By Economist.com

Finally, western economists get it right about China’s economy composition. China is less export-dependent than they thought. This report gives its due to China’s macro-economy policy executed in recent years. It now seems a fast recovery from this down-turn is possible.

“THE Chinese consider eight to be a lucky number because it sounds like the word meaning “prosperity”. And luck, combined with a massive fiscal stimulus, may yet help the government to achieve its growth target of 8% in 2009. Earlier this year, most economists thought such growth was impossible at a time of deep global recession, but some are now nudging up their forecasts”

“Exports, on the other hand, tumbled by 17% in the year to March and global demand is widely expected to remain weak this year. This is the main reason why some economists expect GDP growth of “only” 5% for 2009 as a whole. But the gloomier forecasts tend both to overstate the importance of exports and to understate the size of the government’s stimulus”

“Contrary to conventional wisdom, China’s sharp economic slowdown was not triggered by a collapse in exports to America. Its growth began to slow in 2007, well before exports stumbled, driven by a collapse in the property market and construction. This was the result of tight credit policies aimed at preventing the economy from overheating. The global slump dealt a second blow late last year, but China is less dependent on exports than is commonly believed. Exports account for nearly 40% of GDP but they use a lot of imported components, and only make up about 18% of domestic value-added. Less than 10% of jobs are in the export sector.”

http://www.economist.com/finance/PrinterFriendly.cfm?story_id=13497030

I’ve seen several criticisms of democracy on this forum, the most common one being that a country shouldn’t be ruled by the privileged, but by “the people”. It’s a great idea, but how do we create such a system when historical experience shows us there’s always some privileged group? It’s capitalists, politicians, bureaucrats or unions… but not a unitary people. Perhaps it’s that view of one people that ought to change.

Chris, thanks for your even-handed and thoughtful comments.

@ colin #12: I don’t think China is being underestimated at all, except by some uninformed media who have no conception of how things actually work. There are books galore out there written by American authors (Tom Friedman, etc.) touting China’s successes and strategies. In my opinion, overplaying or underplaying China’s successes and failures indicates a lack of understanding of the country. All approaches have strengths and weaknesses, regardless of the system. Some systems have more strengths than weaknesses and vice versa, but to act as if it’s an all or nothing scenario seems naive.

China does some things well and some things poorly. Overall, the good outweighs the bad economically and that is why China is progressing. Their leaders at the top aren’t geniuses but they are sharp. Many local leaders are corrupt and the top leaders know it. China will continue to grow, run into difficulties here and there, make adjustments and continue on its way. That’s the optimistic outlook and the one I subscribe to.

I think you might be underestimating the ability of countries to observe and analyze the behavior of others. Chinese officials are analyzing non-Chinese government practices as well as there being non-Chinese governments that analyze Chinese practices. This isn’t just the “west” but countries from all over the world. That’s one of the primary functions of any government.

What strikes me is that this slow but steady strategy, with focus on the future, is also the approach the CCP takes on most issues. Again, these guys (CCP) are amazingly patient and rational. I really think the west underestimates the ability and strategy of the top chinese leaders. And because of this, the world will wake up one day to find that china has progressed much further than was previously thought possible.

I personally think Wahaha’s description is kind of cute. Of course – while that expresses a perspective (perhaps even a valid insight), what we are probably more interested in here is to capture some of the undercurrents of current developments … and a perspective of where things will go – for that, we need to share different ideas … experiences … etc.

While we are at it – I wonder when we talk about American vs. Chinese capitalism: we might as well talk about American vs. European capitalism?

Anyway, while we’re at it: Allen and Steve, what do you think about Wahaha’s description?

While I am tempted to agree with you – that China and U.S. are moving toward a similar type of capitalistic system, I still think that there are important fundamental differences.

I still think the U.S. fundamentally likes to focus on creation of “free” markets – where individuals are the ultimate beneficiaries of the economic system – where individuals are guaranteed with certain rights (i.e. property rights) – and where the destiny of the economy lie with the individuals – whereas China likes to focus on development of the society and economy as a whole – where the government is in control of setting overall policy – with individuals only as cohorts to help the government achieve that overall policy.

Maybe I am becoming ideological myself by saying the above.

Or maybe the differences in perspectives above will lead to interesting differences in the future.

Time will tell…I guess!

