Cracking the China conundrum by Yukon Huang – Why Conventional Economic Wisdom Is Wrong

Book review. Author: Ferenc Bánhidi

Discussions about the economy of China feature prominently in both the media and scientific circles these days. But the strong interest has not resulted in convergence of different positions, in the past few years a polarisation of views can be observed. While pessimists perceive that the slowdown of growth and soaring debt levels signal an inevitable financial crisis, optimists interpret the ineffective operations of markets as opportunities for new developments within a framework of comprehensive reforms.

Yukon Huang, a renowned economist and China expert, indicates with the title of his new book that he does not consider himself standing in the middle in the above debate. He sees that the source of popular but faulty views on the near collapse of the Chinese economy is that experts use inappropriate framework for analysis. They try to evaluate a huge country with a large diversity of levels of development along a general system of criteria. They fail to notice that although basic principles of economic transformation (marketisation, property diversification, opening to the external economic sector) are identical with the successfully modernising countries, the process of transformation differs, so the mechanical application of the experiences of those countries lead to wrong conclusions. The author highlights three, widely accepted views on the Chinese economy that are based on such wrong premises. The first is about the shortly expectable debt crisis. The debt level of the economic operators itself may give cause to worry, but this can be regarded as public-law debt, for the management of which the state has appropriate resources at its disposal (foreign-exchange reserves, national landholding). In respect of the decades-old, distorted pattern of growth of the Chinese


Yukon Huang is an American economist of Chinese origin. He worked at the World Bank for years and at the end of the 90s he was the World Bank’s first country director for China. He currently is a senior associate and a China expert at the Carnegie Endowment. In the past few years he has published dozens of articles in the Wall Street Journal and the Financial Times. As an acknowledged expert on the subject, his opinion about almost all current issues of Chinese politics and economy has been asked for. Huang wrote this book with the intention of summarising and systematising his explanations provided in the past five-six years about various subtopics.

economy, although share of consumption to gross domestic product is exceptionally low in international terms, in China this does not require restructuring of the growth model, because it is based on the ongoing urbanisation and the traditionally high savings rate. And finally, maybe the most widely accepted view reckons the Chinese state capitalist system a distorted form that suffocates the market and thus competition. According to the author, although the state in China has a larger than usual role in taking economic decisions, this system stimulates competition, because the local governments behind the companies are interested in it, and it is also supported by the political system.

Yukon Huang is not uncritical with the Chinese political-economic system. He gives detailed analyses of the controversial situation of the 250 million rural workers in cities, and the so far sluggish execution of the 2013 decision on economic reforms. He also notes that the increasingly ambitious Chinese foreign policy does not correspond to the institutional bases of the political decision-making system, so the risk of exceeding itself is inherent. Yukon Huang’s book is primarily for those readers who believe or at least accept that a China of growing influence must be taken into account both in global politics and in the world economy, and who are curious about the challenges that this country, which is so difficult to decipher, has to face in the following ten-fifteen years.


In the past three-four years, the unfavourable opinion became dominant in the USA and Europe. Studying the trends revealed by public opinion polls, the big difference between the averagely favourable opinion in the period of the global financial crisis and the overall unfavourable opinion in the period of the recovery since 2012 is striking. In Europe, the impact of the great power rivalry with China is much more moderate, so negative opinions are clearly less here. But within this it is interesting that 60 per cent of negative opinions come from Germany, the country that has the most intensive economic relations with China. The United Kingdom is on the other end, where the ratio of unfavourable opinions hardly reaches 35 per cent, although bilateral commerce is not significant.

The evaluations in the Asian countries also differ from each other, but favourable opinions are predominant as a whole. The situation is controversial in case of the ASEAN countries, because their most significant trading partner is China, but they are already worried that they won’t be able to compete with China in the markets of developed countries.

In Yukon Huang’s opinion, the overall unfavourable results of public opinion polls strengthen the conviction of European decision makers that authoritarian systems cannot be considered credible partners in international politics. China had no intentions earlier to engage in global decisions, nowadays this is changing; however, due to differences in values it is difficult to find basic principles for China’s global involvement that are generally acceptable.



