The PBoC has just announced that it is hiking the one-year lending and deposit rates by 25 basis points. Here is what Bloomberg says:
China raised its benchmark lending and deposit rates for the first time since 2007 after inflation accelerated to the fastest pace in 22 months. The one-year deposit rate will increase to 2.5 percent from 2.25 percent, effective tomorrow, the People’s Bank of China said on its website today. The lending rate will increase to 5.56 percent from 5.31 percent, it said.
China’s inflation quickened to 3.5 percent in August, highlighting overheating risks that have prompted the government to curb credit and clamp down on the real-estate market this year. Higher interest rates may encourage inflows of speculative capital from abroad, complicating management of the fastest-growing major economy.
This is definitely good news. It increases household income by raising the return on savings, which is a necessary part of the rebalancing process. It (very slightly) reduces the incredible incentive to borrow money and splurge on manufacturing capacity, investment and real estate development. And it signals that the PBoC is concerned about overinvestment.
But it is a pretty small move and very late. The PBoC has been, very unwillingly I think, behind the curve on interest rates. Most of us believe the PBoC has wanted to slow investment growth and to raise rates for a quite a while now, but it isn’t easy to do so. One of the problems is that the economy – especially local and provincial governments and SOEs, not to mention the central bank itself – is so dependent on artificially low interest rates to remain profitable or viable, that even a small increase in interest rates can raise put pressure on cash flow and financial distress costs
Beijing hasn’t raised interest rates in nearly three years (December 2007), even though deposit rates are clearly negative and the lending rate may well be close to zero or even negative – depending on what you consider the right measure of inflation. There have been rumors about a rate hike for the past three weeks. Earlier this month Chen Long, my assistant at SWS, told me that the there was a lot of talk about a hike in the deposit rate some time this month.
We thought it would be very unlikely that the deposit rate would be hiked without an equivalent hike in the lending rate. The very wide spread between the two (306 basis points for one-year maturities, which does not take into account the typical maturity mismatch between depositors and borrowers) is the main part of a bank recapitalization process which many believe necessary to protect the system from an anticipated surge in non-performing loans.
But Chinese borrowers are too dependent on artificially low interest rates for their viability, so we felt there really wasn’t much room to raise the lending rate. Our conclusion: the PBoC might raise both deposit and lending rates by up to 25 basis points, mainly as a way of reversing some of the decline in real lending rates during the past year, but they wouldn’t be able to do anything more aggressive.
The key is to see if they follow this up in the next month or so with more rate hikes, which I doubt, but it depends on what the balance of power is between the various economic views. More rate hikes would be great news for the medium term rebalancing process. Real rates in China have declined rapidly this year and, as I have argued many times before, this is a real problem for the economy. Declining real rates exacerbates China’s already serious over-reliance on excess investment. But I don’t think there is much they can do about it without causing a serious slowdown in growth, and before the leadership transition in 2012 I don’t think there is much appetite for a slowdown, no matter how badly needed.
New lending
On a related note the most interesting piece of news last week for me was the new lending number. Net lending grew in September by RMB 596 billion, a lot more than the expected RMB 500 billion. This may have helped convince Beijing that they needed to do something more drastic and probably helped the decision to raise rates.
New lending totaled RMB 6.3 trillion for 2010 year to date (84% of the RMB 7.5 trillion quota). To get a sense of comparison, in 2009 new lending in September was RMB 517 billion, with the year-to-date total being RMB 8,7 trillion (90% of the year’s RMB 9.6 trillion total). In 2008 new lending in September was RMB 378 billion, with the year-to-date total being RMB 3.5 trillion (71% of the year’s RMB 4.9 trillion total).
We are talking some pretty big numbers. Last week the PBoC also raised the minimum reserve requirements for the six biggest banks by 50 basis points. Here is what my assistant at SWS, Chen Long, said at the time:
The PBoC unexpectedly lifted the reserve requirement rate for two months by 0.5% for the 6 largest banks, which will freeze RMB 200 billion in the banking system. The PBoC’s open market operations had injected RMB 181 billion into the market with 3-month, one-year, and three-year bills and notes. Short-term money market rates dropped while long-term rates rose.
