Chinese policymakers have a stellar reputation for the quality of economic management but the same was true of the Japanese three decades ago. For the Japanese, the difficulty of shifting from their high-savings, high-investment, “catch-up” economic model proved very large. Indeed, this has still not been completed. While the Chinese economy has far more room to grow than Japan a quarter of a century ago, its disequilibria are even bigger. Moreover, contrary to conventional wisdom, the transition to a new pattern of growth has not really begun.
Already, the difficulty of handling this transition is damaging Chinese policymakers’ reputation. Mistakes in handling the implosion of the “bubble economy” of the 1980s did the damage in Japan. Now it is the Chinese authorities’ mishandling of the currency and the stock market. Similarly, the financial crisis of 2007 and 2008 devastated the reputation of western financiers and policymakers. Everybody seems to be a genius when credit is surging.
Understandably and rightly, observers are calling upon the Chinese authorities to be more transparent. Given their political system — “the bureaucrat knows best” — that is going to be hard to do, but this is a second-order matter. The first-order one is that it is unclear how and whether the transition to a more balanced economy is to be made,