Against the Grain6 min read

Mike Cormack reviews Cracking The China Conundrum by Yukon Huang


The opening of the Chinese financial and service sectors – or at least, the Chinese government’s pledge to do so – and the sometimes cynical, sometimes overeager response to it serves as a reminder of the fallibility of Western economic analysis. Never in the history of prognostication have so many people been so wrong about so much so regularly as with the modern Chinese economy. But this is understandable. The Chinese economy presents a huge number of difficulties for analysts.

For one, the scale and length of its growth is unparalleled, leaving those who predict downturns looking ill-informed if not ideologically driven. Its closed capital account means it can withstand external shocks that would knock most countries for six. It is run by an authoritarian government which nonetheless leaves most sectors mostly free to make profits. Its state-owned enterprises are lumbering behemoths, inefficient but largely profitable, albeit able to access capital with velvet ease. The banking industry is huge, if largely cosseted from competition, and run for the good of the state, rather than for financial imperatives. And the whole system is underpinned by a Leninist party structure which moves state executives from position to position for political concerns rather than managerial or business motives. Many of these practises were present in the Soviet Union, but the effectiveness of the Chinese economy is unparalleled in communist states (though Vietnam has been adopting the Chinese playbook). In sum, the Chinese economy is a sui generis entity of remarkable definitional complexity.

But this is not the sole problem when it comes to discussions of the Chinese economy. Its successes are often taken as validation of the Chinese political structure, in the crude appeal of the wealthy. Hence the tendency of free-marketeer media outlets like The Economist or the Wall Street Journal to emphasise any problems, the very notion of a successful Communist economy offending their sensibilities. Discussions of the Chinese economy are thus, in some sense, always ideological, even when you stick to the data – which itself is likely to be unreliable, having been finessed by politically ambitious provincial officials.

Establishing the true facts of the Chinese economy is Yukon Huang’s primary concern in Cracking The Chinese Conundrum: Why Conventional Economic Wisdom Is Wrong, an authoritative, closely argued, and hugely insightful survey. Huang is highly credentialed: he is a Senior Fellow in the Asia Program at Carnegie Endowment for International, and his former posts took him from the World Bank to the US Treasury to an economics professorship. (Not that this proves anything. Economics has an odd way of turning people with considerable educational garlands into partisan hacks. Yet clearly Huang has earned the trust of people who need expertise rather than talking heads). Seeking to correct the many myths and fallacies encrusted around the Chinese economy is an honourable if large endeavour – so how does Huang do it?

The book is a methodical look at key issues concerning the Chinese economy, with chapters such as ‘China’s Unbalanced Growth,’ ‘China’s Debt Dilemma,’ and ‘China’s Trade And Capital Flows.’ This involves some intellectual heavy lifting on the part of the reader. Cracking The Chinese Conundrum is not a pop tour, in the vein of Freakonomics. It is perhaps closest to Thomas Piketty’s opus Capital in the 21st Century, albeit with a far sharper focus, in its combination of academic depth and explicatory analysis. It is not, lest you fear, a tedious read with endless unrelieved text, as each chapter is divided into bite-sized topics and there are many helpful charts and diagrams.

“Huang burrows to the nub of an issue, often demonstrating the constraints under which the Chinese government is operating”  

One issue Huang tackles is that of the declining share of domestic consumption. Advanced economies have a far higher level of personal consumption than China, so, the conventional thinking goes, China should make efforts to elevate it. This would give consumers more money in their pocket, and make China less reliant on low-level manufacturing. Huang suggest that this misreads the situation. While China’s share of personal consumption has fallen, the overall level has been rising significantly. And for good reason: Huang cites the example of the farmer who brings in RMB10,000 a year and spends RMB7,000, thus giving a consumption share of 70%, and the factory labourer, who brings in RMB 30,000 annually and spends RMB15,000, giving a consumption share of 50%. Hence, the level of consumption has more than doubled, but its share has declined. The issue is the process of urbanization rather than economic repression of consumption, and it which will adapt organically as urbanization tails off.

Huang also looks at debt in the Chinese economy, which has become the new bugbear of Western economists in the way that the (supposedly) undervalued renminbi was in the early 2000s, suggesting that while a small proportion of firms (mostly SOEs) do ineed have enormous debts, the issue is not systemic. Consumer debt, mortgage debt and non-SEO debt are lower than might be realised. Other issues he addresses include the huge surge in property prices (suggesting that the sharp rises are due to real estate finding its market value from a zero level, rather than necessarily indicating a bubble); foreign direct investment and capital flight (also examining the near-panic in 2016 and how China addressed it); and broader issues such as how China is changing the global balance of power (with China an “abnormal power” – unique in being a returning power, still a developing country, and noticeably an insecure one). Throughout, Huang burrows to the nub of an issue, often demonstrating the constraints under which the Chinese government is operating, the differences of its particular model, and what it is doing to redress current strains.

Cracking The Chinese Conundrum, while clearly an important book, is not perfect. The first chapter, ‘Differing Global and Regional Perceptions,’ feels rather tangential to its main concerns. Although I appreciate his quantifying erroneous perceptions about China’s economy, a whole chapter on the subject seems excessive, and placing it at the beginning feels like a false start. He also feels rather complacent on the uncertainties on economic data, dismissing them as part of the complexity of modern service economies. The significant restatements by Liaoning and Tianjin’s Binhai New Area surely demonstrate their political motivations. Regardless, his clarity and ease of explanation make this one of the very finest recent books in English on the Chinese economy, to be mentioned alongside G.E. Anderson’s Designated Drivers and Eswar Prasad’s Gaining Currency. It deserves to be on every university reading list, and to be closely parsed by everyone with the slightest interest in the subject. ∎

Yukon Huang, Cracking The Chinese Conundrum: Why Conventional Economic Wisdom Is Wrong (OUP, August 2017)