I am often asked, especially by my Peking University students, to list what I think is the sequence of steps China will take to address its economic imbalances. Remember that rebalancing, in the Chinese context, has a very specific definition. It means raising the consumption share of GDP. This is just a way of saying that consumption growth must outpace GDP growth, and over the next few years it inevitably will, if the rest of the world is unable to absorb a rising Chinese trade surplus.
But there are many ways this can happen. The good way is by a surge in consumption growth that allows GDP growth to remain strong. The bad way is for consumption growth to slow, and for GDP growth to slow much more rapidly.
So how will China rebalance? Unfortunately there is no obvious answer. I always tell my students that even if I were smart enough to know the optimal sequence, it would nonetheless be very difficult to make any reasonable prediction since the sequence is not likely to be subject to economic analysis. This is as much or more a political issue as it is economic, for at least two reasons:
- The rebalancing process will cause short-term pain and perhaps a rise in unemployment. Postponing it will make both of those problems worse when the adjustment finally takes place. China has to choose when is the best time to begin that process, and this depends on a lot of social and political factors. Most obviously, the 2012 succession process is a key variable.
- Because rebalancing mainly means increasing the household income share of national income and, with it, the household consumption share, it implicitly means redistributing income from businesses and governments to households, and exactly which businesses, governments, and households depend on which adjustment mechanism. There are several ways to rebalance, each with different implications for social policy, making it an issue that must be determined not by economists but by political leaders.
I want especially to address this second point. In previous pieces I have discussed four main ways of boosting the household income share of national income. Over the rest of this entry I will try to set out the very different sets of winners and losers under each policy, and suggest how different policies and sets of policies might change the underlying economy.
China can raise the value of the renminbi. An undervalued currency affects the domestic and trade imbalances by shifting income from households (who are net importers) to net exporters. This automatically increases the gap between what is domestically produced and what is domestically consumed, and so expands the trade surplus. By increasing savings (savings is equal to production minus consumption), an undervalued exchange rate increases the excess of savings over investment, which is by definition equal to the current account surplus.
By revaluing the currency, Beijing reverses this transfer and helps rebalance the economy. So who benefits?
Clearly households in the aggregate, as consumers, benefit because the reduction in import prices implies a real increase in their income. The greater the import component as a share of income, the greater the real increase in income. My guess is that middle and lower middle classes benefit most since the very poor (especially the rural poor) are likely to have a relatively low import component in their consumption, and the rich consume a very low share of their total income.
A second group of winners includes companies that sell imported goods (for example large retailers) and companies that otherwise benefit from an increase in domestic consumption but who don’t have an important export market. This includes most importantly the labor-intensive service industries.
The losers are, first and most obviously, the export sector, who will see a rise in their costs relative to their revenues, and second, if these rising costs lead to bankruptcies, households to the extent that they are employees of the export companies. Part of the rise in unemployment in the export sector will be mitigated as new workers will in fact be employed by the winning industries, but a rapid rise in the currency could cause unemployment in the export sector to rise faster than employment in the other sectors, and so any change in household income could itself be constrained or even negative.
This, of course, is the big problem China faces. By now nearly everyone recognizes that raising the value of the renminbi is a necessary part of the process of raising the real value of household income and improving the balance between producers and consumers, but if the currency rises too quickly and so leads to rising unemployment, it will actually cause household income (and with it household consumption) to decline as unemployment rises. The imbalance will still improve, but it will improve in the “wrong” way, in the form of production declining faster than consumption.
Finally any entity that is long dollars and short renminbi will lose. The most obvious example is the PBoC, which loses greatly from revaluation. Investors who have stockpiled significant amounts of commodities funded by renminbi borrowing will also lose.
China can raise interest rates. Artificially low interest rates are, in my opinion, the single biggest cause of the imbalance in China. Very low interest rates shift income from net savers (mainly the household sector) to net borrowers (manufacturers, local, provincial and central governments, real estate developers, infrastructure investors). As with an undervalued currency this increases the gap between production and consumption or, put another way, the gap between savings and investment, and so forces up the current account surplus.
If Beijing raises interest rates the winners are clearly households, who are net savers, and the higher their savings rate the more they benefit. The rich save the most, but they have much better ways of saving than in bank deposits, and more importantly they own the assets (such as real estate and real estate developers) that benefit heavily from low borrowing costs, so I suspect that the rich benefit but nearly as much as one might expect. My guess is that the upper middle and middle classes will benefit the most.
Raising interest rates will also benefit retail industries, small and medium enterprises (SMEs) and especially service industries, since higher household income will increase consumption.
The losers are fairly obvious: capital intensive industries that borrow heavily from the banks, local and provincial governments, real estate developers, and infrastructure investors – all the sectors in which we are seeing serious overcapacity and toxic investment. Banks too are big losers because NPLs will almost certainly rise if lending rates do. Finally the PBoC loses because the cost of its funding will rise relative to the return on its assets.
Of course the same caveat applies as above: if interest rates rise too quickly so that bankruptcies and unemployment in the capital intensive sector rise faster than employment in retailers and SMEs, the resulting rebalancing will occur anyway, but in the most painful way possible: household income will rise very slowly or even decline while investment rises more slowly or declines more quickly. The longer Beijing waits to raise interest rates the worse the capital misallocation will become but, paradoxically, the harder it will be to raise them. High debt needs low interest rates to make them manageable,
China can raise wages. The key here is not the absolute wage level but rather the differential between wage growth and productivity growth. If productivity grows faster than wages, as it has especially in the past decade, the share of production that workers keep in the form of wages necessarily declines, and household income as a share of GDP declines with it. Of course consumption then grows more slowly than production and the trade surplus soars.
If wages rise faster than productivity, or at least the gap between the two is narrowed, workers benefit by increasing their share of national income. In the aggregate households benefit and probably most of the benefit accrues to the lower middle and urban working classes. Of course businesses that benefit from increased household spending also benefit, but perhaps not as much if they are heavily labor intensive.
Needless to say employers in the aggregate are the big losers. If too-rapidly rising wages lead to rising unemployment, the rebalancing, once again, takes place under very difficult conditions, with rising wages being more than offset by rising unemployment. Of course in a flexible market rising unemployment should itself put downward pressure on wages, so administrative policies and wage stickiness are important factors here.
China can privatize and distribute ownership of state-owned assets. The quickest way to give a big one-off boost to household income is to transfer ownership of state assets to the household sector. The winners are the household sector, but of course the distribution of the gains depend on how the transfer takes place. If companies are privatized in a very politicized way and the proceeds used, for example, to clean up the banks, the rich will probably benefit most. If the assets are simply transferred to the pension funds, the middle and lower middle class, and urban workers, will benefit the most.
The losers are government entities and individuals that benefitted most from control of the assets. This makes this option politically very difficult.
Winners and losers
To summarize very simply, the table below lists the options:
| Action | Winners | Losers |
| Raise the renminbi |
|
|
| Raise interest rates |
|
|
| Raise wages |
|
|
| Transfer state assets |
|
|
As the table implies, the discussion about the timing and sequencing of the necessary adjustment policies depends heavily on political considerations and on the relative ability of the expected losers and winners to influence the outcome. That is why I always argue that this is a political discussion more than an economic discussion.
The trick for any of the first three adjustment measures (which are the necessary ones for a sustainable adjustment) is to adjust just fast enough so that the employment created by the rise in household consumption offsets the unemployment created by financial distress among the relevant losers. This is easy to say, of course, but not so easy to do because the negative employment effects are likely to be quicker than the positive employment effects. If any of these adjustments take place too quickly, the net impact on household income (and thus household consumption) can actually be negative in the short term as rising unemployment reduces household income faster than the adjustment increases it.