The RMB accelerated its appreciation this week, and we believe it will continue. USD remained very weak, but the RMB actually depreciated again a basket of currencies in the last week as other currencies (AUD, JPY, SGD and EUR) rose. What is happening now is exactly what we expected: Beijing is appreciating RMB, but does not dare to tighten the credit. Liquidity is very loose and is the main reason driving up the stock market.
It looks like there has been a lot of unsterilized money creation in the third quarter, driven at least in part by what seems to be a pick up in hot money inflows, and the reserve hike was probably aimed at mopping up some of that money. There is some concern that today’s raising of the deposit rate might cause an increase in hot money inflows, but I am skeptical. I don’t think 25 basis points one way or the other is going to drive hot money in such a volatile economy.
I suspect the PBoC actions on minimum reserves also represent what seems to be a split among policymakers. One the one hand for many, especially in monetary circles in Beijing, loan growth is already excessive and they are very worried about the implications of yet more investment. I discuss why both in last week’s Financial Times article and in an article in Monday’s South China Morning Post, where I talk about the implications for China of Japan’s post-Plaza Accord policies.
On the other hand many policymakers, especially I suspect provincial and municipal leaders and SOE heads, are opposed to any slowdown in loan growth that may cause a real decline in the growth rate of investment and so in GDP and employment growth. They have made it very difficult for the monetary “conservatives” to tighten their leash on new lending, and I wonder if the PBoC reserve hike, which probably doesn’t require state council approval, reflects PBoC worries. The small interest rate hike is also probably part of this tug-of-war.
Net new lending has to average 400 billion a month for the rest of 2010 if we are to make the quota. Let’s see if that happens. It averaged RMB 310 billion a month in the last three months of last year, although that number was distorted downwards by the explosion in disguised short-term lending earlier in the year.
I am betting that policymakers will be hard pressed to keep the numbers within the quota, but who knows? They may be determined this time around. There are very strong rumors that next year’s quota will be only RMB 6 trillion. This would be a good thing over the longer term (and may represent lobbying by the next generation of leaders), but it will automatically mean, unless we see an explosion in the fiscal deficit or in disguised lending, a sharp slowdown in growth – even more so if the trade surplus is forced down, as I expect it will be.
Your RSS feed is being hijacked by spam again — the title of this post showed up as “Levitra 50mg” on Google Reader.
Just a quick note: your blog RSS feed (I’m using Google Reader) has all these ‘Levitra 50mg’ spam notes through it.
- Always ironic given all the stimulus efforts going on in the economy these days.
now this is one to watch seriously..
So, are Bernanke and Geithner winning their battle to export inflation to China and force rmb appreciation?
Enjoyed the article.
Analysts on Bloomberg trumpeted this as nothing but good news. “It shows that China is transitioning away from “crisis management” of the economy to more normal policies” was the quote, I believe.
The timing is suspicious but I feel this is better policy than simply letting the yuan rise another 2%
Dear Pettis,
In your opinion, how the QE policy from US government will influnce RMB? It will definitely put a down side pressure to USD and force RMB to appreciate itself. Yet the question would be how much and how fast? Will RMB go up by 10% overnight? or 10% over year…
If QE is really as effective as some one’s thinking, and the appreciation of RMB goes out of Chinese government’s “control”, do you think China can afford such a huge hike of currency without serious social crisis caused by the exports bankruptcy and further imbalance?
Also, since assets are relatively cheap in US right now( real estate for example), we are seeing capital flows back into US (investors from China are buying assets in US recently, for instance), what do you think about this capital- flowing-back-to-US will do to the emerging market? Especially China who replies on investment so bad.
Thanks a ton!
Michael, how can you say the deposit rate hike increases household income when you go on and state that deposit rates are clearly negative. Would it not be clearer to state the households are having to transfer less income, or pay for less subsidisation than prior?
