On August 8 Credit Suisse published a study they had commissioned by Professor Wang Xiaolu of the China Reform Foundation. A lot of readers have asked on- and offline me to discuss this study in light of the entry I posted two weeks ago about Chinese consumption – and especially to explain whether this study would cause me to retract any of the things I said.
Before I get into that, I suppose by now everyone has noticed that China is trying to diversify its reserve holdings and is reported to be buying more Japanese yen and Korean won, and perhaps other currencies. In my entry six weeks ago, I argued that the fear that China could disrupt the US Treasury market by dumping dollars was totally unreasonable. The latest news support my argument, I think. First, it is pretty clear from the recent performance of the market that the vigorous attempt to diversify PBoC holdings has had no disruptive affect on the US Treasury market.
It cannot. The world has a problem of too many countries eager to increase their export of savings and too few increasingly reluctant countries importing savings. Too-little foreign financing won’t be an issue for the US Treasury, it is too much foreign financing that the US must worry about. As if to prove the point, the Financial Times had an article Wednesday with the title: “Foreigners flock to buy US Treasuries.” I am pretty sure they will continue “flocking” for many more years.
Second, even the small moves into won and yen are causing consternation in Japan and Korea. For example, Saturday’s Financial Times has this:
Japanese prime minister Naoto Kan on Friday said he was ready to take “decisive” action on the yen, and urged the Bank of Japan to implement “expeditious” monetary policy measures.
…The government is under increasing pressure to stem the rising yen, which threatens the country’s economic recovery. His remarks suggested that the central bank could soon introduce additional easing measures to tackle the waning economy.
I pointed out in my piece six weeks ago that if the PBoC switches from dollars to some other currency, one of two things must happen. Either the recipient country buys dollars to keep its currency from surging, in which case the US gets the money anyway, or the US trade deficit will be transferred to the recipient country, which will cause trade tensions with China. Wednesday’s South China Morning Post already has the Japanese financial authorities threatening intervention because the rising yen is hurting exports — although apparently it is not just PBoC buying that is forcing up the yen.
The second of those two things is happening, in other words, and to prevent it from continuing, Japan will resort to the first. As an aide, it was not that long ago when the japanese were arguing that US attempts to force up the yen were misguided because Japan’s trade surplus had nothing to do with the undervalued currency. Now, apparently, it seems that the value of the currency does matter after all.
Expect a lot more of this. As the US deficit surges as a consequence of the combination of collapsing trade deficits in Europe and expansionary trade-related policies in China, Germany, Japan and other trade surplus countries, surplus countries may implicitly or explicitly try to relieve pressure on the US by forcing deficits onto their neighbors, but no one wants them. In the 1930s this was called beggar-thy-neighbor. I discuss it in an OpEd piece for the Financial Times on Monday.
Chinese income is higher than we thought
But enough on the awfully gloomy subject of trade. To get back to the Credit Suisse study, it is a very interesting attempt to estimate the real size of the Chinese economy, Chinese household income, and Chinese savings and consumption rates by eliminating some of the biases in the NBS surveys. As they explain it:
The purpose is to try to correct the understatement of income in the official household survey by the National Bureau of Statistics (NBS). Basically, the study assumes that while respondents understate their income during the survey of NBS (for reasons like worrying that such information will be passed to tax authorities, etc.), they have no incentive to understate total spending, particularly the percentage of food consumption to total spending (the Engel’s coefficient).
Based on this assumption, the survey employs interviewers’ questions about income, spending and food consumption from the 4,000 plus respondents whom they know personally. The assumption is that as the interviewer knows the respondent personally, the respondent will feel more comfortable and willing to disclose their “true” income.
While I agree that having strangers ask questions about income may introduce biases in people’s response – we’re probably more likely to understate our income, especially if it includes grey or illegal income, when asked by strangers representing the government – I am not sure how comfortable I am with the idea that having friends ask the same questions eliminates biases. Maybe it just creates a different bias – I suspect we are likely to overstate our income when we discuss it with friends.