Notice also that Beijing can address more than one of the target policies above and can even move them in opposite directions. This means that there are many ways of rebalancing (or even of avoiding rebalancing) and these will have very different sets of winners and losers.
For example China is raising wages dramatically, right? Maybe. I am a little skeptical that they can pull it off to nearly the extent that people seem to think, but I would guess Beijing can indeed raise wages dramatically only if they counteract the negative employment effect by lowering the cost of capital. Otherwise unemployment could rise much faster than Beijing can tolerate.
This will mean, however, that Chinese growth would become even more capital intensive than ever. In that case money will effectively be transferred from employers in the aggregate, especially labor-intensive employers, to capital-intensive industries. It will also almost certainly increase speculative activity.
Alternatively China can raise the value of the renminbi, perhaps because of US pressure, and then counterbalance it the way they did during the 2005-08 appreciation and the way Japan did it during post-Plaza appreciation – by lowering real interest rates and expanding credit. In fact one of the reasons I have disagreed with most economists about the likelihood of an interest rate hike in China this year is precisely because I expected increased pressure on the renminbi. By the way Monday’s Bloomberg had a story on just this topic:
China’s five-year interest-rate swap fell the most in more than a month on speculation the central bank will hold off from increasing interest rates as it allows quicker yuan appreciation.
…“As the yuan’s appreciation pace picks up, it’s less necessary to raise interest rates because currency gains are also a tightening measure,” said Hu Hangyu, a Beijing-based bond analyst at Citic Securities Co., China’s largest listed brokerage. “The central bank won’t raise interest rates this year.”
At any rate what might happen in the case that China raises the value of the renminbi and then, to counter the impact, reduces real interest rates? As the box above shows, depending on the relative magnitude of the two opposite policies, it is very easy for the imbalances actually to get worse – i.e. lowering interest rates confiscates household income faster than raising the renminbi returns it – and for the trade surplus to rise.
This combination of policies will also almost certainly increase speculative activity, capital intensivity, and capital misallocation. That is frankly my biggest worry about excessive US focus on the currency. If the US does get China to revalue the renminbi dramatically, and China responds with a sharp cut in real interest rates and/or an increase in loan-driven investment, not only will the domestic imbalances get worse, China’s trade surplus and the US trade deficit could easily rise, and household consumption drop, while China’s capital misallocation will be significantly aggravated. China, in that case, would be following Japan’s late 1980s footsteps very closely, with all the dire consequences that this implies.
The key point is that there are many ways that the necessary adjustment can take place, and each of these has a different distributive impact. The other important point is that any Chinese adjustment must be slow because in the short term the negative consequences for employment can overwhelm the positive consequences.
Unfortunately the pace of China’s adjustment will in large part depend on the pace of the external adjustment – China needs trade surpluses to absorb excess capacity, but its trade surplus depends on the ability and willingness mainly of the US and trade-deficit Europe to absorb those surpluses. Because China has resisted adjusting for so long, I worry that the rest of the world is neither able (especially in the case of trade-deficit Europe) nor willing to wait long enough to allow China a relatively easy adjustment.
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Michael,
I’m really glad to see a post on politics.
I think much of the discussion about China, whether it’s about consumption, infrastructure (high-speed rail, etc.), and monetary policy, occurs on two parallel tracks precisely because politics imho trumps economics for the Chinese (that could be because the state has its hands in everything). Sometimes politics and economics are aligned, as when the CCP wants 8%+ GDP growth for political reasons, but not always.
China looks to me worryingly as a de-facto fascist, militarist regime in formation. The fascists in Italy didn’t like fast cars because they were economically viable, they liked them because they were fast and cool. The Soviet Union didn’t put up Sputnik or build up their nuclear arsenal for economic reasons. What’s important for a a fascist regime is not the welfare of its individual citizens, but the strength of the nation. The individual is disposable. The state helps private companies to build up the nation’s strength. I see an example of this difference in perspective when you bring economic arguments against high-speed rail, and you hear back arguments about the coolness and speed of the trains. Yes, individuals may be poorer because of the high-speed rail, but the nation is stronger.
When you look at China’s actions from a totalitarian, militaristic viewpoint, a lot of what’s happening now makes perfect sense, and rebalancing toward consumption doesn’t. Perhaps there’s a power struggle within the Chinese government between the PLA/fascist faction whose political goal is to overtake the U.S., and others who care more about the welfare of China’s individuals and becoming a responsible member of the international community. But as in the Soviet Union, this is ultimately a political debate. I’m guessing the PLA faction is winning, though I don’t pretend to know about these things. Economics will only start really mattering when the economy hits a crisis, and even then it’s not clear which faction will carry the day. Gorbachev was not inevitable. Imho China could well turn overtly fascist and militarize rather than liberalize after an economic crisis. Either way, economics is only a tool for political ends, and not the other way around, in this debate.
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Prof Pettis. Sorry to not reply specifically to this post, but i notice you said on the last comment section that you have a book maybe coming out next summer!!!
Any hints as to content, title etc?
We are waiting!!!
Prof Pettis,
2 questions
Will there be any positive outcomes short term for US citizens/workers if and when Chinese re-balancing/adjustment should occur?
Can we also assume that China is pulling forward demand for commodities and will depress commodity demand/prices years into the future?
This is one of your best posts. It makes this very complex topic much clearer. Congratulations for a very logical summary that very few people besides you understand so well..
Maybe winners and losers can be predicted in terms of short run and long run. If your suggested policies worked very well, everyone could be a winner in the long run. But practically speaking, China is more like facing a big bang change at somewhere, sometime.
The three raises you outline all push the Chinese supply curve up and to the left in an attempt to push the domestic component of the demand curve up and to the right in an attempt to reset the equilibrium at an equivalent Q. As you note, there will be a lag in the latter adjustment at best. But your last paragraph says it all: what happens to external demand? It seems clear that external demand is moving the curve in the wrong direction; policy makers are “behind the curve” on this and could soon find themselves only reacting to events with less and less control as the market reasserts itself. Your last option, transfer of assets, may be politically unpalatable but could avoid much of the lag inherent in the three raises and could be forced in less than peaceful ways should the autocrats not embrace it in a timely manner – not a good outcome for anyone, given likely unintended consequences.
Excellent!
Excellent post, thank you!
I noticed you listed PBoC as both a winner and a loser for RMB appreciation and interest rate hikes (in the table), but in the text you only highlight the negative consequences for the bank (dollar portfolio depreciation and higher cost of funds, respectively). I can speculate as to the positive effects for the central bank, perhaps lessened currency intervention costs(?) and reduced inflationary pressures, but I’m curious what you had in mind here as a positive.
Also, to the extent the PBoC is a net loser in any of these scenarios, what are the implications for other sectors of the economy? Are monetary losses ultimately passed along to households, as I think you have suggested in some of your other posts?
Professor Pettis,
Thanks for the thorough analysis.
My questions concern your thoughts on another implicit tax levied on the citizens of China – the lack of real, effective environmental regulation.
It seems to me that by not seriously taxing polluters, the government basically shifts the cost of pollution from those industries that pollute (capital intensive commodity producers?) to the household sector, specifically to the lower to middle class household sector that may not have the means to avoid contaminents. Not only does contamination increase the future cost of health care, but also it decreases the future value of airable land/water, potentially increasing the cost of food/water down the road.