Michael, very timely post, and I am glad to be the first to comment. two points:
first, I don’t share your view that the Chinese authorities don’t want to geninuely slow things down. they did this before. they overly tightened ahead of the global financial crisis despite growing global uncertainty. this time may be differnet, but not impossible.
second, slower credit is certainly not good on growth, but it does not necessarily lead to growth diasppointment. between 2003 and 2008 Chinese credit growth had been constantly below nominal GDP growth, but back then economic overheating and asset bubbles were the dominant concerns.
I am willing to bet that PBoC will keep lending within quota this year, if there is no global catastrophe.
Paul Krugman offers this opinion of the move……..
So, the United States is pursuing an expansionary domestic monetary policy, which increases overall world demand; however, a side consequence of this policy is a weaker dollar. China is pursuing a weak-yuan policy; to counter the inflationary domestic effects of that policy, it’s pursuing a contractionary domestic monetary policy, reducing overall world demand.
We’re doing the right thing; they’re making the world as a whole worse off
Michael,
Steve Keen has a post up where he talks about effects of changes in credit flows, as opposed to credit levels. He cites some research into way some economies seemed to recover from a financial crisis not because credit levels rose, but that their fall decelerated.
http://www.debtdeflation.com/blogs/2010/10/19/deleveraging-deceleration-and-the-double-dip/
Will the fact that total outstanding debt is increasing at a decreasing rate in China act as a drag?
The US market reaction was highly negative to the news of the rate hike, which seemed out of proportion.
That makes me worried about the US market’s addiction to easier money. I suspect whatever the US Fed does at its next meeting may be greeted by disappointment.
Prof Pettis
Dumb question. Wonder if the rate hike could reduce pressure on the currency front. As for hot money inflows, really doubt if the rate hike would be a factor. Don’t really see hot money as the type that sits in the bank as cash deposit.
“This is definitely good news.”
Paul Krugman and the U.S. equity market appear to disagree with you. It reduces global AD, which is bad for ROW right now. Why don’t they let the yuan appreciate a bit more instead?
And how about China’s announced limits on exports of rare earth minerals? Do you think it is a good idea for them to be acting tough on trade right now? Being big net exporters, they have a lot more to lose from a trade war than most other countries. Intimidation of U.S. companies might work, but measures like this have hit the press and will make their cause unpopular.
This NYT article, just like many of its predecessors, continually reminds me of the blocks of commercial real estate and entire (residential) developments I ‘ve seen within 15 minutes drive from the city centre of 1st and 2nd line cities. That spooks me everytime I’m tempted to get one of those units.
The upshot is not only are native Chinese involved, a whole pack of foreign speculators are in the soup mix this time. Which brings us to the question: when the outflow takes place, what would the situation look like? My guess is capital controls version 3X.
apologies, apologies, chalking it up to a lack of sleep, here’s the linkhttp://www.nytimes.com/2010/10/20/business/global/20ghost.html?pagewanted=2&ref=world
One of things we were trying to work out was why the reserve requirement hikes didn’t take into account Bocom. They targeted the big four, understandably, China Merchant’s (maybe understandable given its status as the largest private bank) and Minsheng. Why not Bank of Communications?
Another question Prof. Pettis. In the first half of 2010, i was hearing that off balance sheet lending was more than the entire total for 2009, the banks have since been ordered to move this lending back onto the books. When this happens, do the banks put it in their current monthly figures, or do they include it as an adjustment for previous months? or something else? I haven’t looked at even the interim results for any banks yet, but could some of the large number for September be off balance sheet items being moved back on…?
Michael, it would be interesting to know what you think about an article by Peter Tasker of Arcus Research in Tuesday’s FT called ‘Renminbi peg risks emerging economies boom and bust’. He states:
“Between September 1985 when the G7 met at the Plaza Hotel, and December 1990, when the Nikkei index peaked out, both the yen and the [German] mark rose roughly 40% against the dollar. But in stark contrast to the Japanese experience, there was no German bubble. When the Nikkei was trebling, the Dax rose by a cumulative 50% – less than most major markets. German house prices gently declined.
The message is clear. It wasn’t the rise in the yen which sank Japan but the response, which was an egregious policy mistake. So if you really want to sabotage the rise of China, the best way would be to facilitate a gigantic asset bubble”.
