Last week I suggested that slowly the consensus is shifting towards a recognition that Chinese growth may slow sharply in the next few years. When I discuss this prospect with analysts and investors, however, they almost always worry about two things. First, since China represents the largest component of global growth, it seems reasonable to expect that a sharp slowdown in China will also mean a sharp slowdown in global growth. Slowing Chinese growth, in other words, should be terrible for the world. Secondly, if growth does slow sharply, this should cause an equally sharp rise in social instability and, with it, rising political instability.
I disagree with both claims — not that they are necessarily wrong but rather that they are not obviously true, and depend heavily on the way China rebalances. To see why it is worth considering what happened to Japan in the past two decades.
In 1990, Japan was 17 percent of the global economy and was easily the second largest economy in the world. It also accounted for the largest share by far of global growth, having completed two ferocious decades during which time it’s economy had grown annually by eight to ten percent. Only the most skeptical doubted that within a decade or two Japan would overtake the US as the world’s largest economy.
Imagine at the time that you had been smart enough, and foolhardy enough, to predict that over the next two decades Japan’s growth rate would collapse to substantially less than one percent annually, and that by 2010 it would be less than one-third the size of the US. Had anyone believed you (and of course no one would have believed you), they would have almost certainly made two very obvious predictions.
First, a collapse of that magnitude in the Japanese growth rate would create an enormous drag for the rest of the world. Without Japan to power it, global growth would be anemic at best.
Second, the Japanese people would have been unwilling to accept with equanimity such a disaster. At the very least there would be a surge in social instability and Japanese voters would have revolted against their leaders.
Although the first prediction, about a dramatic slowdown in Japanese growth, would have turned out to be completely accurate, the two subsequent predictions would have been completely wrong. First, in spite of the virtual collapse of the Japanese growth machine, the world experienced robust growth in the 1990s. Second, the Japanese people turned out to be remarkably docile about the terrible turn the Japanese economy took.
Contributing to growth
It is worth considering why Japan did not fulfill what seems like such obvious predictions. The answer, it turns out, may depend crucially on the way the Japanese adjustment took place. Take Japan’s impact on global growth. Analysts too easily confuse a country’s share of global growth with its contribution to global growth, but they are very different.
Although Japan comprised a disproportionate share of global growth before 1990, this doesn’t mean that it contributed disproportionately to growth outside its borders. On the contrary, Japan had at the time the largest trade surplus ever recorded as a share of global GDP. This meant that it absorbed far more global demand than it provided.
Since I believe that it is largely demand that powers growth, Japan may well have been absorbing more growth from the rest of the world than it contributed. In that case the impact of Japan’s declining GDP growth would come about largely as a consequence of the change in net demand it provided to the rest of the world – would its trade surplus grow or shrink?
On that score it is pretty clear that Japan’s contribution in the past two decades to the rest of the world was positive. The combination of the small decline in Japan’s surplus as a share of GDP and the large decline in Japan’s GDP as a share of the world (Japan dropped from roughly 17% of the world in 1990 to 8% today) meant that from the late 1980s to the present, as a share of global GDP, the Japanese trade surplus dropped by more than half.
This means that Japan’s net demand more than doubled during this period as a share of global GDP, or more accurately, that its deficiency in net demand dropped by more than half. This would have provided an expansionary boost to the global economy. Perhaps this is why the world was so easily able to shrug off the almost unprecedented collapse in Japanese growth rates even though Japan was seemingly the great growth engine of the world.
It wasn’t so bad
But what about social instability – why were the Japanese so accepting of such a shocking contraction in growth? The answer here has probably to do with the fact that during this difficult adjustment Japan rebalanced its economy away from one that penalized household income and consumption growth to one that supported it.
If the Japanese measured well-being in terms of GDP per capita, the last twenty years would have come as a brutal shock. But if they measured it in terms of consumption per capita, the last twenty years were not so bad. Before 1990, Japanese consumption grew much more slowly than Japanese GDP as households were forced to subsidize growth via large transfers of wealth from households to businesses – mainly in the form of very low deposit rates and a seriously undervalued currency. This, of course, is the same process that is occurring in China.