Beijing has tossed around the idea of a ‘green tax’ for some time, and has taken some one-off steps to close certain plants. What are your thoughts on the progress of this economic adjustment and what kind of political context would be needed to get this done correctly?
Thanks again, your posts are always very insightful.
Did you mean to have exporters in the winner’s column in the renminbi row?
Hi, Michael,
I like your new post very much, thought there are some mistakes in your table.
Maybe I will add improving market access, deregulating the monopolized sector, granting the farmer property rights to the land, in your list.
Unfortunately the political power on the left side of your table is much weaker than the right side (Wage rising seems to be least contentious). The political leadership is too conservative at the moment. Adjustment will be unlikely to take place until Chinese economy hits the wall.
How about they choose the dirtiest way? Do micromanage the economy even further. Overtax sectors, industries the government doesn’t like and roll out social progams from the money?
Save the export sectors and the SMEs, kill the overbuilding?
HI
Great post that adds to the dialog!
great post. v useful framework.
do you think the recent spats with japan over currency intervention and the fishing boat might be related?
it occurs to me that a logical purpose for china behind the fishing boat incident would be to increase japan’s awareness of its dependence on the us military shield. given that the us is no doubt unhappy with japanese currency intervention (as indeed the chinese are also no doubt unhappy), perhaps engineering a quasi-military dispute was a way for china to undermine the bank of japan?
a bit far-fetched, i admit, but i find it hard to come up with a rational explanation for chinese behaviour. maybe it was just a freak incident, and two still loathe each other after 60 years? i dunno.
btw, you need to delete all the losers from the winners column in your table.
As always, an extremely logical presentation. It raises some obvious questions. Presumably the powers that be, political, business, and military, are to varying degrees aware of this. Do you have any sense of 1. to what degree and 2. how far the dialogue has progressed? Also, I regularly read that China does not really want to be ‘pushed’ into a corner and appear to make decisions because they are forced to do so. Frankly, I think that is true of any country. That said, what is your sense of the leadership’s understanding that the deficit countries are approaching points at which they cannot (deficit Europe) or will not (US) continue to give China unlimited latitude. China is approaching a ‘cornered’ position which will definitely be sub-optimal for all countries, but politically imperative for other countries to a degree that they will no longer accept the “pace of adjustment” China would prefer.
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Prof Pettis
Apologies for playing devil’s advocate. Then again won’t it be boring to have people just agree with you and not have that thorn that does something else sometimes
Think Stephen Roach puts forward quite succinctly what some of us in the opposing camp think , his piece in the NYT http://www.nytimes.com/2010/09/29/opinion/29roach.html
Adjustment has to take place, no one disputes that, just the pace and degree. The multilateral aspect (that Roach highlights) is an aspect of deficit/surplus adjustment which sometimes escapes attention: unless American workers are willing (despite union and social expectations) to accept broadly lower wages and costs of manufacturing are lowered drastically, there is very little chance that manufacturing bases are moving back to the USA anytime soon. They are likely to move on to other lower cost bases, which means the deficit/surplus problem just shifts geographically but does not eliminate itself.
Just as interesting is his point re borrowing/financing.
Whatever points of disagreement I may have with Roach’s views on other matters, these are points that seem to have some merit. Maybe it’s just the comfort of knowing there are others who may possibly think the same way – safety in numbers
sorry, thought to clarify: adjustment on 3 fronts, Currency, trade deficit/surplus and perhaps rates.
So, suppose China does none of these. And suppose the U.S. and Europe do not enact any significant protectionist measures. (I’d say these are both reasonably likely.)
What happens then? And how long does it take to happen?
Michael:
Curious if you have thoughts on the suspension of rare earth metals to Japan. Clearly, a repsonse to the Diaoyu fishing boat incident. For those that do not understand the West’s concern about China’s rise as an economic power, this is exactly the kind of thing that worries other countries. China often admonishes the west not to politicize economic issues (like currency appreciation), the west fears economic actions for political purposes.
Very sorry everyone, but when I created the table somehow all the losers were reduplicated in the winners’ column, and I didn’t catch it until just now. I have fixed it.
Of coarse there is at least one additional option which you did not mention: Increased spending by the central goverment. The first three methods are desireable and should be pursued, although probably best in a gradual way. Increased central goverment spending can serve to mitigate some of temporary pain from the adjustment process. Where would they get the money? The two most obvious sources are 1) sell off some goverment assets (somewhat related to option 4), or 2) borrow the money from savers within China, i.e. soak up part of the excess savings of households and businesses via government dis-savings. They could also get some of the money by reducing subsidies to exporters. Direct spending has the advantage that the goverment can control and direct the money to best benefit the country. This may be compared with the recent forced lending approach, which appears to be relativley difficult to control.
Judy Yeo,
I think you are repeating what you said in another comment section. Yes the manufacturing will probably move to a third party (which would probably be quite good for the third party’s economies in the short term, yet another reason why China’s policies are damaging poorer countries more than rich ones) but it pretty much depends on whether these third parties do what China just stopped doing (ie pegging their currency at an undervalued rate or intervening to keep appreciation from occuring) or not. If not, then eventually their currencies will rise with their growing surpluses, and then the manufacturing will move on to 4th party countries. Eventually it is not unimaginable for some of it to move back to the US.
Judy:
Two points the surplus may move elsewhere, but you are assuming that it will be saved rather than spent on investments. Spending which could increase trade, Global GDP growth, and the export industries of neighboring countries that receive further development from the mechanism that ensures China receives a disproportionate share of global investment breaking down, which is essentially mercantilism on steroids. Anyway where such treasure isn’t stored, it might be utilized in multiple further trade relationships, resulting in further imports from and exports to a vast array of further countries as those moneys advanced the twin goals of world trade and global development. That is just the problem, you are assuming the only issue is the retrenchment of trade back to the US or Europe due to alterations to the system. The real problem is that when the money gets stuck somewhere in the system (in the PBOC and US Treasuries) the limit the cycling of that money through the system, which may very well help competitive US, Chinese, EU and developing world countries export industries, and increase imports and exports between nations, increasing trade, growth, and similar on a more even, stable and, perhaps, even egalitarian footing. Rather than propping up, and developing en masse, via infant industry theory on a massive scale, competitors in as many industries as possible, over as short a period of time as is possible by the sheer size and weight of the financial repression mechanism which essentially delimits the development opportunities of other trade PARTNERS in the system. ould work, even able to be overlooked in a very small country of small size, essentially runs counter to balance in such a large player.
I understand the importance, a massive push into SMEs revolving around service industries, coupled to institutional developments along legal and property rights reforms is whats needed. IF it were true that China had a very dynamic, Wild West economy, and if the economy were developing to its potential, I argue, that considering China’s population relative to the global economy, then they would have created many more Millionaires well before they reached a single billionaire, relative to their per capita GDP levels. Although great progress has been achieved, and there exists many astounding examples of progress, more dynamism need be really injected into the system for it to have a material effect on the population and move anywhere close to the global expansion of middle class growth dynamics that has been projected over the coming decades, which is the basis upon which so many companies and countries have yielded in aiding the development of the Chinese people. Of course, the Chinese people themselves have done the most, importantly they, rather than large institutionalized stakeholder groups should benefit the most.
