Albert Hirschman and China

CHINA ADVISORY - Report 10 Nov 2023 by Andrew Collier

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How will China’s property crash end? There are different views:

*Consumption boom. Chinese economists argue that after a short period of post-Covid adjustment, consumption will increase and the economy will gradually transition to an era of new technology, including AI and semiconductors.
*Dual circulation. Others within China say U.S. decoupling is to blame for China’s problems. The only solution is to institute domestically-focused economic policies (described as "dual circulation") that will boost domestic demand.
*Stimulus package. Some investment banking economists expect Beijing eventually to provide a significant stimulus, either through loans or central government bonds, to support local governments and the property market.
*Western “shock” therapy. Some western analysts believe that China cannot grow without dismantling the state system. They basically advocate full-throated reform of the Chinese economy. I would characterize this as part of the “Washington Consensus", and it is similar to the shock therapy that was used in Eastern Europe.
*Long adjustment. Other—usually academic—economists are not optimistic about China’s economy. They believe reliance on a single industry—property—has created a property bubble that will require a decades-long adjustment period similar in some—but not all ways—to Japan’s stagnation that began in the 1990s.

I am in the adjustment camp. Deleveraging the property sector is going to be a long task. China does not have viable alternatives to replace property (which represents as much as 30 percent of GDP growth). Industries such as electric vehicles, a success story in China, and semiconductors are either too small or too undeveloped to generate significant economic growth.

However, I also differ from many of these analyses because most of them are “top down”: they assume the economy is controlled by the Politburo in Beijing and therefore any major changes must come from there. Instead, this painful deleveraging is likely to occur through a series of ad-hoc experiments in the provinces, similar to the approach of economist Albert Hirschman, who saw such change as one of improvisation in pursuit of multiple paths, not implementation of a pristine policy blueprint. Is this reform? Perhaps. If so, it could be as negative as it is positive.