It appears to me that China is unwittingly going down the same path as Japan. This time is not different.
I have seen hot money inflows mentioned several times now, then why don’t the government statistics break them out? The problem is that the government leaders are trying to copy the U.S. too much. Being totalitarian they can decree that all money inflows that are exchanged into rmb will have the exchange rates recorded. When that account repatriates any funds, the corresponding exchange rate will be used in a first-in first-out fashion.
Prof. Pettis, Rebecca Wilder over at Angry Bear had an interesting take on the raise in interest rates related to Prof. Krugman’s post on it being, in effect, a demand contraction in a world that needed more demand. Ms. Wilder stated that the interest rate hike could have the strange effect of inducing relative depreciation through reducing domestic demand (and hence production inputs) when CNY is pegged at a fixed exchange rate.
http://www.angrybearblog.com/2010/10/chinas-competitive-devaulation.html
When the pots are calling the kettles black http://www.nytimes.com/2010/10/21/business/global/21dollar.html?ref=business
It remains a pretty weird policy mesure in a country where values are -in general- not set by what people in the West tend to call market forces. It is always interesting to see how policy measures taken in an alien environment work out. But in the case of China there will be very little to see and whet there is will be difficult to interpret.
Thinking about China and its strange economics, I spent some time with Friedman/Schwartz’s Monetary history of the United States again especially on the “greenback” period, when the US went through one of its best growth periods while prices were declining and money supply was virtually constant. A very different monetary situation then than present day China, but the real economy, with very fast growth, an infrastructure explosion (railroads, canals, telegraph, opening uo the West) as well as rapid immigration (similar to the riurals coming to the cities in China) quite similar.
Not that these scant facts (and the little I know about Cina) by themselves offer a aparale, let alone the basis for a theory, but it, combined with China’s explsosion of the money supply under otherwise similar circumstances, suggests that maybe contractionary monetary policy does not work in a cash society (as the US was then and China now) that is simply growing too fast, and that monetary policy is irrelevant. The one thing China now and the US then share was friction (and complexity) on the international front. No one really knew how to relate US treasury paper to gold/sterling and hence the domestic financial market was partially shielded.
The value of the Chinese mesures, imho, is simply symbolic. But whi trusts the symbols of a politically weak government?
Judy:
In 1994, China devalued the RMB by 60%. I assume this was to deal with some issues in the banking sector. That was 16 years ago, I assume some ability since then to have addressed those issues and move back toward a model which doesn’t unduely siphon off opportunities for more balance in global development or lead to a sucking of MNC/TNC supply chains up into China from other regional and global economies due to the structures that exist, that don’t exist elsewhere, where the “model” isn’t able to be replicated elsewhere, due to its size, where much of its sustained growth, might be from those issues, beliefs on all sides as to the value and utility of those structures (both internally and externally) and even narratives as to the benefits, necessity, of said structures to the global economy. Don’t get me wrong I understand the value and importance of a strong China, it is now time to move in that direction, upon principles that are of benefit toward furthering global development, as there are and will be in the lifetimes of any member of this boards grand-childrens lifetimes a plethora of development opportunities.
Today’s news:
BEIJING – China’s customs revenue for 2010 hit 1 trillion yuan ($150.4 billion) as of Oct 14, a surge of 46.1 percent from one year earlier, the General Administration of Customs (GAC) announced late Thursday.
http://www.chinadaily.com.cn/china/2010-10/22/content_11444291.htm
For anyone living in Beijing, it is hard to buy that the Chinese middle class are under-consuming, and we all know that the migrant workers spend every fen (cent) they make.