I’d almost rephrase your initial question to be “What is the difference between government regulation of capitalism in the United States and China?” Within the rules allowed by each, the capitalism as practiced seems the same to me. China controls less in some areas (safety, IP protection) and more in others (investment, real estate and banking).

You are right. I have not carefully distilled what I meant when I wrote:

Another important aspect, I think, is the goal of economic prosperity. China takes a more “holistic,” perhaps results-oriented view to economic prosperity whereas America tend to take (historically at least) a more “individualistic,” equal-opportunity point of view.

What I mean is the philosophical approach – which depending on circumstances – may or may not lead to concrete policy differences.

Property is one example. In the West, property right is considered a basic right – whereas in China, property rights have been assigned as a form of economic regulation (in this case, to enable decentralization of certain economic activities).

If circumstances arise where the removal of such a right may be justified for the public, they will be removed without causing too much consternation.

There are many other differences – such as role of gov’t in regulations, the role of property (mentioned above), the role of gov’t ownership, the role of public policy in business, etc., etc.

In the above interview, it is quoted:

My view is that there is no single model of effective governance. What works in some countries or cultures may not work elsewhere. In the United States and Europe, equity investment is highly fragmented, so management of the company must be delegated to a board or a small number of key executives, and various incentive mechanisms must be used to motivate people at the helm to run the company in a way that creates value.

Many Asian businesses are controlled by a single family. Family-run firms are thought to be highly efficient. But regulating the relationship between large and small shareholders is often a problem. In China, large banks and businesses favor a model in which the state owns a large proportion of company shares. In our case, for example, Central Huijin Investment and China’s Ministry of Finance each hold more than 30 percent of ICBC shares. Such arrangements aren’t unique to China: in Austria, Israel, Singapore, and many other nations, the proportion of state ownership for large companies can range from 40 percent to 70 percent. The challenge with this model is how to manage complex networks of trust agency relationships. In these types of organizations, reliance on incentive systems alone tends to do more harm than good.

Each model has its strengths and weaknesses. They all bear careful study. It seems to me there are no obvious best practices. But we’ve learned from the financial crisis that there are plenty of worst practices.

If you go back to the late 1990’s as well as early 2000’s, you’ll find (in the U.S. at least) so many articles and critiques on the role of Chinese gov’t in Chinese economy. The gov’t is almost always depicted as distorting market dynamics. These articles almost all unanimously touted that the way forward has to be a “freer,” more American system. They also touted that the Chinese banks cannot be reformed without first putting all the state owned companies out of business…

This is partly why Jiang said:

We’ve learned our lessons on risk. In June 1999, the nonperforming loan ratio at ICBC reached 47.5 percent. At the time, some Western media claimed Chinese banks were technically bankrupt. You can’t imagine the pressure we bankers faced then.

The first step in addressing the problem was to focus on risk management. After I was appointed president in 2000, one of the first things I decided was that we must hold the nonperforming ratio for new loans to less than 2 percent of assets. We created a credit-management system to control existing and new loans. By addressing irregularities and punishing violators, the quality of new loans quickly improved. Since then, ICBC has kept its nonperforming ratio for new loans to 1.7 percent.

Changes in the regulatory environment helped as well. In the wake of the Asian financial crisis, the Chinese government reorganized and developed the nation’s financial regulatory system, putting great emphasis on risk management, creating the China Banking Regulatory Commission, enacting a range of new rules and regulations, and introducing stricter external auditing and accounting standards. China’s large commercial banks developed sound governance structures and were subjected to close scrutiny from investors as they prepared to list shares publicly. This combination of internal and external factors substantially improved the governance of China’s financial institutions and left them in much better shape to manage risk today. Now ICBC’s bad loan ratio has been reduced to 2.2 percent.

In the end, though, the key to risk control is employing good people. That’s why we put so much emphasis on ethics and developing a corporate culture that values precision, professionalism, and teamwork. Good governance is impossible without a good corporate culture.

Another difference that can be inferred from the above quote is that the West seems to focus more on structure whereas China seem to focus more on people. Although in reality, good management require a mixture of both.

Anyways – I don’t think I am quite prepared to give a comprehensive overview of the difference between Chinese capitalism and American capitalism (or Western capitalism in general) in part because all these concepts – especially in today’s economic crisis – are in flux and still developing. (This is why I am only willing to refer to this as a case study…)

But I think there are definitely fundamental philosophical differences that over time, will definitely be worth our time to discuss in more depth!