Zhang Weiying: China's Anti-Keynesian Insurgent
By ABHEEK BHATTACHARYA
The Wall Street Journal, October 12, 2012
Zhang Weiying's warnings that stimulus spending would lead to malinvestment were once ignored. Now official ministries invite the follower of Hayek to speak.
China's Anti-Keynesian Insurgent
Zhang Weiying's warnings that stimulus spending would lead to malinvestment were once ignored. Now official ministries invite the follower of Hayek to speak.
Beijing
It's a rare afternoon in the Chinese capital when smog hasn't blocked the skies, and one of China's most famous economists is in a sanguine mood. The economy is in trouble as the Communist Party heads for a once-in-a-decade transfer of power while prosecuting its former golden boy, Bo Xilai, on criminal charges. Worried investors want signs that Beijing remains committed to growth—and the sign they'd most like to see is a big Keynesian stimulus.
Zhang Weiying would say that they're wrong to panic. The economic slowdown, he calmly says over tea, is actually good news that "makes the government think we need to change"—toward reform and away from priming the pump. We aren't all Keynesians now in China, he insists.
Three years ago, Keynesianism was official policy. The 2008 financial crisis had Beijing gloating over the failure of the free-market "Washington Consensus" and touting the "China Model" of government intervention. Keynesianism fit the statist zeitgeist and Beijing then suffered an export slump, so the government allocated $3.5 trillion—or about 50% of gross domestic product—in bank loans and direct spending.
Mr. Zhang's academic colleagues were all praise for the "China Model," but in 2009 he was giving speeches entitled "Bury Keynesianism." Then a top administrator at Peking University, where he now teaches economics, he argued that since the financial crisis was caused by easy money, it couldn't be solved by the same. "The current economy is like a drug addict, and the prescription from the doctor is morphine, so the final result will be much worse," he said.
Zina Saunders
He invoked the ideas of the late Nobel laureate Friedrich Hayek and the Austrian School of Economics to argue that if the economy weren't allowed to adjust on its own, China's minor bust would be followed by a bigger one. He also advocated doing away with existing distortions such as the monopolies enjoyed in many industries by state-owned enterprises.
Those were the days when China was fast becoming the world's second-largest economy (growth in one 2010 quarter crossed 11% on an annual basis), so the establishment was in no mood to listen. "When I criticized the central government's stimulus policy, many senior officials were not happy," Mr. Zhang says. It might not have helped that at last year's World Economic Forum in China he called the government's powerful National Development and Reform Commission "a bunch of smart people doing something really stupid."
Ultimately, Beijing's stimulus fed a false investment boom that stoked asset bubbles—then the morphine wore off while the government tightened. Officials claim the economy grew at 7.6% year-on-year between April and June this year. Skeptics think the real number is closer to 4%. (One London research house says 1%.) Meanwhile, industries dominated or favored by the state, such as steel or solar power, are idling from overcapacity. Countless sheets of copper are reportedly stacked in warehouses, blocking doorways and exemplifying Hayek's notion of "malinvestment."
In other words, the stimulus was a poster child for Mr. Zhang's Austrian theories. And the sheer size of the failure suddenly has people paying attention. "The Keynesian policy didn't deliver what it promised," he says, so "more and more people realize that . . . when the government makes investment [in] something that's useless, recession will come."
Chinese officials no longer treat Mr. Zhang as a pariah. He reports that Ministry of Agriculture officials tell him they enjoy reading his articles. Other ministries and local governments, including in Henan and Liaoning provinces, invite him to speak. He says that when he recently wrote an article praising the late Austrian economist Murray Rothbard, the Communist Party secretary of Shanghai—a fairly high-level apparatchik—told him he liked it.
Could Austrian sympathies be percolating right to the top of Chinese officialdom? Last month, Premier Wen Jiabao called the stimulus a "scientific response" to the crisis and tried to refute the charge that the country "paid an undue price" for it. He sounded like someone forced to defend against internal challengers who had been reading Hayek—or Zhang Weiying.
Mr. Zhang didn't identify with the Austrian school until 2008, when he presented a paper at an economics conference in Chicago and someone told him he sounded like a Hayek acolyte. He says he'd always thought this way.
The 52-year-old was born in rural Shaanxi province in north-central China. In a country where party officials and tiger mothers compete to brainwash youth, he escaped both.
"Rural areas were not so polluted by [party] ideology," he says. "My parents were illiterate," he adds, and once he began his education, they couldn't understand the ideas he brought home from school. "That means they never interfered."
Mr. Zhang has been charting his own way since he was a graduate student in economics in Shaanxi. He wrote a newspaper article in 1983 arguing that money wasn't evil. For that crime, critics from the still-powerful anticapitalist camp tore into him. There was a danger he wouldn't be able to graduate with a degree, but "thankfully, China's political climate changed in a very short time."
In the mid-1980s, under party leader Deng Xiaoping, officials were moving to liberalize the economy. Yet they were sometimes clueless. After decades of a planned economy, says Mr. Zhang, "the price [of everything] was distorted" and the government's solution was to "set up a price research center with a big computer . . . and adjust prices according to this calculation." Of course, "they couldn't get any results."
