The Jan. 20 panel, which included Chicago Booth faculty members Randall S. Kroszner and Chang-Tai Hsieh as well as UChicago alum Richard Wong, AB’74, AM’74, PhD’81, focused mainly on China and the policies and challenges facing the country as it slowly liberalizes its economy. The talk was the second in Chicago Booth’s 2021 Economic Outlook series and hosted by Booth’s campus in Hong Kong.
Moderated by Henny Sender, former chief correspondent for international finance for the Financial Times, the hourlong discussion drew the attention of more than 400 attendees, many of whom submitted questions for the panel. The wide-ranging conversation explored China’s approach to the pandemic, shifts and vulnerabilities in China’s economy, and geopolitical issues likely to affect the entire region in the coming year.
China’s pandemic response: How has it differed from the U.S.’The U.S. approach has been to offer stimulus and recovery money to businesses and people, while China has spent its efforts on treating the virus and has maintained economic growth, said Hsieh, who was a visiting scholar at the Federal Reserve Banks of San Francisco, New York, and Minneapolis, as well as the World Bank’s Development Economics Group and the Economic Planning Agency in Japan
"China never undertook the fiscal spending that the US did. There was essentially no cash rebates to consumers," said Hsieh, the Phyllis and Irwin Winkelried Professor of Economics and PCL Faculty Scholar at Chicago Booth. "It does look like the best rescue package is a package that fights the pandemic instead of shoving cash out the door."
China’s economy: What shifts are you seeing and expecting?The trade war with the US has forced China to rethink economic policy, looking to generate more internal demand. That will likely lead to more stimulative policies for Chinese households, said Wong, who has been founding director of the Hong Kong Centre for Economic Research since 1987 and the Hong Kong Institute of Economics and Business Strategy since 1999.
"Basically they would like to balance the economy and encourage household consumption, discourage savings," said Wong, professor of economics and Philip Wong Kennedy Wong Professor in Political Economy at the University of Hong Kong. "This response might actually create better conditions, not only for the Chinese household going forward, but with more sustainable long-term economic growth. You’re probably able to do things like deal with social security, pensions, investment options for households."
New administration: How will the Biden administration handle geopolitical issues with China?While there are several potential flash points, it will be important for the new administration to consider the places in which it can find common ground with China, said Kroszner, a former governor of the Federal Reserve System from 2006 until 2009.
"I hope the Biden administration will look for benefits from the economic relationship between the U.S. and China, and China and the rest of the world," said Kroszner, deputy dean for executive programs and Norman R. Bobins Professor of Economics at Booth. "I think sometimes that’s lost by focusing only on the military challenges, which are quite significant but which leads to thinking about the relationship in purely zero-sum terms, rather than looking for opportunities for mutual benefit."
Vulnerabilities: Why has China relied on the U.S. in areas like semiconductor production rather than boosting its own industrial efforts?China’s strong regulation had made profitability less risky in some sectors as opposed to others, Wong said. Deregulation is occurring, but that’s a slow process and will keep China behind in some areas.
"Think of it as deregulating the economy street by street. Therefore, the easiest solution for a lot of companies to turn a profit and boost sales is not to actually engage in things like doing semiconductors, which is much more difficult," Wong said. "You go along pathways where there’s least resistance and you do not want to go on pathways where, if you were to develop a semiconductor industry, you need a lot more streets to be deregulated, you need universities, you need the financial system."
Business relationships: What can we learn from the Ant affair about China’s relationship with private businesses?China ordered Ant Group, an IT arm and digital pay platform of the e-tail giant Alibaba, to cancel its IPO and revamp its business practices. The company was growing quickly, but the government clearly had an issue with it wading into lending and other banking practices, Hsieh said. It’s a sign that China is intent on mitigating risk even if it means slowing a company’s growth.
"This was not a crackdown on Alibaba. I think it’s one part of this broader campaign to deal with risks in the financial system," Hsieh said. "They were doing a tremendous amount of lending and so it was essentially a bank, but it was being regulated like an IT company."
Demographics: What does China’s aging population mean for its economic future?For decades, a key driver of China’s extraordinary growth had been migration of people from the interior of the country to the coast, increasing the supplying labor to the formal part of the economy, Kroszner said. But as the Chinese population rapidly ages, growth will be harder to maintain.
"There was an enormous increase in the number of workers who were part of the formal economy. Ultimately, economic growth is the number of hours worked multiplied by the output per hour, that is, productivity of that work," Kroszner said. "So China really needs to pivot to thinking about reforms to boost output per hour, because they are not going to get the same kind of growth from-and actually probably a contraction in-the number of hours as the working age population shrinks."
--This story was first published by the Booth School of Business. Visit the Chicago Booth website for a full transcript from the event.