As it sits now, the structure of the system is bleeding vital of the system, limiting the potential of other members of the system, most notably other developing members of the system. Alterations could prove very beneficial for global growth even US, EU and Chinese growth even if it didn’t see mass return of industry to the US or EU, or masse exodus of industry from China via gains from trade among developing countries members who spent surpluses rather than held them to prop up the value of their currency. Such a scenario may come to benefit the sectors of the Chinese economy who are economically viable, even incentivising innovation, efficiency and productivity gains which could lead to actual globally dominant corporations able to compete on their own two legs while not lulled into mediocrity via massive and continued subsidies of one sort or another.
Houhui, the title will e something like “China, the US, and the Collapse of the Asian Growth Model.” In it I will try to describe the growth model China has flowed in its historical context and discuss what I think are the constraints.
RS, yes, just as a Chinese rebalancing means a relative shift from producers/investors to households, a US rebalancing implies the opposite. Households as consumers will suffer relative to households as workers. When US unemployment was low, the shift was adverse for households, but now that it is high it is likely to be positive. That is why I have always argued that high unemployment is politically incompatible with large trade deficits. As in China, the distribution of winners and losers will depend on specifically what policies are implemented to force the shift. As for your second point, yes, I believe that we are seeing an acceleration of commodity purchases which puts upward pressure on prices today and downward pressures tomorrow.
Michelle, yes, I am talking mainly about short-term effects here. The longer-term impact is much harder to predict and depends on the speed and nature of the adjustment. One of the things that strikes me historically is that many developing countries have seen periods of furious growth up until the difficult adjustment periods. Some, like the US and South Korea, suffered brutally during the adjustment but then quickly regained growth. Others, like many countries in Latin America, suffered during the adjustment but then for a variety of reasons stagnated afterwards. The former joined the rich-country club and the latter did not. The way a country adjusts after a period of rapid growth, then, may be key to determining its long-term success.
John G, that is exactly how I think of it. That is why I keep insisting that the global environment is the single most important factor in determining China’s adjustment process. The pace of China’s adjustment will be determined to a very large extent by the pace of the external adjustment simply because surpluses and deficits must always add to zero.
Jacob, I screwed up the table but it is now fixed (I hope). Yes, the losses of the PBoC (and other entities implicitly long dollars/short renminbi) are simply distributed to entities that have the opposite position. The most important of the latter, of course, are Chinese households.
JR1286, yes you are right. There are many other mechanisms that have the same “transfer” impact. For example environmental degradation lowers the cost for polluting manufactures and raises the health costs for households, and in that sense transfers resources from households to manufacturers. A deteriorating social safety net does the same thing – transfers resources from households who are losing coverage to employers who are no longer on the hook. I focus on currency, wages, and interest rates because I believe they are the biggest and also the easiest to change quickly.
Litz, I suspect you are right. Real reform and adjustment usually do not happen until there is a crisis, and not just in China.
Lemmiwinks, Adam Tooze’s “The Wages of Destruction” is a brilliant account of the German economy in the 1930s that may be very relevant. That is exactly what the Germans did. Each distortion was addressed administratively, and temporarily resolved, but at the cost of forcing new distortions that then had to be resolved by new administrative measures. In the end the German economy was so complex, so hard to manage, and so close to collapse that Tooze argues, very persuasively, that the reason Germany invaded Poland in 1939, rather than in 1941 which is when the army felt that they would be ready, was because without vigorous action the economy would have collapsed well before then. I suspect that a good economic history of the Soviet Union would show something similar. Administrative measures can be powerful ways of adjusting in the very short-term, but it seems they complicate things in the long term.
Bena, for the past two years I have taken it as an article of faith that global competition for dwindling global demand would spill out of the trade sector into other areas of politics. In that sense the Japanese dispute, especially coming on the back of a dispute over Chinese purchases of yen, was not a surprise. There will be more, I am pretty sure, and involving not just Japan and China.
Dean, very interesting questions that each unfortunately fall into one or more of three categories: a) I don’t know, b) the answer would be too long, and c) I am not comfortable discussing it publically.
Judy, not only am I not sure that I agree with the claim that none of the jobs china loses can be replaced in the US (after all Chinese growth is capital intensive, not cheap-labor intensive), but I also insist that it doesn’t matter. As Houhui points out below, if Chinese jobs move to, say, Mexico, if the Mexicans do not intervene in the currency, interest rates and wages, greater Mexican exports to the US will automatically fund greater Mexican imports from the world, and mutatis mutandi it will benefit US exports. Roach also argues that the trick is not to raise import costs but to raise US savings, but of course the trade account affects the savings rate as much as the savings rate affects the trade account. I discussed this more in my April 28 entry.
Noah, in that case the US trade deficit surges, and both US unemployment and the US fiscal deficit will rise. That is why I never for one moment believed that the US would not retaliate.
G. Stegen, it depends on how the increased government spending is funded. If it is funded by taxes or borrowing, as in the recent automobile and durable goods subsidies, it will have no real impact beyond distorting “natural” demand because the housing sector will have to pay for it anyway. If it is funded by the sale of state assets or the confiscation of SOE profits, it will have a positive impact, but in that case I would simply include it in my Category 4.
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[...] insight on the Chinese perspective, as usual, we go to Michael Pettis. Explore posts in the same categories: [...]
Judy,
The US is not the problem. The customer never is. It is the seller who does not want to be paid right now. But, on closer inspection, the “seller” is not a principal, just an agent for the Chinese people. And the agent acts, as economists tend to call it, maybe opportunistically, by letting their private interests prevail over their principal’s (the Chinese people) interests. Why on erath would the Chinese people want to amass all those USD that will never be turned into useful things that The people may want now? Roach is correct, that one way to deal with the imbalance is to let wages in, say the US fall. He does not say how far they must fall (he is probably not aware that the US subsistence level is a tad above the average nominal (not PPP) gdp/capita of a PRC citizen (excluding perhaps some 35 million holders of residence permits and good jobs). Mr Roach might well have added that tarriffs are a bit more practical, if all the adjustment is to be done by the buyers. And, let’s not forget, the buyers have an agent too: the US gvt, democratically elected and hence, inherently citizen-regarding. Would they want to impoverish the US voter? Better for everyone to raise the Chinese non-voter’s living standards..
Why didn’t you include increased inflation? Obviously. real wage increases have some inflationary implications. But if the PBOC decreased its sterilization of currency intervention that would also affect the real exchange rate, which is what matters. Is increased inflation too politically sensitive?
[...] How the Chinese make adjustments will have dramatically different effects. (China Financial Markets) [...]
Thanks for the reply. Table looks good now!
Michael, two questions:
1. Does China have to increase its bilateral surplus with the U.S. in order to avoid rebalancing? Or could it just keep it relatively constant?
2. Are you saying that U.S. protectionism is the only possible thing that will ever force China to rebalance? Could a period of Japanese-style deflation and low growth happen in China without any U.S. protectionist action?
Houhui79
:then the manufacturing will move on to 4th party countries. Eventually it is not unimaginable for some of it to move back to the US.
As in lower rung manufacturing? Really? You see costs lowering till they reach the level of those 3rd party countries you mentioned? Would unions accept that? Could Americans accept that? If you are thinking that higher costs -> higher prices and as everyone accepts higher prices, that eventually leads to acceptance of higher costs and therefore manufacturing bases will return to higher cost countries, that’ll be a bit of a stretch. Yes, it is a shorter version of the comment I made in another comment section, thing is Roach made things all that clearer, I therefore defer to him on this topic.
