Interviewed By Emmanuel Daniel
Top policy advisor, Huang Yiping explains the history and direction of China’s economic policies.
Huang is a highly recognised economist whose career traces back to the Moganshan Meeting in 1984, when he was a student. In this in-depth discussion, Huang shared insights on the history of economic decision making in China and the ideological framework that guided the economic policymakers. He also discussed the framework of current policies, especially the relationship between the state and private sector, as well as the trajectory of policymaking in terms of the prospects for the liberalisation of the renminbi and the opening up of China’s capital markets.
“The right term to characterise the Chinese reform approach is not really like gradualism, or dual track, I think it’s pragmatism. The best way to characterise it is the cat theory of Deng Xiaoping, “White cat or black cat, as long as it can catch mice, it's a good cat”. This was really the whole philosophy about economic reform policy,” Huang emphasised.
Over his career, Huang held multiple positions in research and academia, including in the Research Center for Rural Development of the State Council; General Mills International professor of finance and economics, Columbia University; and Chinese economy programme director and senior lecturer, Australian National University. He also held roles in the finance sector, including managing director and chief Asia economist, Citigroup, managing director and chief economist for emerging Asia at Barclays, independent director at MYbank and China Life Insurance Limited, and economic advisor to Alibaba Finance. Huang was also an advisor on the Monetary Policy Committee for the People’s Bank of China, and a member of the External Advisory Group on Surveillance, IMF.
The following key points were discussed:
Below is the edited video transcript:
Emmanuel Daniel (ED): Studying more closely when, how and what policies were considered and why China’s economic policymakers made the choices that they did, helps us appreciate that China’s policymaking was always a fragile process that could have gone in different directions.
To capture an idea of the origins of the ideological framework that China’s economic policymakers are guided by and perhaps more importantly, to help me project some of the likely policies that will guide China into the future, I had the privilege of visiting the National School of Development at Peking University. The National School of Development campus is situated deep inside the beautiful campus of Beida, which is the short name for Peking University. The campus is just behind the Old Summer Palace and very beautiful at the onset of autumn.
I met and spoke with Huang Yiping, the Sinar Mas Chair Professor of Finance and Economics at the school, whose work I have been able to follow in recent years. He is also the director of the Institute of Digital Finance at Peking University, although I did not get the chance to talk to him about that as a topic. Professor Huang’s career traces back to that famous meeting in Moganshan in 1984, when he was a student at that time.
China’s economic policymakers are close-knit community of economists who have influenced each other’s thinking over a 100-year period. It is possible to track the influences of economists from the days of Sun Yefang in the pre-communist era, to Wu Jinglian, who argued for a market-based Marxist economy, and Zhu Jia Ming who organised the now famous original Moganshan conference in 1984. These were the mentors of subsequent policymakers, including the highly respected Zhou Xiaochuan who was governor of the People’s Bank of China until recently, and who still wields considerable influence, and Zhang Weiying, who was the author of China’s now famous dual-track pricing mechanism that guided the country to transition into a liberal economy and avoid the mistakes of the Soviet Union and other countries that chose the “Big Bang” approach promoted in the West by the so-called “Washington Consensus”.
The National School of Development was set up in 1994 by Justin Yifu Lin as the China Center of Economic Research. Justin Lin, famous for his work on structural economics in developing countries, was one of China’s earliest graduates from the University of Chicago Economics faculty.
I had a lot of questions for Professor Huang Yiping, for which he provided insights candidly and very generously. I have great respect for Professor Huang’s clear and direct insights into China’s economy.
I focused our conversation on three important areas. Firstly, the history of economic decision making in China. Secondly, the framework of current policies, especially the relationship between the state and private sector. Thirdly, the future trajectory of policymaking. In particular, I wanted to test the prospects for the liberalisation of the renminbi and the opening up of China’s capital markets.
Huang Yiping (HYP): Well, I'm a professor of economics and finance at the National School of Development at the Peking University and my own interest is mainly on financial sector development, so financial reform, macro, monetary policy, and what we've been working on also fintech recently.
ED: I'm actually very excited to be here in this campus. It's very beautiful. It's part of the Old Summer Palace. And it's got an incredible history in terms of being the home of economic policymaking in modern day China. I want to capture a little bit of that in our conversation.