Still, that aside, the numbers seem plausible, at least to me, but not everyone agrees. According to an article in the the China Daily:
Officials from the National Bureau of Statistics (NBS) said on Wednesday that the figures in the report, which was published by an independent group in July, were unreliable.
“There are many flaws in the report, such as how the samples were chosen and calculations made, and the final result is significantly higher (than the actual level),” said Shi Faqi, an official with the NBS, in an article on the bureau’s website.
At any rate according to the study there is enough hidden and grey income in China, more than estimated by the NBS, that China’s real GDP might be understated by 10% relative to official numbers. In 2008, China’s official GDP was RMB 31.4 trillion. According to Wang it really was RMB 34.6 trillion.
Chinese household income, the study claims, has also been understated and, with it, Chinese household consumption. The study argues that Chinese household income was about 30% higher than the estimates of the NBS.
The response of most analysts and the press to the report was a little puzzling to me. Professor Wang’s study, many people seemed to argue, proved that either China didn’t have an under-consumption problem, or else it proved that the problem was much less serious than the worriers had claimed because both consumption and income may be higher than we think. A more sophisticated variant was the claim that the study proved that China had much greater potential for consumption growth than previously imagined.
Under-consumption is easy to prove
The first two statements are simply wrong. They confuse absolute consumption with relative consumption. To say that the Chinese under-consume does not mean not that Chinese households have failed to consume at a certain nominal level. It means that the consumption share of total production is very low. In that sense China most certainly has a serious under-consumption problem, and Professor Wang’s study actually suggests that it is worse than any of us has imagined.
The third statement is probably true, but only to the extent that the worse the under-consumption problem, the more potential there is for consumption growth. This may be arithmetically correct, but it also suggests that unlocking that consumer potential is likely to be harder than expected.
How do we know that China has an under-consumption problem? To answer that question it is unnecessary even to look at the consumption statistics. All you need to know is that China has a very high investment rate (perhaps the highest in the world) and a huge trade surplus.
Every country produces goods and either consumes or invests those goods. This is not quite an accounting identity, but it becomes one if you take into account the trade balance. Why? Because if it produces more than it consumes or invests, it must run a trade surplus. If it produces less, it must run a trade deficit. In other words by definition what ever you produce is equal to what you invest plus what you consume plus or minus the trade balance.
China has an extremely high investment rate, perhaps the highest ever recorded for a medium or large economy. Countries with high investment rates should normally run trade deficits, since there is so little left over of their production for them to consume that they must import the balance. This is what happened, for example, to the US during most of the 19th Century.
But China has probably the highest trade surplus ever recorded. This means that an extraordinarily large portion of its production is invested, and another extraordinarily large portion is exported. So what about consumption? The only way a country can run an extraordinarily high investment rate and an extraordinarily high trade surplus is if consumption is extraordinarily low.
So almsot by definition we know that consumption in China is extraordinarily low as a share of its total production. It is unnecessary to check consumption statistics to prove this.
In fact official statistics do prove it. They show that Chinese households consumed a little less than 36% of total GDP last year. This is an unprecedented number, much lower than the 65-70% typical of the US and Europe and even far below the 50-55% typical of other low-consuming Asian countries.
More income inequality
But Professor Wang’s study suggested something very worrying. He claims that nearly two-thirds of the missing income belongs to the wealthiest 10%. Most of the rest went to households in the top half of the income scale. Poor people in China were far less likely to have hidden, grey, or illegal income.
So, according to Professor Wang, Chinese household income is distributed far more unequally than any of us had suspected. This is worrying enough for reasons of social equity, but what does it have to do with consumption?
A lot. It turns out, not surprisingly, that the rich consume a much smaller share of their income than do the poor. For example, according to Professor Wang’s numbers, households that earn more than RMB 400 thousand save 63% of their income, while households that earn RMB 75-400 thousand save 51%. At the other extreme households that earn RMB 7-10 thousand save only 9% of their income and households that earn less than that dis-save (by 23%)
So while Chinese household income might be significantly higher than we thought, most of that additional income goes to the high-savings rich. The Chinese savings rate, consequently, is also much higher and the Chinese consumption rate much lower than the official numbers suggest.
