Editor's Note:

China's massive stimulus package in 2008–09 was publicly credited with saving the economy from the recession. Yet the measures have had their strident critics, among them is Xu Xiaonian (Xu), a professor at China Europe International Business School, whose high-profile criticisms of what he sees as erroneous policies go to the very heart of economic theory. Are his criticisms correct? Is China throwing money away? Will China follow the path of Greece? NetEase Finance (NE) interviewed Xu on his opinion of China's economic policies.

Xu Xiaonian

NE: Year-on-year GDP rose by 11.9 percent in the first quarter of 2010. Some believe that China has entered the fast track of economic recovery. Is this right?

Xu: Let us first assume that those numbers are real and the economy is indeed recovering. I believe that the excessive credit supply of last year and the extremely loose monetary policy both resulted in recovery, which I regard as the result of squandering money. Whether the effects of squandering money will last depends on the government's decision on whether to keep throwing money about.

Needless to say, squandering money will definitely stimulate the economy.

However, China's economy has structural problems that cannot be easily solved by palliatives. Too much investment, too little consumption and purely relying on domestic investment and external demand-driven economic growth will no longer support sustainable development.

Chinese President Hu Jintao has repeatedly stressed the need to accelerate the reform of the economic growth model.

But contrary to our fantasies, squandering money did not change the previous growth model, and it has resulted in the structure of the economy deteriorating further. Blood transfusions and oxygen therapy may make a patient feel better, but the illness is not cured. Toxic water may cure your thirst, but it may still kill you.

NE: You claim that macroeconomics is nothing but a pseudoscience. So are our current national macroeconomic policies based purely on pseudoscience?

Xu: There are two important issues in macroeconomics that haven't been discussed so far, and that's why I call it a pseudoscience.

The first issue concerns how macroeconomic volatility occurs and what are the reasons for it.

I regard macroeconomics, especially the policy part, as an implementation of counter-cyclical policies for an ostensible economic cycle that doesn't really exist.

It's just like physical therapy, where you offer a cold bath to a fevered patient and a sauna to a shivering patient. Keynesianism never questions why the patient is sick. It maintains the stability of the economic cycle, regardless of how this cycle is caused.

Let's take the invention of railways as an example to illustrate how new technologies affect the economic cycle. Railways were a major technical innovation of great importance 150 years ago, which massively increased the efficiency of transportation. Everyone then was investing in railways while the speed of economic growth was accelerating.

The government then had no reason to control the development of the railway system.

Government obstruction would obviously impede a wider application of railway technology as well as obstructing social productivity. Faced with such peaks of economic growth, the government would be better off doing nothing, and it would be nonsense to keep stimulating the economy after the peak of growth was over.

Also, can the illness be really cured by such physical therapy? The answer is no. Government policy was not helping to conserve steady economic development in many cases, and it increased the volatility of the economic cycles instead.

Such measures are based on the premise that the government can accurately predict the right point of time, launching the right policy with the right intensity.

If the time and intensity were not appropriate, the wave would be even bigger than before. In many cases the government reluctantly enlarged the wave.

NE: Some people say that if the government suppresses the property market and increases the interest rate, China's economic growth will be reduced. High unemployment rates and business failures will occur. What do you think of these worries?

Xu: This argument is unfounded. Cantonese like the number eight because they believe the number is lucky. I have no idea why decision-makers in the government like the number eight when it comes to growth figures. What is their logic? Where is their evidence?

The key to full employment, as President Hu has said, is to reform the economic growth model. How many jobs are we eventually creating by building railways, highways and airports? I need reliable data and analysis. How many jobs are we eventually creating by investing in the heavy machinery manufacturing industry, the automobile industry and the iron, steel and cement producing industry? These industries are all capital-intensive industries that require a highly automated production process. You must reform the development model to solve the employment problem in China.

After China's economic transition to service-related industries, China's economy may not need a GDP growth rate of 8 percent. Five percent would be sufficient to achieve full employment.

If we consider the problem with an eye to development, reform and the transformation of economic growth, the obsession with 8 percent growth is not justified. We can certainly achieve full employment without a high GDP index.

NE: What is the biggest source of resistance in promoting the next stage of development?

Xu: The source of resistance now is the government itself. The government has become the biggest interest group in the market.

All reforms require the circulation of interests, and the greatest interest group now is the government.

NE: Will China follow Greece into debt crisis?

Xu: It's extremely likely. China is not likely to become another Greece at the moment, but if the problem continue, China certainly will be. We are going to discover hundreds of little Dubais around the country and many local governments will go bankrupt. I assume that many local governments have already gone bankrupt, and the problems should have been revealed earlier.

The central government is very worried about the issue. They believe that under such circumstances cleaning up the mess is of the most priority. However, cleaning-up must result in the rearrangement of vested interests. I think it will not be easy to practice such actions. Keynesianism damaged Greece once and it's going to damage China if we don't act quickly.

NE: What do you think is the most serious problem with Chinese economists?

Xu: The most serious problem among Chinese economists is that they are not really into their fields of research. They are not into using practical problems to study theoretical problems.

The highest ideal of ancient Chinese intellectuals was to pass the examination offered by the authorities. As a result they would be officially appreci-ated by the emperor and be promoted to better positions. However, the demands on intellectuals in modern society are obviously different to the ideals of our ancestors.

Intellectuals in modern society are required to be physically and mentally independent. Our goal is to discover truth and to publicize it. We as econo-mists should have nothing to do with interest groups, governments or ordinary people. We should never fawn on authorities or kiss up to the public.

That is how we should behave. However, many Chinese economists nowadays distort their original convictions and moral principles to meet the need of other people.

We can never reveal the truth if we are not independent. Imagine if Copernicus had gone along with the Catholic church, and we still thought that the sun went round the Earth.