My first question, give me a sense of how economic thought evolved in China after Deng Xiaoping started the process of liberalising the economy. Because we are very familiar with the story of Shenzhen and, the decisions made to open up certain parts of the country and so on. But there was this whole economic mechanism that needed to evolve from a controlled command economy to a liberal economy. And in the early days, the focus really was, or rather the global trend, and the global sentiment was the “Big Bang” approach. And China didn't take the Big Bang approach. China took a gradual approach. And it was in campuses like this, where professors like yourself, who today have become leading decision makers, started formulating the process of liberalising price control. Give me a sense of how that evolved.
Gradualistic approach to economic liberalisation
HYP: Well, I think it's a good question to ask why China pursued a different approach, what we call gradualism, compared to the shock therapy. People in this group start to play active roles in the early days, in the very beginning of the 1980s, especially starting with the rural reform, and then moved on to reform items in the urban area. But I would probably say the beginning of the reform or adoption of this gradualistic approach is probably not designed by somebody’s intended economic thoughts to prepare for this. If you look at what happened at the end of 1978, when reforms started, bottom line was we had 30 years of central planning. And that worked in some areas but didn't work in terms of lifting the living standard of people. Consumer goods were in severe shortage. That was I think, one of the reasons why Deng Xiaoping decided to move ahead with some kind of liberalisation. The question about whether or not we should adopt a shock therapy or a gradualistic approach, and nowadays, people are all discussing why the former Soviet Union adopted a different approach and we did this way. I think in part, this was just determined by the political atmosphere because we decided to reform but the agenda at the time was not the move to a free market economy. The short-term objective was really to improve efficiency and to produce more goods for the consumers. And I would say a gradualistic approach was mainly determined by the political constraints. You can imagine in 1978, when some leaders said we wanted reform, nobody would be able to voice the term “market economy”. What you can say is we should do things better on the margin. So in the end, you'll find that this is more about pragmaticism. And you can do things gradually better. But that in part was constrained by the political condition. At the time, I don't know what Deng Xiaoping had in mind, but even if he had in mind that the ultimate goal is to establish a free market economy, he wouldn't be able to sell it to his colleagues at that time. It's more about a piecemeal improvement.
ED: The question here really is, did there evolve two schools of thoughts? And I get the sense that the gradualist school of thought, which is what you mentioned in his remarks, and it went into the dual-track reform and so on. And then there was the packaged reformers, centred a lot around the Chinese Academy of Social Sciences. So, is that what it is right now, which you call it as two schools of thought, and how did it evolve?
HYP: I think the distinction today is much less visible. But in the 1980s, it was quite clear. And the question is, if you should move ahead, the piecemeal approach is step by step, or you should actually address the problem in one shot. I think the gradual approach was more determined by the political constraint at the beginning since we have to maintain portion of the central planning. We have to maintain state-owned enterprises (SOEs). Then the question is, how do you ensure a gradual and smooth transition? The dual-track liberalisation approach and what we nowadays often say, “new policy for new people and old policy for old people”. And initially, it was proposed by one of my colleagues here Professor Zhang Weiying who attended the Moganshan Conference in 1984. At the time, he was still a graduate student. You can't believe he wrote this article about the idea of dual-track price reform. For the older part of the central planning, you maintain the old state price, but then you liberalise the other track, let the prices be liberalised. So give you an example, for the grains, which was the main component I worked on in the 1980s, after I graduated from a university, close to here, Renmin University. My first job was to conduct an experiment of how to liberalise the grain prices. So what happened though, was the government will continue to purchase the grains from farmers at the state price and supply to the urban residents because urban people, their income was stable, and they couldn't afford a sudden jump in market prices. So that just makes sure that the transition is as smooth as the older supply and the price the continuous, it's really about the stability. But at the same time you allow farmers to produce more, and if you can produce more you can sell in market, then the price will be higher, so the incentive will be there for them to produce more. That was the original idea of Zhang Weiying's proposal of a dual-track price reform. But that idea was generally applied. For instance, when we want to liberalise the urban economy, we really wanted the foreign investors, firms and private enterprises to grow rapidly. But at the same time, you want to make sure the SOEs don't collapse overnight because that would cause other problems. So again, you have this dual-track approach. The reason why I said that the distinctions between these two schools are less visible today is because even for these people proposing the dual-track liberalisation approach, what is in their mind, I believe, is eventually the state track will go away. So you're not going to maintain it forever. Now whether it's going away smoothly as they expect, that's another question. So that was more for a transition purpose. It's not a long-term strategy. Eventually, hopefully, for instance, in the case of private sector and SOEs, because the private sector would grow very rapidly. And then eventually, you would know, the proportion of the SOEs in the overall economy will be very small in a market economy.
