China’s Opaque Lens with Prof Dr Wong – KSInsights Mar 2024

Published on 02 Apr 2024

1. Could you please introduce yourself and briefly share your academic interests and what sparked your passion for economics, particularly in the areas related to international macroeconomics, monetary policy, and economic development?

The very first economics book I read was The Principle of Microeconomics written in English when I was carrying out my duty as a librarian. As I was a science stream student then, I have no idea at all what it was about. However, I was fascinated by the diagrams, figures, and equations that discuss topics I can relate to, like individual behavior. That’s really an “a-ha” moment for me, someone who like abstract-while-being-practically-oriented thinking. I was 17 years old at that time.

Then came the Asian financial crisis. News about ringgit depreciation, a crashing stock market, and banks in trouble occupied headlines every day. That probably sowed the seeds in my mind that economics would be my forever love. After attending a public talk in Melaka my hometown given by Prof. Dr. Jomo K.S, who was then affiliated with Universiti Malaya, and Lim Kit Siang of DAP, I knew UM is where I would want to go after completing my STPM, and Jomo would be the thesis supervisor I’ll seek for.

I was, and still am, grateful that things happened as planned. I wrote my undergraduate thesis in the year 2000 on the topic of the Malaysian financial crisis through the lens of Hyman Minsky (the Minsky moment was not even popularised yet, not until the global financial crisis) under Jomo’s supervision. I continued to work on the issue of exchange rate regime and capital flow for my master’s study, and global macroeconomic interdependence underpinned by global value chains and China’s economy for my doctoral study.

Thanks to the rise of the internet in the late nineties, I was able to read the blog writings, as well as their research articles, of many top-notched economists from the West, Paul Krugman, Stanley Fischer, Oliver Blanchard, Nouriel Roubini, Larry Summers, you name it, without a delay. That was really critical in my professional career, not only as a source of self-learning the up-to-date technical knowledge but also as a constant reminder of what good economics is supposed to be like: to make an informed policy for the betterment of society.

My academic interest is extended later to prudential capital control, Mudarabah finance, China’s and Malaysian economies, financial technology and monetary policy, and the labour market effect of automation. Recently, I’ve been working on using the economic approach to understand “power”: great power competitions and the de-carbonization of the power sector.

2. With China setting a growth target of 5% for this year, what mechanisms might be most effective for achieving this, particularly through fostering investment and bond issuance? What challenges could arise in this context?

 

What’s perplexing about the growth target announcement made during the Two Sessions by China Premier Li Qiang is not so much about the 5%, although many would have doubted if 5% is too optimistic, but, the lack of policy initiatives that support the economy towards the goal. The underlying factor to the economic slowdown in China right now is apparently the insufficient aggregate demand: households are reluctant to spend as their wealth is largely tight to the plummeting housing prices and unfinished houses; businesses are reluctant to invest when the external environment is unfavorable to Chinese exports when there is abundant of property overhang while resolutions remain obscured, and when there is a lack of aggregate final demand to deliver profits; and local government is trapped in a giant pile of debt to push fore more public spending on infrastructure.

Dampened market confidence and mounting debt burden are key problems to be resolved in short.

And yet, we do not see any particular policies working towards that direction. While the 1 trillion yuan worth of ultra-long bonds issued by central authorities resembles the conventional fiscal pump priming during the economic downturn, I’m afraid that for an economy of 126 trillion yuan, 1 trillion yuan is simply too little even, let alone the fact that fiscal multiplier in China is generally less than one. And because it is a bond-finance spending for special functions, i.e., projects that foster economic resilience and security, where the interested parties may have to go through a prolonged bidding process, the time lag can be substantial.

3. How could China’s targeted growth and investment strategies potentially impact global trade dynamics and production structures, especially considering the current economic climate?

Another strategy mentioned in the recently concluded Two Session was the “New Quality Productivity”. No one knows the substance yet. But this is likely to be another supply-side reform that emphasizes manufacturing capabilities and green transition with national and economic security as the priorities. This means a couple of things for the global economy. While America and Europe de-risk by reshoring and friend-shoring the supply chains, China is also decoupling dependence on the Western economies by internalizing the supply chains. This implies the hyperglobalisation of trade and production we used to live in is really in the rearview mirror.

Secondly, the supply-side reform could have a mixed impact on the global inflation. On the one hand, the expansion of the manufacturing sector already in overcapacity would insert downward pressure on the final goods prices in the world market, but on the other hand, greater demand for primary commodities could send the commodity prices higher, complicating the world’s current effort in bringing down inflation.

4. Considering global inflationary trends, how might China’s strategies for economic growth influence both domestic and global inflation rates? What balance should be struck to mitigate potential adverse effects?

