomics can offer politicians and bureaucrats are few and far between. The one thing we know for sure is that there are far more governments who have pulled their economies downwards than there are ones that have pushed their economies upwards. The textbook political advice sounds a lot better on paper than it works in practice.

Which brings us to my recent series of posts on China. In China, they change the group at the top every ten years. They claim to rule by consensus, but who’s at the top still matters. They’ve had Xi Jinpeng for just over 3 years now. And what we’ve learned is that Xi appears to have control issues.

Here is Andrew Browne, from an opinion column in the January 9 issue of The Wall Street Journal entitled "Xi Jinping’s Micromanaging Leaves Markets in the Lurch":

A defining characteristic of Xi Jinping, the Chinese president, is his controlling personality.

Mao reigned with godlike aloofness. Deng Xiaoping left the details to underlings. Mr. Xi, by contrast, takes charge of everything; he’s an inveterate micromanager.

Amid the mayhem of China’s markets this week, one dysfunction stands out: bureaucratic confusion. …

Part of the problem, it seems, is a policy-making bottleneck. Mr. Xi has reversed a collective-type leadership process inherited from Mr. Deng and concentrated decision-making authority in his own hands.

But he’s thinly stretched.

For the last couple of decades, the # 1 guy in China has run the politics, and the # 2 guy has run the economy. Not now:

As a consequence, Premier Li Keqiang’s job has shrunk. His immediate predecessors ran the economy; he doesn’t enjoy the same autonomy. If things go seriously wrong, though, he might end up as a convenient scapegoat. Other highly competent economic leaders look less like decision makers and more like cheerleaders for policy concocted above their heads.

Do note this is the same Li Keqiang mentioned in my other post as known for not trusting the GDP numbers produced by his own government. Maybe he was on to something.

Recall that I noted this was an opinion piece. He echoes what I said in class on Friday:

Conventional analysis holds that the Chinese stock market doesn’t have much connection to the underlying economy, and therefore the wider world shouldn’t be too worried about the latest gyrations.

But this misses the point. Investors have a right to feel concerned …

Note that his tone is a little different than mine: he’s saying investors should be concerned, but he didn’t say that macroeconomists should be. But then the author gets serious:

Instead, we’ve seen almost comical ineptitude, the most recent example being the introduction of circuit breakers to reduce volatility in the stock market.

The measure had been fast-tracked by the securities regulator after the stock-market wobbles made Mr. Xi look more vulnerable than at any time since coming to power in 2012. But the circuit breakers had to be abandoned after only four days—because they made volatility much worse.

“It’s Amateur Hour!” writes the Shanghai-based economist Jonathan Anderson of the Emerging Advisors Group.

…

The regulatory confusion reflects a contradiction at the heart of Chinese economic policy making, one that has Mr. Xi’s stamp all over it. On the one hand, the Chinese leadership wants efficient markets to help pull China through the transition to consumer-led growth. Yet Beijing doesn’t really trust free markets and prefers guiding them with regulation.

It’s these bureaucratic interventions, poorly conceived and badly implemented, that now threaten the most damage.

None of this is a guarantee that China will go into a long stall. But, the whole reason macroeconomists bring this sort of thing up is that there are quite a few countries that have gone into long stalls when they hit a middle income level of development comparable to where China is right now (just look at Brazil’s slow moving trainwreck this year with everyone watching the countdown to the Olympics in Rio this summer). The relatively smooth sailing that, say, South Korea did going through this phase a generation ago is the exception not the norm.