China and the Challenge of Economic Reform

Bursting Bubbles leave a mess – in the markets, throughout the real economy, in societies, in politics and with policymaking. Major Bubbles leave a trail of disarray and confusion – with the potential for a couple policy miscues to unleash mayhem. Think of the political paralysis and upheaval that has befallen Japan for the past 25 years. Think of post-mortgage finance Bubble divisiveness and political polarization here in the U.S. Look at the social tension and confused policymaking in Europe. The bursting of the historic Chinese Bubble has begun the process of eradicating genius while exposing a mess of monumental proportions, as the current market turmoil illustrates today. The question is, can China's policy makers navigate out of this challenging situation, whilst placing the country in a better place to meet the challenges of a 21st century economy?

Professor Andrew Sheng, a Distinguished Fellow of Fung Global Institute and an INET Senior Fellow, believes China can make it, even as he acknowledges the difficulties the current leadership faces. For starters, never have so many Chinese owned (over-priced and poorly constructed) apartments. Never have Chinese citizens, governments, financial institutions and corporations accumulated so much debt. Never have the Chinese had so much invested in securities markets. China has zero experience with a multi-trillion (yuan or dollars) “shadow banking system.” Never have so many invested so much in “wealth management” vehicles and other sophisticated financial products, without a clue as to where their “money” was directed. And when it comes to corruption, China can certainly match its western counterparts, to say the least.

The Chinese – apartment owners, bankers, Internet financiers and policymakers – have never experienced the downside of a massive Credit Bubble. Never has China experienced Trillions of “money” that retains “moneyness” chiefly on the perception that the all-knowing central government will safeguard its value. Never have Chinese finance and spending had such major impacts around the world. China does, however, have a long history of financial panics and political instability. This is the challenge which its leadership has to face Sheng discusses how China is seeking to manage the delicate balancing act of liberalizing and opening up its country, whilst seeking to avert a massive uncontrollable debt deflation.

[nthperson]

Collect the full potential annual rental value of all locations and the problem of affordable housing will be solved by market forces. When the rent of land is fully collected there is no imputed rental income from land to be capitalized into a selling price for land (or for a leasehold interest in the land). This idea as adopted by Sun Yat-sen but has been lost to the officials today.

[AllNightDayDream]

Wow, definitely one of the best interviews you guys have done. I will have to look into this guy's work.

[esperanzalu]

Totally agree on many points of view in this interview.

[GenerationX]

We need economic reform that will take from the rich and give to the poor. We need to abolish private property and replace the concept of ownership with egalitarian ideals where nobody owns anything.