After 1990, Japanese consumption grew substantially faster than GDP as the country painfully rebalanced its growth model. One of the forms of rebalancing, interestingly enough, may have been Japanese deflation, which automatically pushed real deposit and lending rates into positive territory and so reversed one of the main mechanisms by which wealth was transferred from Japanese households to Japanese businesses – artificially low interest rates on deposits and loans.
Japanese per capital household consumption, in other words, did not decline nearly as dramatically as Japanese per capital GDP. In fact it may have grown in real terms (once you adjust for inflation in the period before 1990 and deflation after, and after you adjust for the decline in population) only a little more slowly after 1990 than it did before 1990. As Japan rebalanced, wealth was transferred from the state and corporate sector back to the household sector. Most of the slowdown was consequently borne by businesses and governments.
I think the Japanese story has important implications for our analysis of China. If China indeed experiences a rapid slowdown in GDP growth, the impact on the rest of the world may be far less than we expect. The real key is the evolution of the Chinese trade surplus. If it contracts, it will provide an expansionary boost to the rest of the world, not a contractionary one.
Of course that doesn’t mean that the world will grow quickly. My expectation is that global demand growth over the next several years is likely to be anemic with or without China. But it does man that a slowdown in Chinese growth might not be the disaster for the world that many believe.
Also a rapid slowdown in Chinese growth does not mean a social or political disaster domestically It depends on how serious China is about rebalancing its economy. If policymakers are willing to force up interest rates and wages, most of the adjustment pain will be borne by SOEs and the state sector, not by the household sector. In that case we might see a slowdown in Chinese consumption growth, but one not nearly as severe as the slowdown in Chinese GDP growth. Since the Chinese, like everyone else, probably measures their well-being in terms of purchasing power per capita, rather than GDP per capita, a sharp slowdown might not be nearly as painful as we assume.
I think what’s coming in China (and other developing countries) is inflation. Some of it because of the excessively loose monetary policies pursued by China and others but a lot of it is old fashioned demand pull inflation. Getting rid of this demand pull inflation means monetary policy has to hurt. You can’t do it while keeping 10% growth. The Chinese policy makers now have a choice – unrest because of inflation or unrest because of the slower growth needed to reduce the inflation. There are no good choices now.
Bob Cringely (iCringely.com) has an interesting argument that China may have a hot decade, but the century belongs to India, due to China’s inability to assimilate, etc. Very good article -
The Chinese Decade
Posted: 31 Oct 2010 09:53 PM PDT
Something has been bothering me lately and it is our assumption that China is the world’s next superpower and that we’d darned well better get used to it. Hogwash. We’re into the Chinese decade, not the Chinese Century.
The century belongs to India.
Last century was all-American. We came into the 20th century a huge but unsophisticated nation. Our industrial might made us a factor in World War I. Our cultural ingenuity caught the world’s fancy in the 1920s and — 90 years later — still hasn’t let go. As a result this will not be the Bollywood Century. The Great Depression secured our place at the table by showing we could take much of the world down with us. World War II saw us save that world, grabbing half a century of global dominance in the process (thanks Dad). But now we’re screwing it up a bit out of inertia and greed and ignorance of the very world we created. We did it to ourselves by thinking that nothing could really hurt us. But in the end that wasn’t true any more than the idea that Harry Houdini’s stomach could take any punch.
So we’re giving it up to the Indians. not to the Chinese. China has the population, the will, the educational system, the foreign currency reserves — everything to make it the next global superpower except two things: 1) an emerging middle class generation comparable to our Baby Boomers, and; 2) a functional diaspora (look it up, I’ll wait).
In contrast to China, India has only those two things: 1) a real Baby Boomer class, and; 2) a functional diaspora (did you look it up?). Nothing else about India works at all — nothing. India is corrupt and divided. While India has a commercial tradition it isn’t an especially functional one. Fractionalism and factionalism, whether economic, social, or religious, will keep India from ever truly pulling together. But that doesn’t matter because my two original points are enough.