ED: Talk to me about property ownership, especially in the urban areas. That seems to be an area where China wanted to be attractive to foreign investors. So there'll be hot money, FDI and so on. But you avoided the path taken by Russia and several other countries in liberalising property ownership too quickly. So where did that feature in the whole evolution?
HYP: Well, property ownership is not a big part of our liberalisation. If you look at, for instance, cross-border capital flows. We start to liberalise that capital account. But really, I think the government have followed a strategy, what I summarise as long term first, short term second; equity first and portfolio second; inflow first and outflow second. So, what did we find during the past couple of decades? A lot of FDI inflows. That would be good from policymakers’ point of view because they come to China to build factories, to create jobs and produce GDP. That's very good. But the officials have been very reluctant number one on outflows, which would sound kind of different, and now we have a lot of outflow FDI. But in terms of portfolio investment in the capital markets, that's much more restricted. Property ownership is not really something that has not opened up.
ED: Where is this debate on liberalising the capital account right now?
Five to ten years to liberalise the capital account
HYP: The current account was opened in 1996. And the original idea was maybe China would take another five to ten years to liberalise the capital account. In fact, then governor of People’s Bank of China (PBOC) Dai Xianglong wrote a letter to IMF to inform IMF that we have done this and we're going to get on with the second phase.
ED: When he wrote a letter like that, on what confidence does he write that? Because getting a buy-in even internally is a process.
HYP: I think that there was probably some consensus among policymakers that it takes five to ten years to liberalise the capital account. But as I said at the very beginning, the right term to characterise the Chinese reform approach is not really like gradualism, or dual track, I think it’s pragmatism. The best way to characterise it is the cat theory of Deng Xiaoping, “White cat or black cat, as long as it can catch mice, it's a good cat”. So this was really the whole philosophy about economic reform policy. While PBOC said we're going to move on to liberalise the capital account, what happened was the following year in 1997, there was a big Asian financial crisis. So that job was delayed. And after the Asian financial crisis followed China's accession to WTO, then we restarted to liberalise the capital account, especially when China's foreign exchange reserves accumulated rapidly around 2003-2004. And everybody's pressuring China to appreciate the currency, to open up the capital account. So they moved ahead further, but then we got to 2008. One way of summarising what I observed during the last couple of decades, you always say, “We want to liberalise the capital account”, then when something happened, you suddenly say, “Gosh, fortunately, we haven't opened it yet”. Because if we open the capital account, we'll see much more devastating consequences. So this presents serious question. I think China wants to open up the capital account. There's no question most people feel that eventually it will open.
ED: Well, the considerations for and against, right now, the against seems to be a little bit longer.
HYP: Not necessarily. I think for China given this stage of development, it probably wants to move ahead, or liberalise more. But the question is, I think one lesson we need to take very seriously is that many developing countries experienced the financial crisis after they opened up. So the question is the price to pay but also I think we need to look seriously at what preconditions we needed to prepare before we take this move. For instance, interest rate liberalisation, exchange rate liberalisation. If you don't have these, forget about liberalising the capital account. Second, even when you're liberalising, there might be a proper sequencing of liberalisation. Some things need to be done first than others. I once summarised that a way of thinking about it is, you should liberalise the real economy first, and then the financial sector. Real economy means the fiscal system, the trade liberalisation and so on. Then you start to think about financial reform. You think about the financial services sector liberalisation first, and then the capital account, like introducing foreign banks to China, that's much less risky. But opening up the cross-border capital flows is probably riskier. And you want to liberalise the exchange rate first before you move on. So I think the sequencing is also very important. Finally, I think we also need to put into place some macroprudential measures, meaning, if you are going to allow the capital to flow across the border freely, there will be some consequences. We like positive benefit, but what about these negative consequences? So therefore, you need things like a Tobin tax or some reserve requirement just make sure to slow down some of the very volatile capital account. Eventually, I think there is a more fundamental question. Now this is becoming more general. Even if we want to liberalise the capital account, it does not necessarily mean we have to liberalise 100%, maybe 80%, maybe 70% is appropriate for us.