How low? Here the number is a shocker. Credit Suisse estimates that last year Chinese household consumption was just over 31 percent of GDP – although I am not sure even they completely believe this number. Still, it suggests that the real consumption rate may be between 31% (their number) and 36% (the official number). Either number is completely off the charts.
So isn’t this good news for consumption as far as its implications foe the economic imbalances? Consumption is so low that it has no choice but to surge, right? Perhaps, but I am very uncomfortable with this argument. It seems to me that the only way consumption can be so low is if there are some very severe structural impediments that distort consumption growth, and I think there is no reason simply to assume or hope that these impediments will dissolve and, as they do, consumption will explode. Rather than proclaim that Professor Wang’s adjusted consumption rate is more evidence that consumption must surge, it seems more reasonable to wonder how any country can have such a massive imbalance. And how can Beijing unwind this imbalance?
Interesting post, Michael. Just interested in what you think about the concerns regarding the US entering into a “double-dip” recession?
The Chinese won’t get serious about increasing consumption until the US shows it’s serious about decoupling from China. The US should rattle their cage.
Here’s a quick list of measures that wouldn’t require Congressional action. They get bonus reciprocity points, since they’re the kind of thing the Chinese do to foreigners every day:
1. Get Customs agents to strictly enforce a presumption that Chinese goods are counterfeit until shown otherwise. Let the goods pile up in the ports.
2. Tighten environmental standards at US ports and for incoming ships. Yes, increase the cost of trade.
3. Prohibit funds from NIH/NSF/DOE and other federal funds from subsidizing the tuition of the hundred thousand or so Chinese citizens studying in the US. Those funds can be better spent on US and other foreign nationals. See the number of Chinese students in the US go from 100k to <10k.
4. Start registering government holders of US treasuries. Just to get the Chinese to worry about the safety of their US treasury holdings.
5. Work with our European and Asian allies to significantly broaden our export control regulations, and increase enforcement targeted at China.
Creative types can come up with a thousand other non-tariff barriers that can be very effective at reducing commercial ties with China even without Congressional action. All it would take is real will. Get Congress involved to and the possibilities are endless.
We'll get only cosmetic change, a la the yuan so-called flexibility moves, until the Chinese cage gets rattled.
My previous comment suggested there are 100k Chinese students in the US. The correct statement would have been that there are 100k Chinese students coming in each year.
Prof. Pettis,
Excellent analysis. I think you are quite correct. The savings pattern you describe fits my perception pretty well. For years I have observed Chinese with lower incomes, poorer people and the young educated, scrimp to save. On the other end, I have assisted well off Chinese invest hundreds of thousands of dollars, sadly, in U.S. securities. One woman, more than ten years ago, said she had three flats in Shanghai and a house in Vancouver, a car she didn’t know how to drive so exporting her money was the only thing she could do.
I suspect visible consumption maybe a bit risky, in the long run, so high savings amongst the wealthy is a product of fear of being noticed and getting to a point where a culturally frugal people just don’t have anything else to buy.
If you think you need to hide it, you don’t spend it.
China doesn’t just export to the US. It exported to the world. In the past, it disproportionately converted the revenue from exporting to the world into US dollar. Other surplus countries have also done the same and accumulated dollar. In other words, everyone’s trade surplus turn into US dollar even though a lot of the trade surplus didn’t go to the US. It raised the value of dollar and at the same time depressed the value of other trade deficit nations.
Note that many have argue there is no choice for China to buy dollar. This is completely wrong. It does have a choice. It could have held different currencies in proportion to its trade with different nations.
This is mob mentality played out amongst central bankers. It is a good thing that China diversify away from dollar. I think it should buy more euro and pound besided yen and won. Other central banks should do the same. Value of different currencies need to be more accurately reflect current account balance.
Stepping back, there is a lot of benefit for the US given dollar’s global reserve currency’s status. How great is it to be able to borrow in dollar and own the dollar printing press! However, there is no free lunch. There is a cost. A global reserve currency based on one country has and will alway distort global trade. The US global competitiveness is hurted by the dollar’s global reserve currency status.
Why would anyone think there is free lunch for the global reserve currency?