In Yukon Huang’s opinion, the two definitive figures of the Chinese reform and opening-up policy are “political entrepreneurs” Deng Xiaoping and Zhu Rongji. Both of them had a comprehensive vision of the country’s transformation and they were willing to take risks to realise it, they were not afraid of radical break-up with traditional interest groups.

Deng Xiaoping implemented three reforms at the beginning of the 80s that gave a key role to non-state economic operators to trigger economic growth. With the agricultural reform he brought back individual farming and market-based operations into agriculture. The industrial and commercial plants of former village and small town communes were given to private entrepreneurs as contractual partners for operation by keeping the property in local government ownership. Foreign investors were attracted into special economic zones by offering particularly advantageous terms, which laid the foundations for the export successes of the following years.

Deng Xiaoping’s strategy in the 80s openly accepted that the differences between regions would increase. The traditionally more developed coastal territories could offer considerable benefits for investors from Hong Kong and Taiwan. At the same time, he lifted domestic market barriers, so workforce and capital was able to freely move from the less developed western areas to the regions opened for foreign capital. Ultimately, he was the one who introduced the system based on growth competition, which was also supported by the factor that GDP growth of the region became a main criterion in the evaluation and later promotion of political leaders.

Zhu Rongji made three politically risky decisions at the end of the 90s. In order to join the WTO, he agreed to radically decrease customs duties; he initiated large-scale company restructuring to increase the industry’s competitiveness; and he terminated the state housing system overnight. All three measures played a significant role in the two-digit economic growth rate after the turn of the millennium. However, these steps required serious sacrifices. The number of workers laid off from factories reached 40 million.


Yukon Huang has effective arguments against the widespread criticism about Chinese economic policy that the state tries to support economic growth with forced, not market-driven tools, thus endangers long-term sustainable development. As critiques put it, interest rates artificially kept low to stimulate investments, and consciously devalued foreign currency exchange rate to encourage export are exactly such tools. The impact of these two factors appear in the extraordinarily low share of consumption to gross domestic product, which will create barriers in demand against growth in the future.

According to the author, the flow of village workforce to the cities and transfer of labour from agriculture to industry leads to an increase of share of profit to gross domestic product, and this also drives the growth of investments. In agriculture, labour incomes are several multiples in production value of those in industry, so if employees transfer between the two sectors, it means considerable growth of profit ratio in the economy as a whole. The urbanisation rate in China is currently 56 per cent, which is a significant growth compared to the 20 per cent of the 80s. But in comparison with the rate of similarly developed countries, it does not count as high, so further growth can be expected in the following 5-8 years.

The investment stimulating effect of urbanisation and industrialisation is a natural process that all newly industrialised countries went through, the author says. If the Chinese government listened to criticism and tried to artificially increase the consumption rate, it would jeopardise further growth. Yukon Huang presents international examples to prove that among the developing countries that went through the industrialisation process, those East Asian countries were successful that had a relatively high investment rate. The Latin American countries where the investment rate remained lower, remained stuck at a medium level development after a quick phase of convergence.


The unsustainably high level of Chinese debt has given topic for discussion for the media on a daily basis since 2012, and it has been the most often cited argument together with the slowing economic growth to support the view that the Chinese economy moves toward an inevitable financial crisis. Yukon Huang categorically refutes this evaluation. In his opinion, the basic structure of Chinese economy is healthy: the international balance of payment has a surplus, budget deficit is moderate, savings of households are stable and significant in size. One has to be strongly biased to regard an economy of such parameters to be on the brink of a crisis.