ED: Interesting. What is 80% liberalisation? I mean, it's like 80% pregnant. Is there an inflection point?
HYP: The IMF had this broader category, seven broader categories and 40 individual categories of capital flows. When I said 80%, 70% or 90%, I mean there are areas where you don't feel 100% confident, but they could become volatile. And these are the ones you should retain your restrictions. Give you one example, I think these derivative products and cross-border investment by individuals should be restricted because, number one, the risk is much more difficult to recognise and understand. So if you just open up and let everybody buy, you are inviting a lot of risk. You can allow the institutions to invest in these products because they will be very good for managing risks.
ED: From banking’s point of view, China is actually very banking centric. It's not market centric in that regard. Every day that you don't liberalise the capital account, the cost of funds domestically is very high. The banking system being a state-owned enterprise infrastructure is being subsidised. That's one way to look at it because of the high interest rates. Do you think that there has to be a dismantling of banking dependence of the economy?
Capital market is more capable of supporting innovation
HYP: Well, this is, again, a very tricky question. As an economist, we look at the financial structure. And one thing economists always come to is that financial market, the capital market is much more capable of supporting innovation, because we are now into a new stage of development. Information becomes the new driver of Chinese growth. If you can't support innovation, there is no future for the economy. But compared to the banking sector, capital market does much better in supporting innovation. So everybody's arguing and even the policy now is saying, we needed to develop a multi-layer capital market and increase the proportion of directed finance in total financial intermediation. I fully support this. But to the question, can we reduce the dependency on the banks? I'm very doubtful. I think there are reasons why China is bank dominant. If you look at it as among the developed economies, and we also see market-dominant financial system in the US, and the bank dominance of the financial system in Germany, both of them are politically democratic and a free market system. Why do they have different financial systems? My own view is the differences are not determined by policy. They are determined by your culture, politics, legal system and a lot of things. So in other words, even if Germany wants to develop a capital market, obviously, they can raise the proportion from here, but I doubt they would be able to develop a financial system like the US. If that's the case, if you agree with me, then my implication is that China can develop the capital market, but I think China would probably be more like Germany, then like the US in the perceivable future. So my conclusion is, yes, capital market definitely will become more important. But in the perceivable future, at least before I retire, and I will retire probably relatively soon, the banking sector will still dominate the Chinese financial system.
ED: I'm not saying that the banking system per se is good or bad. In Germany, I think it's also the per capita profile. The individual is not leveraged as in the US. It's a source of incredible cheap liabilities. So the banking system absorbs the liabilities of the system. In China, the savings rate is also very high. And so it'll be captured in the banking system. But when you see all the amazing things that have happened in China recently, the capital market is essentially driven by the private sector.
Guo Shuqing made this comment that the private sector now accounts for more than 50% of the taxation in the country. And a lot of that is actually foreign capital. They raise capital abroad. Then the question is, when will China have a robust capital market that is not state centric, that's really free market?
HYP: Well, that relates to the point I was referring to. The way or your capability of building an effective capital market is dependent on many factors, your legal system, your political system, your culture, and so on. For instance, financial regulation, you can't rely on financial regulation that is heavily influenced by policies. For instance, sometimes we have regulators adjusting their policies following the volatilities of the macroeconomy. That's not something that regulators should do. The regulators should maintain order of the financial market and maintain fair competition. But our regulators are looking into very different things. Only in the past two years, I think the capital market regulators started to do the right things. They have this three-term propaganda, establishing institutions, zero tolerance, and no intervention into the market operation. If these three objectives or principles are seriously implemented, I think we can go a long way in developing the capital market, but overall, I think it will be quite challenging.
ED: Just to add one more element to that flow, the liberalisation of the renminbi. How much of that is rhetoric? Because I hear it everywhere. But when you really think about it, all of the Chinese exporters or any Chinese corporations doing business on the Belt and Road is asking for dollar because the dollar is cheaper. So the reality is the dollar is still the operating currency for many reasons. At the same time, as long as you don't liberalise the capital account, this whole idea of renminbi internationalisation, liberalisation, is just a rhetoric. Give me a sense of how that journey will evolve.