Csteven
I understand some of what you say, however, that circuitous path is dependent on several “ifs”, very tenuous “ifs”. One point, isn’t over-investment one of the critical points made of China? Another point, hey, I am all for egalitarian development, problem is it more often degenerates into a slogan rather than reality. Which developing country does not see certain individuals and groups profiting massively, sometimes at the cost of the rest of the population? Even for subsidised industries and conglomerates, the idea again harks back to a sort of “size really matters” idea, it is really much easier to negotiate or to grab deals when you have the money, in Chinese, there is a phrase ????, sometimes, money does speak that much louder, especially when the organisation is big and has lotsa money behind it.
Prof Pettis
:if the Mexicans do not intervene in the currency, interest rates and wages, greater Mexican exports to the US will automatically fund greater Mexican imports from the world, and mutatis mutandi it will benefit US exports.
Thank you for your response. I understand your example. The question is how tenuous is that “if”. There is a tendency to want to preserve the “competitive advantage” for as long as possible, for higher rung manufacturing that is what R&D is all about, for lower rung manufacturing, that’s where costs come into play. Would there be a government that seeks not to prevent erosion of its cost advantage once it perceives threats posed to it?
As for manufacturing in China being capital intensive rather than labour intensive, I think you are sidestepping the point that no matter how capital intensive, the element of labour and labour costs (which relates again to wages and employment figures) cannot be ignored and it is a fact that American workers are hardly likely to accept the conditions Chinese workers have been subject to. It would be great if conditions and wages could be improved but at what cost? A recent article in the NYT highlighted that protests against minimum wage policies in South Africa was led by the workers because though those measures would have improved their standards of living, they were killing off existing industry and jobs.
Roach also argued that consumption and savings were choices, just as you cannot mandate consumption or savings, so rates can only act as “influences” not directives. The writing on the barn wall does not direct us, not if you have free will.
just realised the chinese words did not appear, hanyu pinyin: cai da qi chu.
[...] Mankiw / Paul Krugman / NotAYesMan / The Three Fedsters / Martin Wolf / Archein / Pettis / House [...]
Prof Pettis,
just to clarify your point about commodities, would you forecast a decline in demand for oil and coal, which might be positively correlated to consumption (through cars and electricity) as well as nickel and aluminum, for example?
dh
OGT,
I think inflation is one of the main fears of the CCP. If you look at historical inflation and wage growth in the reform period (Victor Shih’s book is good for this) it is clear that there are serious stability issues. Inflation is often cited as one of the main reasons that so many supported the 1989 movement. Even more recently, in the inflationary spike in 2008, the government reacted pretty strongly (although this spike was nothing compared to the previous spikes in the 1980s etc) and unfortunately slammed on the brakes despite the at the time unknown severity of the impending world financial crises
Judy
I don’t think US levels will fall so low, but eventually other country costs will rise with their exchange rates and development, as well as possible future increases in the cost of transportation. The US will still have a trade deficit if the RMB is allowed to move, but the point is that the Chinese exchange rate policy is currently damaging countries less developed than China, and as China moves up the “value chain” with its manufacturing, then will be directly damaging industry that would otherwise still be competitive in developed countries too, not just for hi-tech trains and alternative energy technology. Whilst China still has a “fat bottom” of low end manufacturing, it is gradually becoming more active higher up the pyramid.
OGT, I don’t include inflation because it is not really a policy choice (Beijing is very worried about inflation, as Houhui notes) and to the extent that there is acceptable inflation, I see it as very roughly analogous to currency appreciation. The difference might be that while an appreciation is the equivalent of inflation in the cost of inputs in the tradable goods sector, actual Chinese inflation might show up elsewhere, for example in food prices.
Noah, there is really no answer to your first question because the concept of rebalancing cannot be very precisely defined, but if Chinese consumption grows while Chinese investment and the trade surplus stay constant, China is rebalancing. As for your second question, I don’t think I have ever said that. There are many things that can cause China to rebalance, including a much worse external environment, but the best ‘cause” of Chinese rebalancing is a recognition by policymakers.
Judy, many countries do not intervene, or at least intervene much less than China, and since the mid-1990s Mexican intervention has been fairly limited. By the way I do not agree that a country’s consumption and savings rates are just “choices”. I believe that is what is called a fallacy of composition. It is interesting to me that in every country that undervalues its currency and represses interest rates, its citizens ”choose” to save a lot. I have already pointed out that because of the growing China/Japan/German trade surpluses and the contracting European deficits, the US trade deficit will rise and Americans will mysteriously “choose” to save less. Whenever a country engages in mercantilist policies its citizens always “choose’ to save more, whereas in the countries on the receiving end the citizens “choose” to save less. Perhaps policies do matter to the consumption ratio. In my book I plan to take a few simple examples and show exactly why a specific policy – taken either at home or abroad – can change the consumption and savings rates of a country.
David, I am not enough of an expert on commodities to predict which commodities will suffer. My only point is that to the extent that commodity prices have been pushed up by the combination of the surge in Chinese investment and commodity stockpiling, they will be vulnerable to the unsustainability of Chinese investment-led growth.
Judy:
Ok, let’s say not so egalitarian, but still development, couple this to property reform, institution building, and the right set of incentives, for example understanding the benefits to the rich even of expanding the pie, unleashing entrepreneurship and such and even enabling growth to be internally focused, not managed, and likely mismanaged, or limited by the parochial interests of any dominant stakeholder group who has benefited from the growth in income inequality over the previous decades. Not only are they limiting their eventual and ultimate gains, but they, when coupled to expectations of growth and advancement of living standards are creating the steps to their eventual demise as they move in step to solidify their hold.
OK, gains from wider development, less development of structural devices that cycle greater amounts of funds into fewer and fewer hands. More hands, and more cycling of production, consumption, sales, imports and exports through more and more hands on a regional, national, international regional, and global level……if the money gets stopped in one place, it doesn’t lead through to more places, thus isn’t supporting further global growth. If structures are set up to place greater and greater amounts of money, production, investment in one place that breaks the cycle which could move the global economy, and global development higher (thus even a stable development to your own increase in wealth and opportunity).
As to income inequality, that has be resolved within countries, there is a similar function, which does require some inequality to ensure a capital base, but not so high, as to deprive further growth within the economy.
On a global basis, the creation of expectations coupled to the obstruction of diversification of growth and investment opportunities on a more global basis will derail the system. One in which to few have been able to grasp the real issues, focusing on some simply “consuming beyond their means” which is what has driven development around the world, but I digress. As to production and manufacturing, there are an abundance of locations where it could shift, even to places within developed countries, or more closely to them, where such structural mechanisms continue to drive a stagnation of growth and investment opportunities in one place it will encourage such a shift; if for simple maintainance of some remnants of the system; where living standards within the core aren’t substantially better then they had been previously, and reversion wouldn’t substantially lessen such, only inhibit growth in some regions, or lead to an enabling environment in others.
Although the global economy is best left to free markets, it should be understood that such mechanisms as exist, as have existed which have led to the development of many countries in the world, can not be stopped, or held in some nations or regions simply because elites in the region have benefited and continue to benefit from it, nor even can it be for elites globally.
Where it doesn’t continue to flow it will lead to reactions globally which will alter the situation, or alter the ability to maintain it. It can and never will be destroyed, only will alter substantially with new names and players, athere is an abundance of opportunities for development. Where the global intelligentsia, as it were, and seriously mistaken the beneficiaries from system structures that have taken on strange manifestations of late, mostly because there are so many new participants that there are bulges in the strangest of places.
So, where the argument, may be intellectually dishonest relative to the immediate shift of industry from China to the developed world, thus reversing the previous shift, if it has been such a shift, regardless, not that I accept the premise totally, but there is anecdotal evidence that there is and has been a return in some small industries.
