Learning from China’s economic philosophy and policy — XIII

In terms of counter-cyclical policy approach adopted by China, especially in the second phase for enhanced economic growth, a study highlighted in the same handbook formalizes a monetary policy rule to reflect the actual counter-cyclical policy emphasis, and that too quite being aggressive in nature.

The same handbook indicated in this regard ‘Chen et al. (2018) [in their article titled ‘The nexus of monetary policy and shadow banking in China’] develop and estimate a quantity-based monetary policy rule based on China’s institutional facts.

Under this rule, monetary policy endogenously switches between two regimes, according to whether actual GDP growth is above or below the targeted GDP growth.

Also read: Learning from China’s economic philosophy and policy — XII

In the normal situation where GDP growth is above the target, M2 growth responds positively to the gap between actual and targeted GDP growth rates. By contrast, in a shortfall state where the actual GDP growth is below the targeted GDP growth, monetary policy takes an unusually aggressive response to stem the shortfall needed to meet the GDP growth target.’

Also read: Learning from China’s economic philosophy and policy — XI

Here, the underlying factor is a well-functioning production capacity backed by high institutional quality, mission-oriented features of a non-neoliberal, purpose-driven government, and inspiring, goal-oriented political leadership.

Also read: Learning from China’s economic philosophy and policy — X

Hence, unlike standard monetarist thought—which posits that “too much money chasing too few goods” drives inflation—a strong underlying base of productive and allocative efficiencies creates investment incentives for capital, resulting in greater domestic production and exports. This approach has led to higher overall economic activity and employment.

Also read: Learning from China’s economic philosophy and policy — IX

In turn, domestic production is absorbed by higher purchasing power and larger aggregate demand, while exports are absorbed globally due to their high productivity and competitiveness. Moreover, investment is incentivized to enhance economic resilience, backed by a thriving renewable sector with a high probability of generating significant returns.

Also read: Learning from China’s economic philosophy and policy — VIII

Consequently, a counter-cyclical approach was meaningfully practiced to achieve economic growth without building up inflationary pressures. This was accomplished by first establishing a deep base for productive capacity through a state-owned enterprise (SOE)-led phase. In the subsequent “investment-driven economy” phase, the incentivization created during the first phase provided a meaningful absorption capacity for investment, allowing targets to not only be met but often surpassed.

Also read: Learning from China’s economic philosophy and policy — VII

During the first phase, credit was preferentially directed to build industrial capacity; in the investment phase, it was primary channeled into that productive and export capacity to generate higher growth momentum.

Also read: Learning from China’s economic philosophy and policy — VI

This sequence of policy and reform planning offers important lessons for Pakistan to learn from China, as it managed a counter-cyclical growth policy without creating significant inflationary or balance-of-payments pressures.

Crucial to this sequence was a “dual-track” pricing mechanism for both goods and capital—particularly through banks—under a non-shock-therapy, non-neoliberal, and non-austerity economic philosophy.

Also read: Learning from China’s economic philosophy and policy — V

In contrast to China’s model, Pakistan has mainly focused on “facilitating” the private sector and “fixing” market failures. This has occurred within a highly liberalized environment governing the pricing of goods, capital, and capital flows under virtually unfettered markets and weak regulation.

Also read: Learning from China’s economic philosophy and policy —IV

Operating under neoliberal and austerity-based economic philosophies, this approach has failed to lead to sustainable macroeconomic stability or inclusive, green, and resilient economic growth.

The same handbook pointed out in this regard ‘Unlike in the SOE-led economy, in which the government provided preferential credits to SOEs across both heavy and light sectors, most preferential credits in this phase were channeled to the heavy sector in order to stimulate investment as a way to meet the overriding GDP growth target.

Also read: Learning from China’s economic philosophy and policy — III

The heavy sector includes both the SOEs and [private-owned enterprises] POEs that are capital intensive. The government’s objective to targeting GDP growth is asymmetric: The GDP growth target has been a lower bound for growth. Monetary policy was carried out to support GDP growth and at the same time control CPI inflation through effective ways of influencing bank loans… This is one of the main features in the investment-driven economy.’

Also read: Learning from China’s economic philosophy and policy — II

There are, indeed, lessons to be learnt in the successful way China has utilized SOEs in both heavy, and light industry, covering also a significant portion of small and medium enterprises (SMEs) in terms of financial support in particular, although greater support in terms of lesser credit quotas, and government guarantees granted to light industry, where the private sector has larger space to stand on its own, given lower capital base needs.

The same handbook indicated as follows: ‘There was, however, one important difference between the heavy and light sectors in the SOE-led economy. SOE in the light sector was typically small and medium-sized (e.g., firms in the textile industry).

Also read: Learning from China’s economic philosophy and policy – I

As small SOEs were less productive than large ones, reforms on such enterprises during the period of the SOE-led economy emphasized the task of “grasp the large and let go of the small” to reduce excess capacity problems in small and medium-sized SOEs. These reforms led to the rise of many productive POEs in the light sector during the phase governed by the investment driven economy.’

(To be continued…)

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