Nicely put, Dr. Pettis.
And a phrase like “global trade war” in your Op-Ed title might even garner some attention!
What is dismaying to me is the lack of coverage of the trade imbalance situation here in the US. But at least your site allows a few of us to find well reasoned & balanced analysis somewhere on the web. Thanks for that.
I think the scenario you foresee is quite probable. But recent history seems to indicate that China will use every tool at it’s disposal to block trade re-balancing. At a diplomatic level, do you think a threat to dump US Securities would have any credibility? The probability of this nuclear option seems remote, and even beneficial to the US, but what other tools do they have? I’m trying to understand the time-frame for predicted events.
As trade tensions grow to political tensions, how do you see this translating into actions on both sides? Will nationalism cause irrational acts? Up to and including the military level? I know this is venturing far from economics, but your opinion would be greatly valued.
Ah, pondering the unknown unknowns…
Why did anyone think this was good news on trade and consumption? The only thing is suggests to me is that, perhaps, redistributive social insurance would have a bigger impact than the official figures would have suggested.
The US was China’s top trading partner in 2009. However, US imports from China dropped 11% (approx) between 2008 and 2009. China’s exports dropped over 16% overall from 2008 to 2009 (these statistics from the US-China Business Council).
I assume that the 1st half of 2010 say some modest improvements (from the Chinese POV) in exports to the US and the rest of the world. However, we appear to be entering the second phase of the recession in the US (and perhaps the world) with the Kenysian economic arsenal of the US and Europe essentially exhausted and with the political landscape in the US (at least) becoming more volatile and, I believe, more inward looking.
My expectation is that demands to limit imports for political reasons will increase. Also, I think that the US economy will, regardless, be less able to consume imports from China (or anywhere) as much of the money for consumption of the last 18 months came from the “stimulus” money that is quickly running out (and cannot feasibly be replaced).
Another big source of money for consumption was “non-payment” of home mortgages. At some point, these homes will be forclosed upon, or abandoned, and people will, once again, have to pay for shelter, reducing money for consumption.
A third large source of money for consumption was the extension (repeated) of unemployment benefits. This source of money also appears to finally be reaching it limit.
Similar, if perhaps, less drastic, processes are ongoing throughout the Western world.
China is facing a drastic and wrenching decrease in its ability to sell to the rest of the world because its customers will become less interested in, and less able to, purchase its products in the near future.
Can China adapt? Will China’s imbalances threaten its banking system first and its political stability soon afterwards?
This is not to say that the US does not face tremendous challenges. But, while it is painful to go from a extremely high standard of living funded by out-of-control borrowing to a more frugal lifestyle that is within our means, it is possible. In fact, our cash flow actuals improves, relative to your obligations, as we spend less (with the exception of those people whose livelyhood is associated with handling and selling imported goods). In fact, as American wages fall as a result of the (I believe) highest real unemployment (as opposed to “official” unemployment) of the last 80 years (possibly in our nation’s history), some manufacturing may return to the US, further reducing our desire for imports.
The burden of the debt taken on by Chinese to produce goods for export, on the other hand, will increase greatly as their customers quit buying. I believe that the Chinese face the harder road. Perhaps I am wrong.
Michael,
I can’t help but agree with the prognosis on trade imbalances. China and Germany especially as they have effectively pegged their currency to other deficit countries (China to the US and Germany to the rest of the EU). I am sure that China is watching Japan’s situation, as the yen soars, and will be very interested in the employment effects. Japan has no tools left. Interest rates are 0. The deficit is 200% of GDP. They cannot intervene in the yen in a big enough way. And then, the Chinese pile on by switching some investments out of treasuries into Japanese debt.
What I think will happen next in the US/China bilateral is a lot of saber rattling. The US will ramp up the rhetoric in Congress. China will open the RMB floodgate just a trickle to try to appease. All this with a lot of high and mighty talk about free trade and how the US is being protectionist (yawn). We will then go down a path where the US and China bob and weave like two sparring partners. Just like the when they let the yuan go to 6.79; now it is back to 6.80. This was a little bone to appease the US to avoid the unfavorable Congressional report. They’ll continue to make little concessions to appease Congress’ bluster.