 

Like I mentioned earlier, China’s growth strategies could bring about two opposing effects on the global inflation: the deflationary pressure on final goods due to expanding supply versus the inflationary pressure on the commodity prices. But because China is inclined to supply-side reform ever since the “reform and opening” in 1979 instead of demand-enhancing strategy, and this time has no different, an expanding production capacity coupled with weakening demand is more likely to insert downward pressure on both China’s and global inflation. While this seems to be giving the world a hand in curbing inflation, it could push the Chinese economy further down the road of deflation.

5. What approaches might China’s central bank take to support the country’s growth ambitions while also keeping inflation in check, especially in today’s volatile global economy?

People’s Bank of China lowered its one-year loan prime rate twice last year, followed by a cut in the reserve requirement ratio and five-year loan prime rate this February. It remains to be seen how the economy will react. But it is not unreasonable to cast doubt on the effectiveness of the monetary policy so far for an obvious reason: the deficient aggregate demand facing China now is not the outcome of liquidity shortage, but the result of dampened market confidence, seemingly reluctant fiscal intervention, and the likely debt-deflation effect. Liquidity constraint is not binding, and people are simply not willing to spend like before. Money is not rolling.

So, cutting interest rates and injecting liquidity per se won’t be helpful in this circumstance. This is the classic liquidity trap. And we’ve learned a great deal from Japan. Pulling the economy out of the trap requires bold fiscal and unconventional monetary initiatives. How far PBoC is willing to go when it comes to interest rate cuts, as they would also worry about capital outflows and yuan depreciation, remains to be seen. But the fact that “it remains to be seen” by itself shows the lack of commitment, the currency the market needs the most right now. It is hard to imagine, however, that PBoC can “credibly promise to be irresponsible”, in Paul Krugman’s famous term, to prevent the Chinese economy from falling into a liquidity trap.

6. In the context of China’s economic goals, how critical could exchange rate adjustments and expenditure-switching effects be in supporting domestic growth and external trade balance?

China’s internal and external balances apparently require different yuan positions. Efforts to upgrade local supply chains and to re-inflate the economy require real yuan depreciation that redirects expenditure towards domestic goods and services. However, trade surplus and initiatives to internationalize the renminbi need a stronger yuan to switch expenditure towards foreign goods and incentivize foreign demand for renminbi.

They used to be more aligned in 2000s when China was catalyzing the industrial upgrading via global economic integration and internationalizing renminbi as reserve currency into the global economy while the economy was still growing rapidly. Real yuan appreciation served both internal and external balances coherently.

But in recent years, from “Made in China 2025” to “dual circulations”, national and economic security become the priority in the development strategy. On top of a weakening economy, a weaker renminbi serves internal balance better, although it will be incompatible with China’s goal to make renminbi’s mark as a global dominant currency.

China’s attitude towards a weaker or stronger yuan therefore depends very much on its developmental preference.

7. Given China’s growth ambitions, what implications might there be for international monetary cooperation, particularly in terms of stabilizing trade and currency values?

Being the largest (or the second largest depending on how you measure it) economy and trading nation in the world that accounts for about 18% of the world GDP and exports, it is unsurprising to observe China seeking greater influence in the global monetary system. China, for instance, established an offshore renminbi bond market in Hong Kong in 2007, pushing for cross-border trade settlement in the renminbi since then and joining the SDR basket in 2016. And Belt-and-Road Initiative (BRI) launched in 2013 is probably the most discussed China’s effort in reshaping the international monetary system.

The outcome is mixed so far, however. On the one hand, China has become the largest official creditor in the world, accounting for a quarter of total bank lending to emerging markets. And Chinese FDI is now everywhere all over the world. Both commercial investments and development-related lending have spurred growth in developing countries. PBoC has also built a global network of central bank swap lines with foreign central banks, laying out the foundation for the renminbi to serve as the reserve currency.

On the other hand, despite decades of internationalization, renminbi accounts for no more than 3% of global reserve currencies, still less than the Japanese yen’s 5% and the UK pound’s 6%, let alone the 80% share contributed by the U.S dollar and the Euro combined. The BRI also has encountered numerous roadblocks: overseas investments via BRI have been dramatically declining since 2016, thanks to the rising concern about debt-trap diplomacy as well as the questionable ROI on the infrastructure projects, even when the projects were deemed as strategically vital a priori.

Whether China can graduate from the periphery of the system to occupy the dominant position hinges on the Chinese authority’s willingness to be fully committed to capital account convertibility and reputation in providing safe assets to the world. That of course requires a development paradigm substantially different from the current practices.

8. How might Southeast Asia and Malaysia, in particular, be positioned economically in light of China’s growth projections? What influences might increased Chinese investment have on these regions?