Michael, this from Societe General, which is what I believe I have been trying to poitn out, and insofar as to your points related to the medium to longer term shift to a more internally demand driven Chinese economy; “Global policymakers, however, will be painfully aware that cleaning up banks, household balance sheets and public sector finances in the wealthy economies is a multi-year process, leaving a gaping hole in global demand. If filled by domestic demand in emerging economies, the world would enjoy firm growth. If harsh words become harsh protectionist actions, global recession would follow”
Societe General, made another point of use, despite calls coming today from the G20 meeting, that there has been some agreement, and historic changes, and although these are important, and the Europeans have agreed to give up some of their over-representation in the IMF, it will take several more meetings for the G20 to mature. Yet, again, for those who believe vast system change to be in the offing, and a movement of economic power in one direction or another to take a step back, again, these things point to more than a decade of working of excesses in the system. Much greater maturity in these matters will need to develop, thus the importance of strengthening institutions with a history, legacy, and cooperative culture based on previous experience and some continuity to structures and operations. As to the movement of economic power, once and for all, this is, and has been a historic process more than 50 years in the making, but, people act as if it is a new creation, even applaud it, in support of it, satisfying tired old frames composed during another era whose time for a philosophical/ideological battle has now passed. Were only the frames, whose lingering memes, are of little utility in the maturing of the global system. Anyway, for investors out there: Food/Agricultural Commodities and Associated Companies Up, Oil stable to lower, Gold (a valueless investment, exit timing is the most important), …..look for signals toward infrastructure investment from Int Institutions, Governments, Businesses and similar (over the next few years). I suspect the world growth to stay sub-par, and the system needs to not only re-build balance sheets, and shake out serious overcapacity, but gain a broader perspective as to what the goals of the system are. Of course, there will, and need be the incentivization of making money, just less of it will be made in the next decade than was made in the previous. Hopefully, all come to the realization, that pain need be felt broadly to optimize the system, short of kowtowing to domestic constituencies, whose perspectives are important but when taken to extension, might be of less utility both internally and externally. As always, there are a plethora of development opportunities, but even in the discussion of such, frames built in another era need be re-evaluated. And much greater digestion of cultural lore, manipulative alternative histories, and memes that bind the people to faulty understandings of the world, its history, the importance of particular historical experiences, need be considered to lead the world in positive directions, ones which will be ultimately more profitable across an abundance of measures.
Daimler sees China as its No 1 market by 2015
http://www.chinadaily.com.cn/china/2010-10/23/content_11449029.htm
Another awkward fact for Nobel-winning economists to reconcile with their two prominent claims:
1. China under-consuming; 2. China RMB under-valued.
Fact 1, China’s 2009 GDP is 1/3 that of the U.S;
Fact 2, for 2010 year to date:
101,350 Mercedes sold in China (mostly S and E Class),
159,700 Mercedes sold in the U.S. (mostly C Class).
The Benz index is 60% more, not 3 times more. China under-consuming in junk food to make up for this over-consuming in Mercedes?
Fact 3, “As 70 percent of our products now are imported, we plan to gradually increase the proportion of locally produced units to 70 percent by 2015,” said Dieter Zetsche, CEO of Daimler AG. A record year-on-year increase of 129 percent enabled by the RMB being undervalued relative to the Euro?
Fact 4, Mercedes earns an average of roughly 30,000 euros ($42,245) in profit per Chinese sale, 10 times its typical take on cars in Europe and the U.S., where less expensive Benzes like the C Class are the most popular whose starting price is around $34,000. Wouldn’t you say that it is more logical to deduce that USD is undervalued thus a German manufacturer has to squeeze profit margin to keep the American list price low?
LinhdeChuan:
Are you actually serious? How about not choosing isolated numbers, of little value or point, where the strength of an economy, by your logic is based upon sales of one particular product, of one extremely diverse class of goods, in a much larger industry, where said product isn’t nearly the largest purveyor of said products, nor even the most important innovator on an industry wide basis. Anyway, such an example is easily explained, further such data could be used to prove very different points then those you seem to desire, while you make weak and illogical conclusions from such seemingly important, yet isolated data, where your conclusions don’t even rise to the level of circular logic, and are stated without any relation to argumentation which considers multiple levels and influences on the issue/industry in question, and are further unable to be evaluated relative to the rather limited data found elsewhere in your writing which actually could be used to prove points, absolutely opposite to those which you seem to purport.
Anyway, how long had you lived in the States or studied the culture,…Benzes, FYI,….Benzs….anyway, under present construction, with consideration of systemic factors, luxury goods, or those seemingly to be, should do well, well into the future, regardless of other outcomes.