Two stages of RMB internationalisation
HYP: Well, the first thing to note, as you notice at the very beginning, the Chinese reform is never a shock therapy, a Big Bang; it's always gradually moving ahead. I will share with you my own experience. I've been watching the Chinese reform policy for more than 30 years and probably 40 years now. And my own experiences at every point in the history, when I look at the Chinese reform policy, I always say, “The policies should have been more aggressive”. And then I realised this was just a part of the gradualism. Economists would think you should move to the optimal point, but the policy movement is always very gradual. Sometimes you move three steps forward, and two steps back, partly because of this gradualistic approach, partly because of political constraints. What is important? I remain cautiously confident about the Chinese reform because when you look back after five years or ten years, in most cases, you already see the policy moving ahead a big step. So that's a part of the gradualist approach. I think it's very useful to keep in mind. Economists are always unsatisfied by the policies implemented. But as long as you're moving ahead. There is an old Chinese saying, “We are not afraid of moving slowly, we are afraid of stopping, standing still”. That's probably a useful thing to keep in mind. But that does not necessarily mean there is nothing to improve in the approach and the internationalisation of the currency you mentioned.
We probably started from 2003-2004 when people in Hong Kong can hold their RMB deposit. But the real programme of internationalisation started in 2009. And then there was a big setback in 2015 when we introduced the reform of the central parity of the exchange rate. There was a 1.8% depreciation on the day. And that encouraged and triggered a wide wave of expectation of currency depreciation and capital outflow and so on. So, now we always divide the internationalisation of the RMB into two stages. The first stage is from 2009 to 2015. And the second stage is after that. You actually find that the difference between these two. As you mentioned, if you just rely on policy push, it's not sustainable. And I think that's one lesson we learned from the first stage of the internationalisation policy. The government push for RMB settlement of cross-border trade, investment for Hong Kong people to hold the RMB and so on. But really, there was very limited assets denominated in RMB for them to hold. Then internationalisation is not sustainable. People want it only when the currency is appreciating. When it started depreciating, they just want to get rid of it. The second phase, I think it's moving into a different stage. From 2016, we were seeing two-way opening of the financial market. There were a number of the Chinese debt and capital markets into the global indices. RMB is a part of the special drawing rights (SDR) basket and so on. This, in my view, would be the key emphasis of the second stage. If the first stage of internationalisation focused on settlement and payment; the second stage, I think, now, the new focus is more on the investment vehicle. So whatever you do, a non-resident can hold RMB assets. That's a longer-term solution to the internationalisation. But the point you made, some people still want US dollar more than RMB this would be a gradual process.
ED: Part of the reason for that actually is because dollar is cheaper and second is that they are incentivised to bring dollars back into China and not RMB. You pay a lower tax if you brought dollar back.
HYP: There are a number of these temporal reasons. By the broader picture is US dollar is still the most important global currency. So in relative terms, of course, people want the US dollar more. And we are not trying to replace the dollar with RMB. We are only trying to expand the international rule of RMB a bit. And that can only be done very gradually.
ED: So you said two stages, I see the two stages. I'd say there's a third stage where foreigners are incentivised to hold renminbi because assets are in reminbi.
HYP: That's a part of the second stage, opening up the financial market, and putting out debt and equity into the international financial market indices. That was, in part, to encourage foreign investors to hold more.
ED: But that's financial assets. What about real assets like property in China, where the foreign corporations and individuals are actively involved in the Chinese economy?
HYP: Well, they can hold a lot of equities for a very long time. I think the tricky thing is opening up their financial assets such as the equities, debts and so on. Whether or not we want to completely open the property sector, I think it is a big question.
ED: There are agendas that are fast to overwhelm the system, provincial level debt is one of them. And the amount of debt that the national government had absorbed in order to build the amazing infrastructure that you have right now puts China on the side of economies which are highly leveraged. How do you think these new agendas are shaping policymaking and economic thinking in China? I mean new agendas of increased debt of the economy, sovereign debt.