Hi Dr. Pettis,
Do you believe that the “severe structural impediments” resulting in low consumption are those policies (as mentioned in your previous posts) that allocate savings disproportionately towards companies rather than households?
I’m wondering if as a rule it would be generally safe to assume that if Savings are high yet Consumption is low, then it must reflect policies that favor a distribution of Savings to companies over households.
CS report can be find here: http://financialcourier.blogspot.com/2010/08/analysing-chinese-grey-income-new-study.html
Michael,
I think your timing with the FT piece may prove to have been spot on. This might be one of the closest things to a real-time measure of trade in the U.S. (from the Association of American Railroads latest weekly rail traffic release): “AAR Reports Weekly Rail Intermodal Volume Sets New 2010 Record- up 22.4 percent from the same week in 2009, and up 2.6 percent compared with 2008.” Intermodal traffic is mainly containers and most imports arrive in containers. So intermodal traffic is up 2.6% from 2008, while all other traffic is still down 11% from 2008.
http://www.aar.org/newsandevents/freightrailtraffic/2010-08-26-railtraffic.aspx
If you look at the charts at Railfax, you can see how intermodal traffic tracked the steep fall in imports in 2009, and how they are now rising more steeply than in the summers of 2005-8.
http://railfax.transmatch.com/
Calculated Risk had a post yesterday where he pointed to both cyclical and seasonal reasons for a rise in the unemployment rate here.
http://www.calculatedriskblog.com/2010/08/employment-report-preview-will.html
Meanwhile, the Obama administration is trying to explain how we went from the “Summer of Recovery” to fears of a double-dip in a matter of weeks. And let’s face it, the main reason the increase in spending here in Q2 didn’t translate into a proportional increase in jobs is a new wave of imports. Blaming the Chinese as a strategy will have the benefit of being at least partly true.
This is only speculative on my part, so please correct me as necessary. It seems to me that the investment focus on export has generated a “stunted” middle class – not truly an entrepreneurial group looking to exploit local conditions, but reliant on government policies and global capital flows.
IMHO, the types of shifts that the interior of China needs must be undertaken in a decentralized fashion in order to be successful. The immense size of the problem in terms of population points to requiring a huge shift of smaller entrepreneurial activities focused on solving internal issues. The degree of risk taking required in such ventures are too high for government-driven activities. Attempts to drive this to the local government/party level in the absence of self-correcting mechanisms (market outcomes, bankruptcies) creates conditions for corruption and mis-investment.
In the absence of an entrepreneurial class, focused on exploiting internal opportunities with the necessary business infrastructure (regional banks, business law, etc.), internal China will be unable to solve their own problems, they will instead end up with centrally-designed solutions: new cities, large infrastructure projects and services provided by global, not local, entities. The middle-class will focus their attention and investment on the east and externally. The interior of China will be chronically under-served.
You could almost call this forced under-consumption.
Consumption is not always recognized as such. For example, China spends oodles of money on public transportation, which counts as investment not consumption. That is okay if the Government then charges market price with built in ROC. But it doesn’t. There is a large subsidy on the operation, and little attempt to recoup the investment. The subsidy on the operation and complete loss of investment (in the financial sense) on public transportation are really consumption. And it also redistributes income the right way. By the same token, if highway buildings are not funded through taxes on the motorists — the spending that counts as capital investment really understates consumption.
Do people ever even wonder how others in the world survive on 1 or 2 dollars a day and how could anyone believe numbers like that with a straight face? In economies that don’t set every price through market counting consumption is far from easy!
Most interestingly, that’s exactly what I expected of a country without effective human rights and effective law in general.
It’s no wonder if you think about a 1.3 billion people economy with non-democratic structures. A lot of people nowadays argue that local governments are useless. I argue: Sub-federal, directly responsible governments controlled by the locals are absolutely essential. No central governments can avoid corruption and keep an oversight at small scales without responsibly acting agents.