The author admits that the 160 per cent corporate debt to GDP ratio can be considered high, and it is especially alarming that this ratio has doubled since 2008. Before the international crisis, corporate debt levels were appropriate for the basic conditions of Chinese economy, 80 per cent in an underdeveloped share and bond market cannot be rated high. The cause of the current problems lies in the package of measures that was taken by the government to manage the international financial crisis. The programme accepted in November 2008 pumped a huge amount, US$586 billion into the economy, a substantial part of which was financed by loans from state-owned banks. Many of the beneficiaries were state-owned companies, which paid more attention to achieve the goals set by the state than to produce returns on investments. Since 2012, the government has been paying extra attention to debt management, but so far has managed only to moderate growth, and failed to achieve a substantive breakthrough: to eliminate bad debt. In Huang’s opinion, the tools to solve the problem are available, there is only lack of determination to assume conflicts of interests. The most important step could be the acceleration of the state-owned companies’ reforms. The substantial part of bad debt has accumulated at these companies, and they are the ones that still drain a significant part of investment resources from the effectively operating private companies. A successful consolidation programme was carried out in the 90s to manage the bad debt of state companies, in which a part of foreign exchange reserves was used to recapitalise the banks. In order to stabilise the financial system, the correction of the real estate market should be required, which could be achieved by making settling for rural workers easier in cities. Also, limiting the infrastructural investments in the Western part of the country would release resources for more useful purposes.



The author acknowledges that the economically successful growth process in China caused social tensions and environmental degradation, which are less and less sustainable under current circumstances. The scale of income inequalities is clearly demonstrated by the fact that in 2016 the per capita income in cities was triple the rural incomes, and the average income in the developed coastal regions was double the average income in the least developed western territories. As Huang puts it, this was the inevitable consequence of Deng Xiaoping’s strategy that was based on competition between regions. Since it occurred between and not within regions, social acceptance could be managed.

Still, the political leadership sensed that changes were necessary. Huang cites statistics that show that the growth of the above-mentioned inequality indices stopped in 2003 at first, then from 2009 on the per capita income in both the rural and western underdeveloped areas grew faster than in urban and coastal regions.

The book focuses exactly on the management of economic problems, but in this part the author also dwells on the possibilities of political liberalisation. He emphasises beforehand, that even if we accept Acemoglu and Robinson’s well-known development theory, China cannot be considered a conventional authoritarian state.

According to Acemoglu et al, in dictatorships the dominant social group appropriates the major part of resources through exploitative institutions. As a result of the political and economic reforms implemented by Deng, a regionally decentralised competition system was created that partly encouraged growth, partly acknowledged and embraced local interests as well. The stability of the Chinese political relations is partly due to this peculiar system.

Western political analyses on China have noted recently that the country has already reached the level of economic development that commenced the political reforms that led to full democratisation in Korea and Taiwan in the 80s. Huang accepts the view that the impacts should appear in politics as well, since China follows Western trends in the economic sector. He does not deny the necessity of liberalising political reforms; he only argues that economic conditions for this are lacking yet. In Korea and Taiwan in the 80s it was not only the income that reached a higher level, but there also emerged a significant urban middle class, working mainly in the service sector. In China, both the urbanisation rate and the development of the service sector substantially lags behind the countries taken as models. In accordance with Huang’s assessment, China will reach the development level which enables western type political reforms to be addressed only sometime between 2025 and 2030.



Huang gives a detailed account on China’s international relationships, and within this specifically deals with some widely accepted views that are based on one-sided evaluation of the facts. One such assumption is that Chinese successes in export are mainly based on western working capital investments. In fact, although the capital import of a total of 308 billion USD in the two decades before 2000 was truly high, 80 per cent of it came from Asia, the share of the USA and the EU was merely 16 per cent. It was more convenient for large multinational companies to transfer the management of production processes to Asian partners (Hong Kong- and Taiwan-based companies) and concentrate only on product design and distribution.

In the decade following the turn of the millennium, China became the centre of a large Asian production value chain, in which Japan, Korea and Taiwan transported key parts requiring high technological levels, ASEAN countries transported partly raw materials, partly lower value subassemblies to Chinese assembly plants. This division of labour worked so successfully, that—as a result of the fast development—China became the most important foreign trade partner for the ASEAN countries after the turn of the millennium.

