Development with financial stability

Those trying to understand the soundness of the Chinese economy and its financial institutions can be divided into two critical interpretative “groups”: the first one has been predicting an imminent economic crash (that never comes), the second one, moderate, foresees a forthcoming stagnation process.

Both have failed in their forecasts. What else do they have in common?

They blame the increases in the credit provision and its mismatch with the nominal GDP growth after the 2008 global financial crisis for the so-called ills in the Chinese economy. They are critical of the role of Stateowned enterprises as strategic drivers to foster and underpin development, and say the SOEs are less productive and prone to resource misallocation.

Both have criticized the Chinese political approach, albeit this very same system has lifted out of poverty more people than in any other country, while many of the so-called liberal democracies haven’t been able to improve the living standards of their people at the same pace as China.

And most critics have neither foreshadowed a financial crisis due to the mounting pile of debt that has been pouring from developed countries’ central banks post-crisis, nor could they anticipate the 2008 financial crash.

Half-truths merged with misinterpretation could scale up rumors and destabilize economic and political systems, and make it even more difficult for developing countries to catch-up with their more advanced counterparts, as has been the case with those that blindly followed the “Washington Consensus”.

Thanks to reform and opening-up, China succeeded in building up a unique political and economic system with Chinese characteristics. China never suffered a financial crisis as the United States did. The Chinese system has an internal intelligentsia that regularly improves its mechanisms while combining a certain dosage of regulation with optimal use of macroeconomic, fiscal and monetary policies addressed to underpin the real economy and financial stability.

China has four of the world’s six top commercial banks thanks to a long process of building capital adequacy, and creating asset management companies with debt restructuring mandates and new financial products. It also has the largest (and profitable) export-led apparatus, which generates a robust asset position for the People’s Bank of China, the central bank, according to the International Monetary Fund’s assessment of reserve adequacy.

Besides, China has continuously facilitated the improvement of institutional and human resources and perfected its guidelines and regulations. It has also helped establish two new multilateral financial institutions, the Asian Infrastructure Investment Bank and the BRICS New Development Bank, in order to alleviate the fiscal burden on developing countries. And it has come up with bold and innovative proposals such as the Belt and Road Initiative and Made in China 2025, fostering innovation, advanced production, and the integration of goods, services and cultures, which could become turning points for a new and integrated global era.

To understand China therefore one has to first respect its uniqueness and avoid ideological prejudices that aren’t proved by empirical observation. The “one size fits all” approach has been proven wrong, for it doesn’t consider development as a wide range of points along a continuum with multiple degrees in a constantly changing world. Assessments and policies need to be at an optimal point between a country’s stage of development and characteristics, and the global trend.

It’s also necessary to realize that the world is not a dichotomy (poor versus rich; or West versus East). Instead, we share a common destiny and agenda, which require joint engagement to achieve sustainable development, improvement in living standards and financial stability.

China, like any other country, has its own challenges. True, China has huge reforms to realize and difficult tasks to perform. But thanks to its reliable institutions and able leadership, it can achieve these domestic goals while playing a decisive global role. If China maintains its sound fiscal balance, and continues to implement innovative and stable policies, it is not going to be shattered by a crisis or economic stagnation. Instead, it will be ready for a new development stage.

To understand China therefore one has to first respect its uniqueness and avoid ideological prejudices ...