After China’s Gilded Age, A Different Progressive Era

Much of the commentary on Credit Suisse’s recent research note on China in 2015 has latched onto the comparison it draws between China’s economic development over the past 30 years and that of late 19th century America, the Gilded Age: massive and fast industrialization and rising incomes and income inequality with their attendant social problems. Scratch deeper and you will also find parallels in corruption, food and product safety and the emergence of large powerful industrial groups.

The policy lessons are dependent, of course, on what comes next. In the U.S., the laissez-faire of the Gilded Age gave way to the regulating Progressive Era in which government involvement in business and wealth redistribution increased markedly. As the FT’s Lex notes, America’s public finances deteriorated equally markedly, never to recover.

China already has close government involvement in business and closing the wealth gap between rural poor and urban rich was a priority for the Hu-Wen leadership as it will be for its successors. Corruption is, as always, being tackled. China’s equivalent of the robber barrons, or at least the least-well connected ones, are being brought to book; the state-owned combines, if not exactly being trustbust, are at least being reined in. Maybe China is just concatenating its versions of what were two distinct eras in the U.S. Or maybe one can only take historical analogies so far.

Beijing’s policy priority is restructuring the economy so the country can pass through the Great Wall, the per capita income levels at which fast-growing emerging economies tend to stop growing without institutional change. That has social implications, especially income redistribution and the provision of more social services, which are front and center of the new 5-year plan, and some political risks to the Party in a growing middle class that expects the provision of both. But it is largely economic driven in its policy dimensions.

In short, if Credit Suisse’s analysts are right, China’s Gilded Age is being followed by an economic Progressive Era rather than the socially-cast one that the U.S. created. Thus the risks to China are largely economic. What Credit Suisse’s analysts say could go wrong is that:

1) the key coastal provinces in China are unable to achieve the productivity gain or generate enough domestic demand after the migration of low-end labour intensive industries to inland provinces;

2) government(s) at different levels are unable to adjust to their new role, [i.e. to spend more money in providing social services and less in infrastructure and industrial investment,] and change the pattern of government financing in face of new demand; and

3) monetary policy and the financial sectors are unable to ensure monetary and price stability.

One popped property bubble and China’s public finances could look as ugly as any in the West.

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