CS
liudechuan:
“Fact 2, for 2010 year to date:
101,350 Mercedes sold in China (mostly S and E Class),
159,700 Mercedes sold in the U.S. (mostly C Class).”
Don’t forget that these luxury cars are not subsidized by the stimulus policy, but are growing much faster than the overall auto sales, which in itself are growing rapidly. So much for “China’s auto sales growth is due to stimulus.”
greg and liuedechuan,
sheesh! just a wild thought, but don’t you think the rising sale of mercedes and bmws might have the teeniest, tiniest bit to do with rising income inequality? the fact that china has more billionaires than any country in the world except the US is not proof of relatively rising consumption. billionaires, and rich people in general, consume a tiny share of their income. in fact this will shock you, but as income inequality rises we will see BOTH rising mercedes sales AND declining consumption as a share of GDP. a few years ago the government was eager to deny the claims made by people like yu, pettis and shih, but now even the most recalcitrant pretty much agreed with those claims, especially that consumption is too low. why do you guys keep insisting on things that even the government no longer pretends to believe?
liudechuan,
why would anyone draw conclusions about overall consumption from mercedes sales? why not use government consumption numbers? or if you are determined to “prove” that the the chinese government is too stupid to get its own consumption numbers right, why not use art sales, or premier cru bordeaux to prove your point. it would be just as silly but a lot more dramatic.
greg,
auto sales drooped when the stimulus ended and started up again when they started. if the stimulus was irrelevant, why has it been continued?
JackW: “sheesh! just a wild thought, but don’t you think the rising sale of mercedes and bmws might have the teeniest, tiniest bit to do with rising income inequality? …”
My only point was that auto sales growth in the last two years do not have much to do with stimulus. I wasn’t trying to debate anything else.
JackW:
“greg,
auto sales drooped when the stimulus ended and started up again when they started. if the stimulus was irrelevant, why has it been continued?”
I don’t know what you’re talking about. When did the stimulus start? When did it end? And when did it start up again? You need to do some homework . Stimulus has some effect, but not the main effect.
JackW:
“a few years ago the government was eager to deny the claims made by people like yu, pettis and shih, but now even the most recalcitrant pretty much agreed with those claims, especially that consumption is too low. why do you guys keep insisting on things that even the government no longer pretends to believe? ”
Most people in China agreed that China should increase domestic consumption; Chinese government has never denied that. I have never said anywhere that China’s consumption is too high or should not be increased. I mostly pointed out that Mr. Pettis exaggerated the under-consumption and over-investment, particularly in infrastructure, in order to justify his overall “pessimistic” view of China’s economic prospect. I believe China’s economic future is bright and the best is still ahead, even though there are tremendous challenges just as there had been huge challenges before.
So I mainly disagree with Pettis about the future prospect of China’s economy, and particularly think his approach in arriving at his conclusion is flawed and biased. He does, however, make some good points about individual problems in certain areas of the economy.
My intent was to pose questions, for our serious thinkers to work out answers that are consistent with their models, but I am not displeased with the unintended result of flushing out participants who have an axe to grind.
With Nobel laureates often at opposite ends of the spectrum in solving China-U.S. issues, it is obvious that economists only have conjectures and Economics is not a science yet. But is Economics a Nobel field that is closer to Literature, expressed in fictional or non-fictional writing about the human experience with passion, or would it develop into one of the sciences where scientific theories are expected to be tested by checking the empirical data against the theories’ predicted results?
csteven, the Benzes sentence is quoted from Jim Palmer’s 10/18/2010 article in Barron’s interviewing Mercedes CEO Dieter Zetsche. Maybe East Coast spelling is different from the Midwest?
DDAIF and LVMH are the stocks to buy if one believes that Chinese consumers will be over-consuming rather than under-consuming, not unlike the Japanese consumers just before their crash in the 90′s.
JackW, amusing and exposing that you use China’s billionaires to dismiss the Mercedes sales surge. According to the Hurun report, there are 1,352 rmb-billionaires in China – families with net worth of US$150M. Maybe each of them is purchasing 99 Mercedes in 2010 because 99 is such a lucky number?