Today there are widely accepted statements in the USA, like “China’s aggressive trade policy is to be blamed for a major part of the American foreign trade deficit”, or “China’s huge export surplus was achieved by a currency policy that consciously counted on devaluation”. Huang thinks that given the above regional network, both statements are easy to refute. The American trade deficit started to grow in 1999 and it peaked in 2005. Trade with China in this period was not yet significant, the largest export surpluses were realised by developed East Asian countries (South Korea, Japan, Taiwan). But in the period between 2005 and 2008, a serious change occurred. China drove these countries out, but the American deficit hardly changed. It is clear from the above analysis that China’s gaining ground does not stem from its trade policy, or currency manipulations; it is due to value chain transformations where China became the final assembly point.

Huang has noteworthy and at the same time peculiar views on the chances of the Chinese national currency (RMB) becoming international. China is known to have made much effort in the past 4-5 years to accelerate the process, but Huang considers this an activity that aims to enhance national reputation but lacks real economic foundations. In Huang’s opinion, there were two factors that played a major part in the American dollar’s becoming a key currency: in the beginning, the open and developed American capital markets and the generous international aid policy (the Marshal Plan), but especially in the past 20 years the fact that the USA resolutely took on the trade deficit and the foreign debt to finance it. According to Huang these conditions are not present in China. They are not ready to afford a negative balance because of employment and other reasons, and the development level of the country does not justify a generous aid policy either. But if there is no appropriate RMB liquidity available in the international markets, becoming a world currency remains a distant goal.


In the closing section, the author returns to the debate between the analysts dealing with China, the optimists and the pessimists, and outlines his forecasts for the next few years. On the basis of what has been said in the previous chapters, he considers himself an optimist; he considers the most important macro-economic issue, to limit excessive credit with a financial system reform, is manageable.

As far as the economic growth rate of the following ten years is concerned, he describes forecasts of three groups of opinions. The optimists, headed by the government’s semi-official advisor Justin Lin, do not calculate with deceleration, they think the 7 per cent growth rate of the previous years can be maintained. Huang is more cautious; he thinks a 5-7 per cent growth is likely in the following 5-10 years. He supports this view with two reasons. The first is that he counts on the effect of the planned but not yet implemented economic reforms, especially the reforms of state-owned companies, which would encourage efficiency and thus generate growth. The second is a somewhat technical reason: the East Asian countries that successfully managed to converge to the US$20,000 GDP/capita level also could maintain the above average 5-7 per cent growth rate. China is currently at US$13,000 GDP/capita level and has 5 more years to achieve the above threshold. In respect of China’s political power, impact on international processes, and its possible role in global governance, the author is far more pessimistic. In his opinion, China has no sufficient experience in handling sensitive international issues. As the results of the international public opinion surveys prove, the efforts of the past years have not been effective either in increasing the country’s soft power or in developing bilateral partnerships. It has to be assessed against this background that Xi Jinping broke with the passive foreign policy introduced by Deng Xiaoping, and attempts to promote China’s national interests much more expressly than before.



A great number of articles on the Chinese economy appears in different media that put forward often superficial and overly biased opinions. Yukon Huang with his decades-long practical experiences at international financial institutions and comprehensive theoretical knowledge aspires to go deeper than daily press and explore the connections between subtopics, and to give solid support to his views by considerable statistical data and thorough understanding of specialised literature. In case of the majority of the topics covered, he succeeds in this. However, he puts the reader into a difficult situation. We often have the feeling that maybe too many questions are asked in his analyses and due to size constraints, he cannot elaborate all his views on them. We missed the thorough explanation of the concept of “regionally decentralised competition systems” most, to which he attributes several positive effects, but fails to prove them.

The debate between the groups with optimistic and pessimistic views about China has been going on for years; in daily press and theoretical writing the pessimists are dominant, while in the analyses of international organisations and papers of prestigious consultancy firms the optimists are in majority. Yukon Huang’s book is a useful guide in following this intriguing debate.

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