HZ
I think the whole point of Pettis’ investment/trade surplus discussion was to show how pointless is the whole caviling about whether the consumption data does or does not understate consumption. China definitely under consumes at a serious level, and if you disagree, you need to explain how both investment and the trade surplus can be so high. To me what is interesting about the Credit Suisse data is while many (including Credit Suisse) have argued that Pettis’ claims on consumption were exaggerated because the data undercounts consumption, the Credit Suisse study shows that the data may actually over count the consumption level, something which Pettis has suggested more than once. I would also say that in your subway example, the government does not pay for it. Households pay for it through hidden and direct taxes.
Scary. Wonder whether the central government/Party will be able and willing to squash all those rich Chinese and redistribute their wealth.
The impression I have is that many if not most of those rich Chinese got that way largely through corrupt dealings with government.
If those dealings were with local governments rather than the central Chinese Communist Party, the CCP may at some point turn on them, first by cutting off their gravy train and then perhaps by forcing them to rent out their stockpiled empty luxury apartments at low rents to poorer Chinese families, or forcing them to sell to the CCP itself for a low price (free, even?), so it could give or rent them to poorer Chinese families.
Sadly, in a way, that can’t happen here in the USA, where it looks like we too have a wealth-distribution problem that is probably limiting the size of our economy. I like the rule of law, but sometimes it can get in the way
TRChan,
. While in China people most definitely consume houses! (They get pulled down and rebuilt all the time).
It is because what you call investments are not necessarily so. For example building houses are normally considered ‘Residential Investments’, while making jewelery is considered “consumption”. Let’s view this in the Chinese context. Since many Chinese buy second/third homes for keep instead of renting to others, what make these investments instead of consumptions? Typically housing consumption is counted through the so-called “owner equivalent rent” in a non-rental society like China, but that would seriously undercount the true consumption of housing, considering how much faster buildings depreciate in China and how many housing units are unoccupied. In the meantime the jewelery is counted as “consumption” even though there is little depreciation of material in terms of precious metal (or stones) simply because there is a readily established price. Do anyone really consume jewelries? (They are rather indigestible, to say the least
I am saying that national statistics is not necessarily telling you what you need to know. Investments and consumptions are constructs used by economists that may or may not correspond to reality. The most you could say is that they have a very different consumption pattern from the West.
Aloha Professor Pettis,
My view is that China wants to become the largest economy in the world, and to that end they will continue to institute supply-side economics to the extreme and households will continue to subsidize investment and exports.
They will push supply-side economics until they reach their goal. and in its wake will be an economy very internally weak, very unequal and very unbalanced.
At some point as the Chinese economy gets bigger, their own households must take up a larger share of the global consumption of goods as comparative advantages begin to appear in other parts of the world. and They simply won´t be able to be consumers at that level.
The end result will be a world without sufficient consumers, as the US is on a long grinding road of lowering household consumption levels.
The economies of the world are in a supply-side competition for growth. This is unsustainable and will eventually lead to a change in ideology: an ideology of taxing the rich, taxing capital gains, supporting labor unions, increasing social programs, raising minimum wages, instituting consumer protections and the like in order to strengthen lower to middle household consumption. But as you say, this will be hard for businesses to accept.
My view is that any market where marginal social benefit equals marginal social cost is the best one. The Chinese economy is not reaching marginal social benefits, but rather, marginal capitalist benefits (to coin a new term). This is not optimal for society in the long run.
Silly Things’
This is the problem. Where Asia’s economies are already export dependent. Where the developibng world disproportionately depends on exports for their development. Where there has been widespread use of competitve devaluations *the 1994 RMB 60% devaluation to combat the domestic banking crisis, which seemingly hasn’t relented or wasn’t effectively countered as the currency hasn’t risen, or similar competitve devaluations throughout recent or long-term history. This is where we have a problem. It might be in China’s interest to spread its bond purchases to other countries, it might even be in the US’s interest for such a thing to happen, at least theoretically, although, the receiving countries, those whose bonds China purchases, will most likely park the proceeds in US Bionds, as China hasw done during this currency devaluation/financial repression/advanced ca[pital investment/infrastructural goprwth phase coupled to export rebates/import tariff and quotas regime while recent growth has been predicated on fuirther exacerbation of these highly unstablwe malinvestments. Anyway such buirden shifting on other regional and global economies, especially on weaker, less able to counteract developing world economies who are mostly export dependent themselves is not China shifting away from dependence on the USD even if domestic rhetoric posits it as such. Essentially causing other nations to carry mopre of the burden, while not diminishing that burden on the US, as all will most likely, as uit passes through to eventually park in US Treasuries. Regardless, this will only work to raise the ire of other nations, less used too, or more cognizant of the burden. Eventually raising the ire of more partners. Perhaps, AChina should just purchase more imports, or value the contributions of foreign Intellectual Property. I know this is difficult in an institutionally weak country such as China.