Southeast Asia is probably the only region in the world right now that can live peacefully with China and the United States, and bridge both worlds, given the long history of ASEAN in engaging with and hedging against the great powers.

Those businesses from the West that reconsider their supply chains in accordance with the China-plus-one strategy would find Southeast Asia indispensable – closer still to Chinese market while being accessible to all other major markets in the world. At the same time, Chinese businesses seeking opportunities abroad either due to the U.S prohibition on high-tech chips and equipment or the slowing-down domestic economy would also find Southeast Asia the best place to go – largely friendly to them, being a growing and dynamic economic region with stable political environment, offering them a good base to reach out to the greater market.

From the Cold War period, when the U.S chip manufacturers started to outsource the assembly in the 1960s to Asia and since the early 1970s to Malaysia for cost advantage, to the end of the Cold War, where trade and financial globalization took off since the early 1990s following the fragmentation of supply chains worldwide; from the Plaza Accord in mid-1980s, where Malaysia was beneficiaries of Japanese manufacturing relocations, and the end of the generalized system of preferences for Taiwan and South Korea in early 1990s that incentivized their manufacturing relocations to Malaysia, to China’s WTO accession in 2001 that diminished Malaysia’s competitive advantage and triggered Malaysia’s premature de-industrialization since then; from the Chimera in 2000s to the currently on-going China-US decoupling, the evolution of geopolitics and geoeconomics throughout these years has presented risks and opportunities to the Malaysian economy. Pedaling the evolution to revitalize our industrial upgrading is probably one of the most important catalysts for achieving the goal of NIMP 2030.

9. In pursuing economic growth, what precautions should be considered to mitigate risks such as asset price bubbles and expansions of the underground economy, both within China and in its trading partners?

I don’t see asset price bubbles as a concern at this moment or soon for both China and regional economies. But a weakening economy is always an important reason why people go informal, especially those who have lost their formal jobs and found it difficult to get another one. Likewise, firms with financial and market difficulties would tend to cut back the size of formal employment for hourly or daily workers. Underemployment thus contributes to the expansion of the informal economy.

And I don’t fully subscribe to the negative view about the informal economy. While it is reasonable to argue that the informal economy causes a loss in tax revenue and restrains labor productivity, its presence also mirrors the failure of the formal economy and provides the unfortunate a cushion to mitigate the adverse impact of job loss on their livelihoods.

So, the key to solving the issue of the informal economy lies in the formal economy: minimal barriers to entering and exiting the formal market, comprehensive welfare protection, a regulated yet agile labor market, and so on.

10. Given the economic strategies being pursued by China, what policy recommendations might you have for neighboring economies, including Malaysia, to ensure sustainable growth and stability?

For Malaysia, be prepared and proactive in attracting and hosting the FDIs from China and other major advanced economies; be more strategic in nurturing domestic lead firms that can integrate into a hybrid of global, Chinese-oriented, and West-oriented supply chains; and be more ambitious in pushing local firms to treat Southeast Asia as a domestic base to invest abroad for their local markets, including China. After all, China is still a growing economy with exceptional market potential.

But the challenges facing the growth and stability of the neighboring economies are beyond what China has brought to us: AI-enabled automation revolution, green transition, the restructuring of global supply chains, rising debt, income inequality, and many others. Each requires different but most of the time coordinated policy responses.

For instance, supply chain restructuring as I mentioned above usually takes place in high-tech manufacturing sector that demands green energy. This means other strategies related to developing domestic AI capabilities and accelerating renewable energy transition are equally important to woo the FDIs. Meanwhile, since the good-paying jobs that can be created in automation-enabled industries must be relatively scarce to benefit the majority, as many others are participating in the services sector, rising wage inequality could become the unintended consequence of the development mentioned above. Then, policies related to developing non-strategic sectors, fostering the availability of transitional adjustment assistances for those affected, and so on shall also be put on the table for consideration simultaneously.

In short, the authority should keep an “general equilibrium” perspective when it comes to the design and implementation of policies in the face of a changing world.

11. What are some emerging areas of economic research that might be particularly relevant for understanding and navigating the effects of China’s growth strategy on the global economic landscape?

Given the huge influence of China’s economy and geoeconomics on Malaysia, Southeast Asia and the world, the institutions that carry out the relevant academic research we have so far in Malaysia are just too few. Even with the existing institutions, the scope of research is too limited. We simply don’t have sufficient experts on China on issues ranging from Chinese domestic economy, geoeconomic relationship with the global south and major industrial economies, industrial policies on EV and green technology, trade policy and preference, which can have impact on our economy. We need to step up our effort.


Date

02 Apr 2024