Saturday, July 25, 2015

Flashback: "Hayek, Once China's Poison, Is Now Its Prophet."

Hayek, Once China's Poison, Is Now Its Prophet: Andy Mukherjee By Andy Mukherjee - July 26, 2004 15:53 EDT July 27 (Bloomberg) -- If economist Friedrich Hayek were alive today, he would scoff at Beijing's awkward -- and failing -- attempts to check runaway economic growth as yet more evidence that all central planning was ultimately a ``pretense to knowledge.''

In a way, Hayek, the 20th century's leading critic of statism, may have given his verdict, some 60 years ago, on whether China's Premier Wen Jiabao (or any other state planner, for that matter) can have enough ``man-on-the-spot'' information to be able to cool excess investments in some industries without freezing up the whole economy.

``If we can agree,'' argued Hayek in a 1945 essay, ``that the economic problem of society is one of rapid adaptation to changes, it would follow that the ultimate decisions must be left to the people who're familiar with the (changed) circumstances.''

``We cannot expect,'' reasoned the Austrian-born British economist, ``that this (economic) problem will be solved by first communicating all this knowledge to a central board which, after integrating all knowledge, issues its orders.''

And that's just what's frustrating the task of policy making in China. Although wedded to capitalist ideals now, China remains a planned society where the state allocates resources. While a market economy can curb overheating by raising interest rates -- a ``pricing'' signal to businesses to reconsider investments -- Beijing is trying to ``plan'' a correction by telling bankers whom they shouldn't lend to.

Credit Crunch

So far, the script hasn't played to planners' satisfaction.

Eddie Wong, the Hong Kong-based chief strategist at ABN Amro Asia Ltd., explained in a note to clients last Friday how Beijing's instructions to banks to curb credit are backfiring.

Since working capital loans are renewed in three months to 12 months and the duration of fixed-asset credit is between three years and five years, ``when the banks are asked to tighten,'' says Wong, ``the easier way is to stop rolling over working capital loans as they'll mature faster, although this is not what the central bank wants them to do, and more importantly, it is not what the economy needs.''

In fact, China's strategy of choking credit to real estate firms and makers of cement, steel and aluminum, is turning out to be an all-round clampdown on credit, even causing airlines to curtail new aircraft orders, according to David Hale, president and chief economist at Hale Advisors LLC.

``They want to slow things down selectively,'' Hale said last week. ``But because their system is so clumsy and so authoritarian, what they produced in the last eight weeks is an across-the-board credit crunch.''

``Pretense to Knowledge''

Hayek, who opposed British economist John Maynard Keynes's view that state intervention was often the key to keep an economy at full employment, was never in any doubt about what works better -- ``pricing'' or ``planning.''

A market-based pricing system is superior because of ``the economy of knowledge with which it operates, or how little the individual participants need to know in order to be able to take the right action,'' he argued.

Hayek's works were banned in Mao Zedong's China.

``Full of poison,'' is how a Chinese introduction described his 1944 book ``Road to Serfdom,'' which was made available to high-ranking communist cadre to acquaint them with the ``enemy's'' thinking, according to William McGurn in the 2000 book ``China's Future: Constructive Partner or Emerging Threat?''

The ban has since been lifted, and Hayek is a respected name among Chinese scholars now, according to Kate Zhou, a professor of political science at the University of Hawaii at Manoa. ``Even some government officials,'' Zhou writes on the Web site of the Mackinac Center for Public Policy, ``have put some of Hayek's writings on their work desks for decoration.''

Blunt Weapons

Earlier this month, China reported second-quarter economic growth of 9.6 percent, slower than 9.8 percent in three months to March 31. Growth in fixed-asset investment eased to 29 percent in June, from 35 percent in the previous month, raising expectations that government measures to slow the economy were succeeding.

However, ``preoccupation with statistical aggregates,'' as Hayek so presciently warned, is counterproductive because the knowledge that oils the wheels of an economy is ``of the kind which by its nature cannot enter into statistics and therefore cannot be conveyed to any central authority.''

Commodity prices, which contain Hayek's ``man-on-the-spot'' information, don't suggest a slowdown is near. The London Metal Index, which combines prices of copper, aluminum, lead, tin, zinc and nickel, closed at 1684.6 on Friday, 9 percent higher than its May 17 low. Since June 30 last year, the index has risen 47 percent, primarily because of strong metal demand in China.

Asia's second-biggest economy is still growing at a ``torrid and unsustainable rate,'' Morgan Stanley Chief Economist Stephen Roach said.

Hayek Vindicated

Hayek was vindicated when the Berlin Wall fell in 1989, three years before his death at age 92. The Nobel Prize-winning philosopher's prophecy is now catching up with China, which is undergoing what ABN Amro's Wong calls a ``policy vicious cycle.''

``When the government tightens,'' says Wong, ``the economy will die; when the economy is about to die, the government will loosen; when the government loosens, it will lose control.''

State planning, especially when it involves state-sponsored investment booms and busts, can be every bit as messy as Hayek said it would be.