Finally, I think yiou should realize the US juast prints money argument to be specious. All countries print more money. With countries such as china printing much more, more quickly, with higher growth rates by official estimates, regardless as to whether most of that growth, and much of sustained GDP has come on the back of increasing lonas and a fiscal stimulus that was actually spent. As to the gentleman who thought that US Fiscal Stimulus has already hit the US economy, and has beenspent, wrong, that fiscal stimulus has been spread accross budgets from 2009 to 2019, which points to how difficult it is to quickly spend and deploy such amounts quickly, and more importantly, efficiently, even in an economy as large as the US with strong instituional strucutures. Something to think about. when consideration the con struction of GDP, even whether it could or should be a model employed elsewhere.
I think it is called debt bubble. How are they going to consume is the question? Are they going to buy Rolls Royce and move it to China? They have a non-convertable currency that floats around the country, is created out of thin air by banks and takes advantage of a massive and largely unemployed labor market. Thus you have this 2 sided economy, a group that has access to imported goods, while the rest at best have access to imported commodities. The missing key is credit, which is the true creator of trade surpluses and deficits. Then I see mentioned households with 7 to 10,000 RMB in income ($1000 to $1400 annually roughly). They pay that in rent monthly for section 8 housing here. Sure those people consume. You have to eat don’t you?
Mr Pettis — If I understand you correctly, folks with higher income are not consuming as much in fear of being noticed as flaunting their wealth or guilty of being wealthy. I am assuming this “being noticed” is by both the rest of the populace as well as the governing body. Do you believe this is fear is rational? Do you believe if the governing body changes there stance to showcase the wealth creation, that this could create a backlash revolt of the lesser income folks, thus destabilizing the centrally planned economy? To me this seems to be a more political issue then a genuine economic issue. Maybe this is the price that we all pay for an economy to be centrally managed to try to benefit the populace. In the end the only ones that benefit are the managers, and the populace is left to eat cake. But they at least feel the love of the governed.
Prof. Pettis:
Somewhat OT, but reportedly the Chinese have been buying up yen and won, driving up their FX rates against the U.S.$. Yet it’s generally considered that the RMB is in the first mover position with respect to a whole slew of undervalued East Asian currencies. Could this be preparatory for another incremental RMB appreciation against U.S.$, since by buying yen and won, the Chinese would be off-setting some of the capital loss on their $ reserves by pawning them off on the Japanese and Koreans prior to appreciation? (Because Japan and S. Korea run surpluses with China, i.e. supply a lot of the high-value components for Chinese exports, and why otherwise would China want to raise their import costs?)
Michael,
Would you mind commenting on the reports that PBOC Governor Zhou may have defected to the U.S.? See http://www.stratfor.com/memberships/170254/analysis/20100830_china_more_unconfirmed_rumors_zhous_defection
What would it mean if it’s true, and if it’s not true, who would be spreading these rumors and why?
Correcting my last post, (hopefully you can delete it)
I meant “expenses are MORE than the revenues”:
“In economies that don’t set every price through market counting consumption is far from easy!”
H.Z. has a very good point. I am really looking forward to the good professor’s illumination on this. I wouldn’t mind working at NBS for a year to learn how the GDP numbers are really put together.
Take Beijing as an example, all the municipal bus companies are city-owned, so the expenses of running all the bus routes every 10 minutes are MORE than the revenues from the fares collected. Are the expenses instead of the revenues counted toward the private consumption part of GDP? Or do the deficits sustained by the bus companies go under government expenses?