More importantly the structures which create the disproportionate focus of investment in one country or area of the world, will directly lead to a reversion of the system to camps, camps in which there are a plethora of areas in which manufacturing can be focused, but potentially after having destroyed the ability of consumers to consume; this also points to problems related to income inequality growth within all countries globally over the last 30 years.
This, of course is not necessarily bad in a world of lessening resource, where we consider the needs of future generations, but is exactly why services, human capacity development, intellectual property rights, strengthening of institutions (internally and globally), and encouraging entrepreneurship around such issues are far more important than simply manufacturing goods. And why the clear overdevelopment of capacity in manufactures globally is such a great burden weighing upon the globally economy (ie the malinvestment of resources, accelerated by the structural mechanism) which requires much more cooperation than we currently are seeing.
The 2000-2008 period of growth was an anomaly. Not likely to be seen again for a couple of decades, the quicker we all get our heads out of our a*****s and see that, and the more willing all the peoples of the world are willing to take the various degrees and kinds of medicine required for the betterment of their peoples and economies and essentially our collective futures as residents of one planet the better. Other than that, it shouldn’t be thought of as per capita GDP, but per capita bio-capacity, where the habits and types of consumption would quickly alter to that fact (ie no SUVs and then carpooling rather quickly, likely bringing energy consumption to near domestic production in the US,… under conditions where most of the worlds oil, which moves to the EU and Asia from the ME, under a new set of circumstances where there would be little need or rationale to protect the shipping lanes for resources or trade, the US gets about 10% of its Oil from the ME).
But anyway the pictures need to be looked at in totality. Just because a person seemingly doesn’t do something, at least in the global correlate of an urban myth, doesn’t mean it couldn’t and further, that it might not be more beneficial to move development opportunities closer to home, especially where wealthy neighbors support wealthy neighbors.
But more importantly, exactly what are we looking to do with this global trade system. Certainly there is no liberty in equality, nor equality in liberty, but the provision of social goods is the goal of an economy, and thus of the global economy on a wider basis, even by the words of Adam Smith, so a more egalitarian, and eventually sustainable, from both an expectations and reality perspective, on a global basis, should be seen as not simply leading to further growth opportunities, but enabling the system to continue. Yet, much more needs to be done as regards this expectation issue both within and between developed and developing countries alike acknowledging need for flexibility within systems and between systems; consumption, production, social safety nets, human capacity development systems, migration, issues confronting the global community such as pandemics, natural disasters and so many more fronts in a world growing smaller and quicker (and likely ever more so). So, much needs to be done, can be done, and surely, it will eventually come to be done one way or another. So, perhaps, not ultimately egalitarian, but definitely in such a direction, were we to truly be considerate of our self-interest, I suppose.
Judy:
Perhaps this will help explain…..http://www.cfr.org/publication/7574/mckinsey_roundtable_series_in_international_economics.html
December 15, 2004
“CHANG: Well, I think part of the problem now is we think of China as this large authoritarian state that controls everything…… We have some sense of what it is, but in terms of the dimensions of it, you know, Chinese statistics are Chinese statistics. ……….
But at the end of the day, you know, they participate in this international system, and they’re benefiting from it because of trade, open trade. They’re in the WTO and all of it. And I think that essentially they’re going to have to buy into the entire system, which also means a flexible currency and open capital accounts, because the rest of the world at some point is not going to put up with it. We’ve seen some attempts on other countries, like South Korea and Thailand and Japan, to fiddle with their currencies in response to China, and eventually that force is going to get stronger and stronger, and the pressure, I think, will be too great. The unfortunate thing is that the pressure is going to occur and China’s going to have to do something precisely at the moment that it’s weakest. Of course it should do it now, when it’s in a strong position.”
Of course we could factor in the nature of recent growth, the nature of movements in the world, the ongoing debate globally as to how to return to growth, and likely responses globally where most misconstrue the nature of the issues at play. For example, the Brazilean Real has been rising, the commodity exporters as others are flush with profits, their shares and debt issuances are oversubscribed, I bet their providers of domestic manufactures are crying. I don’t even need to look, similarly for elsewhere.
Move to SDRs, great, and no need to alter the financial repression mechanism, the Japanese are crying, as might, have, Finance Ministers across the rest of Asia. Germans are smiling with some weakness to the Euro, and greater competitiveness of their truly high quality manufactures, after having decimated manufactures across the Southern Core of Europe. Chinese are starting to tariff jump to get into African markets buy investing in Manufacture there, how long until more tariff jumping is required.
But anyway, there is enough painful medicine to go around to right this listing ship, and don’t get me wrong I understand that it is some level of understanding (and compassion), coupled to self-interest, that I got us to this point, similarly it will require growing measures of such to return us all to a greater measure of economic stability.
Judy, I think you, along with many others, are vastly overestimating the labour component of manufacturing. For semi conductors, PCBs, photovoltaic cells, chemicals and pharmaceuticals, etc., the labour component is negligible. Even for the assembly of of consumer products, like an iPhone, the amount of labour is negligible. The iPhone has 30 minutes of labour in its assembly. Assembly in China might save $15 per phone. In auto manufacturing, in the times proceeding the bailouts, the autoworkers wages were labeled as the problem. On average there is 17 hours of labour to assemble a car. A savings of $20 per hour of labour would translate into $370 savings per car. Not earth shattering.
Glen, you can’t look at the direct per item hours – you have to consider the factory’s total labor cost over its output. In that case its much higher than you imply, but the percentage of the overall cost is still on the order of ~15%. Direct salary savings on labor is a very small difference if you compare costs between the US and China, but you also have to consider benefits/taxes/lawsuits/regulations/environmental controls many of which revolve around the employee and hence are employee costs.
I guess I just still don’t understand what happens, according to the “imbalances” theory, if China’s and America’s policy stances remain unchanged into the indefinite future.
If productivity grows faster than wages, as it has especially in the past decade, the share of production that workers keep in the form of wages necessarily declines, and household income as a share of GDP declines with it.
The opening of the sentence sounds like the US over the last few decades, yet consumption remains high, due to household debt spending ?
I’m thinking ObamaCare will shave about 260 billion (130 million workers times 2000 dollars) off of imports to the US. So that says consumption in China needs to increase about 200 dollars a person to keep employment level.
[...] that is the point I laid out early last year in the magazine, and for which Michael Pettis of Beijing is the most careful and consistent exponent. Short version: when the world’s [...]
Prof Pettis- I guess the reason I think allowing greater inflation, or say lessening bond sterilization, deserves at least a mention is that I do think it has slightly different winners and losers. If the currency is allowed to appreciate nominally that will make USD dominated goods cheaper in China and have some deflationary affect. But, domestic inflation makes Chinese produced goods relatively more expensive in China and beyond. For many economic actors, that’s the same.
But, of course, it is a different effect for holders of nominally denominated RMB debt or credit, which is why I brought it up in terms of a winners and losers analysis.
Also, on Tooze, my take away was that it was political pressure brought on by both the distortions of administrative moves and even more so the strains of re-armament that hasted the Nazi’s march to war. Once the war was started Tooze shows that they were able put in place administrative restrictions and security control measures that they were leery of doing before hand.
I didn’t see him as claiming they were near collapse, especially as most of the territory they added in their initial conquests actually made their food and fuel situations worse. Yet the economy managed produce enough materials to fight on for 4 and 1/2 years. (This is me advocating for admin controls, but I do find the psychological aspects of the war that allowed all parties to make temporarily effect use of measures that would have imploded immediately in peace time).
