China’s Top Banker Warns of Need to “Rebalance” Chinese Economy

Liu Mingkang, the head of China's Banking Regulatory Commission (CBRC), at a seminar at Oxford University said that China’s economy needs a “rebalancing,” after three decades of growth. He also warned that globalization is a “double-edged sword” facing China. The country has too much cash, too much investment, and not enough domestic consumption. That said, he maintains the biggest challenge is keeping the best minds in China in the public sector. One wonders.

Mr. Liu is a great reformer and liberalizer. While this journal has little time for communists of any stripe, one must concede that there huge gradations. The near meltdown of the Chinese banking system about 5 years ago could have resulted in a retreat from markets and in a crackdown on anything but the strictest Maoist interpretations of what should come next. Mr. Liu made sure that didn’t happen. As the BBC reported, “He has allowed Western banks to take shares in China's main commercial banks, allowed them to set up branches in mainland China, and in April agreed that they could compete directly with Chinese banks for retail customers.” That effectively imported Western banking know-how to China’s financial sector.

The stunning growth in China’s economy has led to some clearly non-communist results. There are huge gaps between rich and poor, and the economic development has favored the coasts rather than the interior. That creates regional animosity, economic migration to the coasts and exacerbates the inequalities among individual Chinese. In effect, it has created a situation quite familiar to many Americans, but quite alien to the People’s Republic of China.

According to Mr. Liu, less than half of the Chinese economy is personal consumption. The rest comes from exports (which generate huge trade surpluses) and investments (which largely dispose of those surpluses). The problem lies in the fact that an economy can only absorb a certain amount of investment efficiently. Just as a sponge can’t soak up more than a certain amount of water, investments aren’t economically productive after a point. China has reached that some time ago. There is incredible over-capacity in steel and cement plants for example.

Mr. Liu believes that the future will require great minds to guide government policy so that people in China feel more secure economically and thus, spend more. He believes part of the problem is excess savings brought on by the removal of the Chinese social safety net. The BBC adds, “According to Mr Liu, the Chinese government spends much less on health and education (as a percentage of GDP) than other countries at a similar level of development, such as India and the Philippines. He argues that the government needs to increase its spending on social security in order to give people the confidence that the state will still be able to meet many of their future needs and therefore free them to spend more in the present.”

He worries that the next generation of leaders will go off into the private sector where the money and glamour is greater than it is for 21st century mandarins. That won’t be necessary. Raise taxes on investments, root out corruption in the Communist Party (especially at the local level), and start spending on hospitals, pensions and education. China has the money, all it needs is a little political will. Meanwhile, let the next generation go into business if they wish. As the great communist leader Deng Xiaoping said, “It is glorious to get rich.” No wonder Mao locked him up.

© Copyright 2007 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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