Interesting commentary, thanks. I know a lot of wealthy Chinese tend to have houses outside of China and travel internationally quite frequently. They also usually have friends who live abroad who are happy to bring stuff for them or ship it to them. Is their consumption outside of China even worth measuring or is it totally immaterial relative to the size of the underconsumption problem? Consumption outside of China has multiple benefits: avoids import taxes, allows “grey” or outright illegal income to be laundered / converted into goods without less possibility of anyone noticing, avoids neighbors / friends / the government from noticing the conspicuous consumption…
Mr Pettis
Ironic as it may seem, grey and illegal income does tend to “gravitate” to the high earners, simply because access to opportunity to earn that kind of money often comes with position and status that often accompanies wealth, an unvirtuous cycle if one had a sense of humour.
No surprise that the rich are spending a smaller portion of their income either: first of all, basic consumption (expenditure) will necessarily seem small in comparison to the income figures. Just as importantly, conspicuous consumption and the inability to explain how you managed to acquire the means to consume at a rate that your “official’ income doe not entail has been a classic trap and invites nothing but trouble such as the scrutiny of departments you would rather not have to answer the questions of.
Well, playing devil’s advocate, maybe there is the potential for consumption growth, after all, there is all that “hidden” wealth, just have to figure out how, which again might be one of those questions no one wants to answer.
The reason the consumption rate is so low is that a tremendous amount of the “investment” is simply the trade surplus being funneled through the central bank and the state-owned banks, as well as state owned industries.
Unlike in the US, where Bernanke is stymied by private banks who will not necessarily lend just because he create reserves, much of the Chinese banking and industrial sector is going to be lent and invested because the government has direct ownership and influence over investment policy. This seems to be true at the local level as well, because everything I’ve read indicates that the local bureacracy is intimately tied to the federal bureacracy by the fact that they’re both CP officials competing for favors.
This also works for the abnormally high “savings” rate, which is generally computed as the residual from GDP. Just be aware that it isn’t the average Chinese citizen doing the savings, but rather the “investment” moving in the natural circular flow of income and coming back into the banking system.
I would suspect, (without knowing the detail – detailed Chinese GDP data is hard to get and impossible to reconcile with traditional GDP accounts), that nearly all the “savings” come from state and heavy industries as well as the very rich real estate tycoons. It seems Professor Wang’s findings agree.
FYI
http://www.businessweek.com/globalbiz/content/aug2010/gb20100831_989060.htm
How is it that the undervalued Yuan doesn’t afftect the bilateral balance between US and China and that suddenly if the Japanese support the dollar their bilateral trade with the US would be adversely affected. Oh I get it if currency effects go agianst Chiina no effect but if currency effect go for China, China benefits. This sounds you are an arm of the corrupt Chinese, but I understand you must make concessions to remain on their good terms. THis trade deal is likely to end ugly. A rightest American is likley to back Tawain make sure that that the Chinese communists are being duly elected.
A drop in the bucket, but I suspect there’s more to come:
http://finance.yahoo.com/news/China-imposes-antisubsidy-apf-3003233079.html
Concerning Japan:
1) The export sector must litterally go under (i.e be moved to the US etc.)
2) The domestic sector must rise up (services, real estate)
This will happen as money is being taken home, pushing the JPY up.
Eventually the JPY will “crash”, but first the export sewctor must “crash”. Tough times ahead, but the world needs rebalancing.
Hi,
do you think recent surge in CHF crosses are because of PCB buying CHF?
It is very difficult for oriental countries such as Japan,China,Koriea,Taiwan,–etc,to promote consumption that is so important for this moment to rebalance global ecomony. That must somthing have to do with culture backgrounds which affect the human behaviors and decision how to deploy ones weathy.For a long long time ago,The oriental countries suffered from many man-made dizasters and nature uncertainties that enable people to keep their weathy in need.
If consumption is underestimated (not captured in the official GDP data), than the real size of the economy should be bigger than what is reported. By that logic, consumption as a percentage of GDP should be higher while everything else would have to be relatively smaller.