I agree with JackW that sales of luxury vehicles (affordable to a small % of the population, even in developed countries) is no harbinger of healthy consumption by the populace/economy at-large. You may as well point to record corporate profits, and the current bull markets in gold and silver, as “evidence” that the West is economically robust at the moment: after all, how can they make/spend so much income if the economy is unstable? Overall, China super-rich sit on assets that are between 1/5th and 1/4th of GDP, which makes even America’s alleged income inequality look meager by comparison.
Back to the main topic, however: I read Patrick Chovanec’s take on the interest rate hike, and he treats it as more evidence that inflation is working its way through China’s economy: “The point is that inflation is driving interest rates, not the other way around.” It’s an unconventional but well-defend point he makes.
On the car thing…
China is the largest car market by unit sales (IIRC, it passed the US this year). Note that this is by number of cars sold, not by total value of cars sold: the average price of an American car is around $30k, while I’m pretty sure it’s under $10k in China.
Cherry-picking M-B sales is strange too, as it looks like they account for less than about 1-2% of overall car sales in both countries. Also, I think we Yanks might buy fewer M-B’s in part because they’re not very highly regarded here (they have a reputation for low quality in the States). If I had $50k-$70k to spend on a car, a Mercedes would probably rank toward the bottom of my choices (I’d probably get either a Cadillac CTS-V, a BMW M3, or maybe a big diesel pickup).
The main thing I would take home from those statistics is what previous posters have said: income inequality in China is very high.
Liudechuan, your theory is that only billionaires can afford expensive cars, which is why each would have to buy 99 Mercedes to make the numbers work. I’ll bet you JackW doesn’t mean to imply that at all. I think his point is a little more serious than that. The sale of Mercedes is not an indication of overall consumption. It is an indication of income inequality. I think the point is not only true but also pretty obvious. Why don’t you use government figures on consumption, or the fact that the current account surplus is equal to savings minus investment, to get a handle on how low consumption is? Why are Mercedes the best indicator of overall consumption? is this a pretty standard condition in other countries?
@Cstevens (comment 31)
Sorry, didn’t catch what your comment was referencing?
The cross fire from the currency issues is really interesting , if only for the fact that no single side is really having clean hands and yet lots of waving around.
How can anyone imagine that the world economy has stabilized? My impression is that the viability of a large block of the world economy, the US, Europe, China and Japan is tenuous at best. These regions are leveraged up to the eye balls in order to support an unbalanced, unsustainable economic model. That is my understanding.
There was a near economic collapse in 2008. The collapse was in part a collapse in confidence. The confidence was restored by massive intervention by central banks. The interventions did nothing to correct the imbalances. We now have a situation where asset prices, economic stability and industry viability are explicitly under pinned by central banks. The net effect of which seems to be the poor get poorer and the rich get richer. The mechanism for this transfer being financial repression as described by Micheal Pettis.
It is logically impossible for an unsustainable system to continue. Michael has described some of the different ways reballancing could occur both good and bad ways.
I am interested in what kinds of things could be a catalyst for another episode of severe instability. In 2008 effectively there was an international bank run. What would cause people to once again lose trust in banks? I guess exposure of serious systemic mortgage fraud resulting in creditors becoming unsecured could do it. Of course the central bank can just re-secure them. How about serious civil unrest due to high levels of unemployment? China worries about unrest due to high unemployment within it’s own borders. China should probably be worried about civil unrest within the borders of it’s major trading partners. I need a third possibility to round out my comment so I’ll give an escalation of tensions between Japan and China as Japan is hit by the triple whammy of competition, resource restriction and problematic currency appreciation all connected to activities in China.
If the total car sales are stagnant or shrinking, while luxury car sales are increasing, you can argue that it reflects increased inequality, because less people can afford even the low-end cars. But if overall car sales are increasing, like in China, you cannot make the same claim.
Most Chinese cars has less value than American ones because per capita income in China is less than 1/10 of that in the US. China is far from reaching her full potential.
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