Complaint Filed with U.S. Justice Department Against Standard & Poor’s, Moody’s
Breaking News Story:
S&P, Moody’s Complicit in Hiding Billions of Dollars of China’s Debt
http://www.istockanalyst.com/article/viewarticle/articleid/4548858
The Complaint is accessible online.
Should have said, is not me advocating for admin controls in the above comment.
Does anything change if China buys the Debt of countries other than the US European or Japanese?
http://online.wsj.com/article/SB10001424052748704380504575529523835140714.html?mod=WSJEUROPE_hpp_MIDDLESecondNews
The article says that China has pledged to buy Greek Debt and to help stimulate Greece by investing in that country.
Does this change anything? If the investment in Greece was well placed and improved Greek productivity it might make Greece more competitive with China and improve it’s balance of payments with that country. That would be a good thing for rebalancing. What if China decided to redirect a lot of it’s foreign reserves towards investment in weaker economies? If those investments were good would it not have a similar effect to increasing Chinese consumption? I guess if it resulted in a reduced deficit with China it would be. Is this an alternative way forward for China?
Prof Pettis:
It is interesting to me that in every country that undervalues its currency and represses interest rates, its citizens ”choose” to save a lot. I have already pointed out that because of the growing China/Japan/German trade surpluses and the contracting European deficits, the US trade deficit will rise and Americans will mysteriously “choose” to save less.
Thank you for your response.
Policies do matter to the consumption ratio, question is, how much of an influence is it? My point is, there is influence, just not overwhelming.
In the countries you mentioned in your response, there is little of the social net that supports the individual outsiude of their own savings, particularly in China and Japan, social security is virtually non-existent in China and Japan both in terms of social benefit (physical) and as a concept (expectation/notion/conceptually), you are basically on your own when the crap hits the fan. That makes for a very big incentive to save, of course, that’s a social sciences explanation for an economic phenomenon.
For Germany, many young Germans have actually been moving out of the country i.e. those that have the option, not merely because of personal choice but also because many realise the huge burdens that the social welfare system (is already or going to)impose on the individual, with the bills from the stimulus and rescue packages, that is likely to translate to even greater misery for young Germans who are looking at the prospect of paying for a system they may not eventually enjoy the benefits of. Again, one would think a great impetus to save?
Sadly, your statement about currency manipulation looks likely to be facing a correction pretty soon http://www.nytimes.com/2010/10/04/world/04currency.html?ref=world
when you can’t beat them, join them. The counterpoint about interest rates and perceived American manipulation of the US dollar is rather amusing.
Hello Mike,
How about some suggestions for rebalancing moves by America? Perhaps reducing military spending and its 800 plus overseas military bases, reducing entitlements for government servants, stop abusing its reserve current position, etc?
Wu Jian Long, i wonder if your question was asked out of curiosity or resentment? If the former, perhaps the fact that this blog is called “China financial markets” might be a small hint?
Mr. Pettis have you seen that China has promised to lend $5 billion to Greece as long as Greece uses the money to buy ships from China? I wonder what you think about that.
WJL,
How exactly does the US abuse “its reserve current position”? I know that’s what it says in the book “Currency Wars”, but this is not exactly a very intelligent book, is it? The only use that it gets is the ability to consume excessively, which is a weakness, not a strength. If China wanted to “abuse” the yuan as a reserve currency all it has to do is allow countries to run huge trade deficits against it, but of course no one wants that.
If I remember right Pettis has argued that the US should itself limit use of the dollar as the dominant reserve currency. Having a reserve currency does not allow abuse by the US so much as allows countries to abuse the US by forcing their mercantilist growth policies to be absorbed by the US.
It seems to me that China wants all of the benefits of reserve currency status with none of the costs.
[...] be addressed over some reasonable time-frame. But it can’t be done overnight. As Michael Pettis notes: By now nearly everyone recognizes that raising the value of the renminbi is a necessary part of [...]
Noah, in that case the US trade deficit rises until US indebtedness precipitates a crisis, and China’s trade surplus rises until the US crisis brings both countries down.
Purple, due to rising debt. A household’s consumption growth is equal to its income growth plus or minus changes in its savings rate. Debt is negative savings.
OGT, yes, and depending on whether wages keep up or not with inflation. There is no question that inflation redistributes wealth. I don’t really include it is a policy choice because I think the State Council is too afraid of inflation to choose it, but I agree that it is one of the ways that rebalancing can occur, and it has its own sets of winners and losers.
By the way my reading of Tooze is very different. It has been a year since I read it, but I definitely got the impression that the number of administrative stopgaps to prevent the economy from falling into crisis was so distortionary that Hitler’s economic advisors were pretty desperate.
Simon and JackW, here is what I said about the greek thing in a different forum:
Very interesting move by China, and sure to get them lots of brownie points, but I am not sure this will turn out to be a good idea for China. Of course in principle it makes a lot of sense — without net capital inflows Greece cannot run a trade deficit with China or anyone else, and by lending them money for the specific purpose of buying Chinese ships, China can maintain at least part of its trade surplus.
But many people, including me, believe that Greece is going to have to default and eventually obtain debt forgiveness of up to 50%. As was the case in the LDC Debt crisis in the 1980s, when insolvency was not recognized until US banks had sufficient capital to absorb the losses, Greek (and other?) debt forgiveness won’t occur until European banks have significantly rebuilt their capital.
The risk for China is that European banks effectively use Chinese money to trade out of their Greek debt, so that when the default and debt forgiveness finally occur China ends up taking on a much bigger share. $5 billion is not a lot of money in the scheme of things, but my sense is that once you get involved it is easy to throw good money after bad in the hopes of getting out scott-free, especially in a system like China’s where a big political imperative is not to be seen as having made a mistake. What is worse is that when you finally stop lending more money inevitably you are blamed for having caused the crisis. I suspect $5 billion turns into $20 billion or more within a few years.
I think China’s only experience in sovereign defaults is as a defaulting nation, and even that historical memory is probably lost. In those circumstances it is easy to be dazzled by the glamor of international banking. The US thought it knew what it was doing in the 1920s when it was busily “beating” the British in making risky loans to developing countries, just as Japan thought it knew what it was doing in the 1970s and early 1980s.
Both countries were left with a boatload of bad debt in the subsequent decade. I remember that by 1979, when the big US banks were worried about debt prospects in the LDCs but could not stop lending without precipitating the very crisis they were worried about, there was great relief that the Japanese banks were eager to pour into the business and take market share away from the Americans, just as, I suspect, the British banks were not terribly upset by the late 1920s at getting beaten by their American competitors. I am not sure German and especially French banks (not to mention their governments) will be sore at seeing Chinese lending to Greece.
If I were advising China I would warn them that lending money to someone on the verge of default is rarely good business. Of course the desperate need to keep the trade surplus high and to diversify away from the US is probably driving this, but selling stuff on credit to a bankrupt man is always an easy way to generate sales without being an easy way to generate returns.
I think sinking money even into ever more high-speed railways is better business than lending to Greece to buy ships, and has the same economic impact in the short term
Judy, I disagree. I think Japan (and Singapore) had very good social safety nets and yet they both had very high savings rates under the same conditions. Also it seems to me that you are saying that the Chinese and Japanese save because of their very poor social safety net, and the Germans save because their social safety net is so good that the cost is frightening them off. In that case mercantilist countries seem to have high savings rates whether or not they have a good social safety net, in which case I would argue it must be the mercantilism, not the social safety net, that matters.
