Wednesday, August 5, 2015

Comment: "When the Real Economy Becomes the Starting Point for Decision Making."

Below the fold of the Economic Observer’s August 3, 2015 edition, an editorial was published with the title “When the Real Economy Becomes the Starting Point for Decision Making” to discuss the Politburo’s meeting on July 30th. The editorial advocated focusing on the need for exceptional entrepreneurs and enterprises to carry the Chinese economy forward and the standard of living of the Chinese people upward. Although the spirit of the editorial is basically correct, one premise was wrong.
“…监管者的使命是建立公平透明的规则,让真正优秀的企业脱颖而出,维护良好的交易秩序,打击内幕交易和坐庄行为,舍此之外,市场并无更多诉求。” [“The duty of the regulators is to establish just and transparent rules so that truly exceptional enterprises can stand out. They should maintain orderly exchanges by prohibiting insider trading. Outside of this, the market requests no more from them.”]
Over the last thirty years of reform, much of the debate and policy measures were focused on how to make China’s vast state-owned resources more efficient. State-owned enterprise reform led to unemployment, but the opportunities produced by private sector growth created a net increase in employment opportunities at higher wages. Even though some people got different pieces of pie, everyone’s piece of the pie got bigger.

Ever since the Great Ease Forward in 2008, artificial credit creation created mal-investments in both the private and state-owned sector. The debate now should not be on allowing exceptional enterprises to succeed on their own, but instead on how to liquidate the mal-investments and bankrupt enterprises so that their assets can be re-organized. This will be a much more painful process, so it is unlikely we will see anything but more of the same.