This gave Mr. Zhang his first break. In his graduate thesis, he considered the possibility of having one price system remain government-controlled and leaving another to the market, with industries moving slowly from the first track to the second. He impressed policy makers with the idea at a 1984 conference, and they adopted it, giving Mr. Zhang a job with the State Commission for Reforming the Economic System. The stint turned him off from policy-making. Bureaucrats rarely "rock the boat," he says. "Making policy is a political process . . . a compromise."
Looking for a world where he didn't have to compromise, he went to Oxford, where he studied for an economics doctorate. On returning to China in 1994, he co-founded the China Center for Economic Research at Peking University, the country's oldest modern institution of higher learning.
Mr. Zhang says he prefers the academic marketplace of ideas rather than policies, but he stands out there too. Unlike the Chinese tribe of reformer-economists who see themselves as technocrats chipping away at statism, Mr. Zhang thinks in stark moral terms. In a speech this year, he invoked Aristotle and Thomas Aquinas to argue that there is such a thing as natural law and that the right to property is "passed prior to sovereignty."
The flip side of this freedom to pursue success is being able to stomach failure, which is where Mr. Zhang's affinity for Hayek ties in. Austrians frown even on central banks trying to manipulate demand because, as Mr. Zhang tells it, "when you make a mistake, you must take responsibility."
"If you suffer today, it's a small suffering. But if you don't have that suffering today," tomorrow "you'll have a big suffering." Letting people know that truth, he says, "is what an economist or scholar should do."
Leaders should do this too, and he talks excitedly about the late 1990s, when the Asian economic crisis spurred the party to privatize state companies, even if it left 20 million unemployed. The crisis had brought Indonesia and others to their knees, says Mr. Zhang, and China's leaders understood at the time that "the lesson was not to have crony capitalism" and a bloated public sector.
Back then, the intellectual tide was going in Mr. Zhang's direction. State-controlled CCTV proclaimed him "Economist of the Year" in 2002, and he remembers that at Peking University "the whole culture was reform-oriented too." He was appointed assistant president of the university that year and later dean of the Guanghua School of Management, where he pushed reform.
The reforms proved successful, but the reformer was crucified. The old guard in the faculty lounges revolted, while accusations impugning Mr. Zhang's loyalty and questioning his credentials swirled over the Internet. He was forced out of his Guanghua post in 2010.
Much of the trouble stemmed from internal campus politics, but he also says that the broader "environment changed." China's universities are a product of a planned economy, so "if the whole country [was] in the good process of reform, people like me won't be treated like that."
What happened? China's leadership team of Hu Jintao and Wen Jiabao, in place since 2002, reversed reforms. Rising inequality was the original excuse for favoring the public sector and, one suspects, high growth soon convinced policy makers to continue on that path. The new mantra in Beijing was "guo jin, min tui"—the state advances, the private sector retreats.
When the financial crisis struck Beijing jumped at the chance to advance the state even further. The poor economic result is now front and center, but Mr. Zhang says the past decade has also seen dramatic social problems that help alter the climate of opinion. The Chinese people have watched bureaucrats distribute resources to state companies and their friends, and popular perceptions of corruption and inequality have grown. Far from a crisis of markets, he says, Beijing is facing a crisis of state.
That is why Mr. Zhang is hopeful for reforms. He proposes restarting privatization, which he says is easier to do now because "some of these companies are listed on exchanges." Overhauling the financial system is next, since state companies use the banks as ATMs and deprive entrepreneurs of formal loans.
Can we expect such a liberalization right after the new crop of leaders is anointed in mid-November? He says that Guangdong Party Secretary Wang Yang, a contender for the top decision-making body, is a "real reformer." But otherwise he admits that Chinese politics is a black box.
Is there a possibility that Beijing will turn to another stimulus to goose GDP? "Certainly things could go worse. But there could also be good opportunity," he says. What he does know is that people's way of thinking has changed. It's just that the "impact is implicit, not explicit" in China's nondemocracy.
Mr. Zhang is optimistic because he thinks 30 years of openness have altered expectations. "We have a lot of trust in" markets today, which is why the last decade's anti-market turn has exasperated people. Mass protests against land grabs and other government bullying now number 180,000 a year, according to government data compiled at Beijing's Tsinghua University. These protests are hard for the party to ignore—and powerfully make the moral case for free markets.
"We human beings always seek happiness," says Mr. Zhang. "Now there are two ways. You make yourself happy by making other people unhappy—I call that the logic of robbery. The other way, you make yourself happy by making other people happy—that's the logic of the market. Which way do you prefer?"
Mr. Bhattacharya is an editorial page writer for The Wall Street Journal Asia.
A version of this article appeared October 13, 2012, on page A11 in the U.S. edition of The Wall Street Journal, with the headline: China's Anti-Keynesian Insurgent.
Mr. Bhattacharya is an editorial page writer for The Wall Street Journal Asia.
A version of this article appeared October 13, 2012, on page A11 in the U.S. edition of The Wall Street Journal, with the headline: China's Anti-Keynesian Insurgent.