Raising the central government’s liabilities but reducing those of local governments
HYP: The policy actually is to deleverage. Now, the overall financial debt is already 280% of GDP and that's probably quite high. Especially compared to developing countries, you have higher numbers. For developing countries, it is very high. So I think on the one hand, you probably want to raise more central government liabilities, but at the same time to reduce the liabilities of the local governments, and especially these local investment vehicles, because these are non-government, they are semi-government. When they issue the debt and investors are thinking they have an affiliation with the government, eventually, it becomes a part of the responsibilities of the government. So I think deleveraging would be an interesting thing. It's more about the structure, not reducing the debt. And as we discussed already quite a number of times, the Chinese financial system is bank dominated, which basically means that GDP ratio will be higher by definition, because every RMB coming through the bank ended up as a debt. So I think we have to accept that this leverage ratio would be high for China. And plus one very important difference, if you look at China, compared to many other countries, when we see local government and the central government, their liability is probably quite high. But most of these spending is not like just completely lost. Most of them are invested in infrastructure, some physical property, and so on.
ED: So the building of the infrastructure also assists in taking the income levels up, and the productivity levels up. So that phase is as well done. It's just that, is China now entering another phase, where post infrastructure leverage is in the upside on productivity and wage gain capita GDP? There was one professor that we are both familiar with who said that China is moving away from the middle income, it's going up to the high income category. Is that something that you subscribe to? And how do you think that?
HYP: Well, if you look at the World Bank criteria, high income economy has a GDP per capita of $12,600. And our number is already something like $11,000. So it's very close. I think, within the next two years, unless something drastic happened, otherwise, it would be classified as a high-income economy. But we should also recognise the entry level of high-income economy is still quite low compared to other developed countries. In the US, Europe, you probably have a $40,000, $50,000. We are still quite far away from these countries. We still need to develop our technology, and so on. We needed to take some hard decisions on some issues. And sometimes we need a more top-level design of the reform policies. Most of the policies in the past were bottom up. But maybe it's time to look at the reform issues and policies from a more systemic approach and then crack some harder nuts. That's something we needed to do. But I'm not sure if that's going to happen in all areas.
ED: And at the same time, you also put in some markets like 2008, the US banking crisis in 2015, there are external factors that sort of derails the process somewhat?
Fed’s policy impact on global economies
HYP: Definitely. I think we probably are facing the same challenge now. In 2015, when we reformed the central parity of the exchange rate, there was one step of depreciation, and that triggered a very broad expectation of depreciation. But the background was the likelihood of the US Federal Reserve (Fed) tapering, or reversal, normalisation of its monetary policy. I think we're at the same point again.
ED: And given the amount of quantitative easing that is being pushed into the market these two years, it's amazing that tapering alone is going to be shaping the public policy of many countries.
HYP: I think many countries will suffer, especially those very vulnerable ones. China will probably be okay. But we may also see the pressure for currency depreciation, capital outflow, and so on. The Fed is still the most important central bank globally. So when the Fed is easing, everybody receives more liquidity. But when the Fed decides to tighten, money flows back to the US. So what consequences that we have to bear depends on the health of your own economy.
ED: At the same time, the US economy is becoming increasingly financialised. It's no longer a real economy. Its own debt situation is $27 to $29 trillion against GDP of $19 to $20 trillion. So the ability to repay debt is now a moot point in the US. At the same time, it's got a capital market that is bigger than anything in the world. So, on the one hand, it's a global capital market that provides the structure for all of the other markets. On the other hand, it's financialisation of an economy that makes it difficult to relate to like China exports a lot to the US. What would your exports look like relative to a highly financialised customer in that regard?
HYP: Well, I guess it will be very volatile. For the US, as you know, its former president really wanted to bring back a lot of manufacturing. As economists, we couldn't see any reason why it would happen. When your labour cost is at that level, you want to compete with China or Vietnam on a manufacturing front? That's kind of unimaginable. But I think the US has a very strong advantage. As a leading economy, its innovation sector is world class, it's just probably the unchallenged leader and it's a financial system is also very well developed. So I think they probably should focus more on these instead of thinking about bringing back jobs in the automobile industry or some processing industry. That just doesn't make sense.
ED: I think we've covered all the various different grounds and elements that go into political and economic thought in China. So thank you very much.
I had a sense that the personalities influencing the direction of the Chinese economy are committed to eventual liberalisation, but only when conditions allow. Also, there are new political conditions set on the economy to make it sustainable for the long term. Meeting Professor Huang and hearing from him first hand, gave me the sense that economic policy making in China is a very deliberate process that informs the political decisions the country eventually makes.