Also I would believe in cultural (or at least non-institutional) arguments for savings more if it weren’t for the fact that in the 1940s and 1950s Asia’s poverty was often explained by the “fact” that Confucian cultures traditionally don’t save and work hard.
WJL, I think JackW has a pretty good explanation of why I shouldn’t have to write about American rebalancing, but in fact I do write about it quite a lot, although perhaps not in the accusatory way you would like me to. You might want to try reading several pieces.
[...] over some reasonable time-frame. But it can’t be done overnight. As Michael Pettis notes: By now nearly everyone recognizes that raising the value of the renminbi is a necessary part of [...]
Professor, I am one of the those ones you met during your meetings with EU officials two weeks ago and for obvious reasons I should not identify myself. Aside from saying how valuable those meetings were to all of us I must say that the comment you have written on Greece in Comment 66 deserves its own blog entry because that way it will be widely read in Europe. It is sad but very accurate, and i must say i am impressed with your historical insights. Also i was given a translation of your excellent but very depressing piece in La Vanguardia last Sunday. Thank you for your clarity.
“Noah, in that case the US trade deficit rises until US indebtedness precipitates a crisis, and China’s trade surplus rises until the US crisis brings both countries down.”
So, basically, 2008/9 just keeps repeating and repeating, eh?
Doh.
As an AUSTRALIAN based Fund we spent a bit of time looking over the multitude of statistics out of China – (this from one of our commentators) : Last week, the China Federation of Logistics and Purchasing released September’s PMI data, indicating the second straight month of growth. The media is celebrating the data, arguing that it eases global slowdown worries. After looking at seasonal PMI trends in China, … we are less impressed by the results as, on average, September and August are strong months. the PMI growth has been below the prior five year average(CHART SUPPLIED) .
Could you comment, if appropriate, on the veracity or otherwise of Chinese statisitcs (especially in light of the markets capacity to jump around on seemingly minor expectation hits or misses).
[...] Levaquin Interactions (mpettis.com) [...]
Prof Pettis:
Also it seems to me that you are saying that the Chinese and Japanese save because of their very poor social safety net, and the Germans save because their social safety net is so good that the cost is frightening them off. In that case mercantilist countries seem to have high savings rates whether or not they have a good social safety net, in which case I would argue it must be the mercantilism, not the social safety net, that matters.
Thank you for your response.
I think there’s a slight misreading of what I meant. Singapore’s safety net, by which I take you mean the “pensions” scheme (CPF), is hardly the social net /welfare you see in western countries. if you are below retirement age and you are out of job and cash, you are essentially on your own, there is no jobless benefit/dole. most singaporeans are aware that apart from insurance and savings, there is very little in way of resources, unless you are in the position to sell your house, which for many Singaporeans is public housing.
For the Chinese and Japanese, if there were adequate safety nets, you would hardly see the situation in Japan where those who are out of savings and job are out of housing too. And it is a vicious cycle as most employers would not consider hiring someone who cannot furnish an address. In recent years the homeless problem has become increasingly obvious in Japan, particularly in its cities, so arguably, there seems to be little in way of social safety nets.
For the Chinese, I think you are in a better position to comment, seeing as you are situated in its political and administrative capital.
For the Germans, the problem is not that the safety net is so good but rather, there is a disjoint that is becoming increasingly obvious. Not just in terms of cost but who are expected to bear the cost. There is the sense that whilst the present generation of pensioners are still likely to see their benefits, the younger generation are likely to bear the costs of the welfare system but are likely to see their benefits shrink, creating a situation where a higher portion of their income goes towards supporting the welfare system and the need to save more because some benefits that this generation of pensioners are seeing are perhaps not going to exist when they(the younger generation) become pensioners. Therefore a weakening social net leads to the impetus of saving.
Apologies for the clumsy explanation but that is what I meant. Of course, I agree that mercantilist policies do have an effect, just that there are other factors at play too.
[...] over some reasonable time-frame. But it can’t be done overnight. As Michael Pettis notes: By now nearly everyone recognizes that raising the value of the renminbi is a necessary part of [...]
Wu Jian Long…..sigh.
If you are being paid to post, then it is a waste of your employer’s money. This forum is a little too sophisticated. If not, then you are personally missing the point about nearly everything. You never get involved in any debate (ie answering people’s criticism’s about your uninformed posts), and your kind of posters are now to be found annoying reasonable people across forums everywhere. At least Viagra adverts [might] find a receptive audience…
NA, thanks. i think i know who you are.
Stephen Hains, that is a very tough question. Basically those who track these things (not me) argue, very plausibly, i think, that trade numbers are pretty accurate, although there is always the problem of under- and over-invoicing exports and imports as a way of moving hot money into and out of the country. The PBoC has several times warned about that. Production-side numbers are pretty good but they tend to smooth out volatility. There is also the problem of falsifying data at the local government level. Debt numbers are very poor since they only really count explicit debt even though everyone knows there is an awful lot of fudging that goes on by banks, SOEs and local governments, and these is a huge ‘informal” banking sector. Retail and consumption numbers are pretty poor. Inflation numbers are also pretty poor in the short term but maybe better in the long term (i.e. they smooth out volatility). Financial statements are very poor. In China, like in many developing countries, you really need to develop your own sources of “story” information.
[...] The Politics of Chinese adjustment – China Financial Markets [...]
I did not get formal education of economics knowledge. I just read finance news or articles sometimes and feel curious about the stories they tell us.
I remember in past year many guys told my China is raising wage. But I am not sure whether it is also true for private sector? If China only raise wage in government or state-controlled sectors, or improve people’s warefare using governments’ money, how can Raising Wage influence employers of labor-intensive industries? Are there any data or article about this topic?
Thanks very much!
One or more of the four items in the table in the article will happen. Walmart in the US is not going to make much money in the fourth quarter. Globalism can’t happen without cheap energy. Hang onto your paradynes.
Please Mr Pettis can you go out on a limb and guess when major adjustment will take place?
Prof Pettis
May be a sign of reprieve for China et friends?
http://www.nytimes.com/2010/10/06/opinion/06gross.html?_r=1
IMF again urges China to appreciate yuan…
Adding pressure on China over its currency appreciation issue, the IMF said China should accelerate the appreciation of its yuan currency in order to avoid setting the scene for a new financial crisis. According to IMF chief Dominique Strauss-Kahn the …
China is becoming to think “green” more then ever before. Their “green tax” can bring more money to the Treasury. They will count quite cleverly if it is the right way as there is possibility that some of investors would close down some existing plants. The rest of the world got used to that fact that China is becoming to be unstoppable in many ways…
[...] addressed over some reasonable time-frame. But it can’t be done overnight. As Michael Pettis notes: By now nearly everyone recognizes that raising the value of the renminbi is a necessary part of [...]
[...] The politics of Chinese adjustment - Must Read – If you’re not that much into economics, just read the table at the end and draw hasty conclusions. [...]
[...] in Chinese). As I have discussed many times, most recently in my October 6 entry, my September 29 entry, and my September 11 entry, Beijing needs the US to continue running a rising trade deficit [...]
[...] in Chinese). As I have discussed many times, most recently in my October 6 entry, my September 29 entry, and my September 11 entry, Beijing needs the US to continue running a rising trade deficit [...]
[...] addressed over some reasonable time-frame. But it can’t be done overnight. As Michael Pettis notes: By now nearly everyone recognizes that raising the value of the renminbi is a necessary part of [...]
[...] In order to do that, internal demand needs to rise much faster than the overall economy for many, many years, which either means the overall economy has to grow much more slowly, or that internal demand needs [...]