What I find interesting is that most people just take it as bible truth that China will be the next superpower because it is so number-oriented (huge infrastructure dollars, huge manufacturing dollars, higher per capital wealth than India, bigger middle class, etc…). Plus it is easier to see China becoming dominant because we prefer, I think, to be economically conquered by people very different from ourselves. And China just seems more different than India.
China has all those factories and all that money (our money — isn’t that the way we tend to see it?). China also cheated itself out of a generation through overzealous population control, which might be good for the globe but is bad for hegemony. But the biggest reason why India will win and China will lose is the Chinese stay to themselves too much. They don’t assimilate.
Look at the world’s multinational companies. Compare their executives of Indian and Chinese nationality or descent. Indian executives are everywhere. Chinese executives are nowhere.
Now remember what western corporate law teaches us — that managers control companies, not their shareholders. China isn’t just the 1.5 billion Chinese, but Chinese inside China plus their diaspora worldwide. Same for India. The big point is not very politically correct but it is nevertheless true — there is a massive disparity in Indian vs Chinese executive representation in the top 500 multinational corporations.
You can rattle off the number of Indian CEOs, COOs, CTOs, CIOs, and CFOs then find another legion operating just below the CXX level. My guess is that their comfort with western culture, their English language skills, and — perhaps most importantly — their institutional training by the Brits enable them to be the best bureaucrats and political operators who — even though they may not add a single dollar of value — use those skills to survive in droves and make it to the top. In contrast, you see hardly any high-level Chinese executives in multinational corporations that aren’t Chinese multinationals.
Juxtapose this with domestic Indian conglomerates that have managed 10 percent year-over-year growth despite the absurd inefficiencies of the domestic Indian market and you get a phenomenal triangulation move that will leave China in the dust in the next 10-20 years.
Then remember that the Indian workforce will still be young and growing in 10 years versus a rapidly aging Chinese population and the fact that India has not only already won in services and pharma, but is proving itself smarter and more innovative in industrial manufacturing, too.
China is not a particularly good bet after about 2020, though the Chinese domestic economy will grow like gangbusters for the next few years — hence they win the decade, though not the century.
History has shown, too, that India and China don’t play well Both are outrageously arrogant and selfish, China is too top-down and India is too driven by short-term political issues. Chinese companies hate dealing with Indians.
Here’s what all this means for the future. It’s very good for the English language, for one thing. That may not seem like much, but it is, at least for those of us who are native English speakers. It’s not that English is so great, you see, but that it is not Mandarin. The Indians will ensure Mandarin does not become the dominant language. And if they can do it they’ll also make sure the RMB doesn’t replace the dollar as it is not in their interests from either a national or a multinational corporation management perspective, either.
I suspect the multinational corporations effectively controlled by the indian diaspora won’t even need excuses to work more with India instead of China as China becomes more and more of an ass-pain for the world. Since the Indians control the multinational corporations, they have a vested interest in the U.S. and Europe not completely collapsing.
Lucky us.
While there’s not much optimism floating atop this idea that Indian managers will allow us to survive as viable economies mainly to keep the Chinese at bay, remember that survival is an absolute prerequisite for resurgence.
If we have a hope of making the 22nd century again ours (and I think it can be done) we have to start somewhere.
Michael,
Your reasoning is clearly sound, but one thing I find interesting is how little weight you and most other China observers place on democratic institutions. And I don’t really mean being ruled by a central committee versus a parliamentary system like Japan, or our federal government here. At the national level, I think people in China probably see their government as at least as responsive as people in the U.S. see ours.
But in a representative democracy the more local the governmental body, the more responsive it is. I can get my mayor on the phone and complain about anything I want, and she’ll listen to me respectfully, mainly because she needs to run for office every two years. This year, we voted for a rise in our own property taxes. Some people aren’t happy about it, but it’s a lot easier to hate Congress than it is your neighbor.
China has created a bizarre system where the more local the governmental body, the LESS responsive it is to the needs of the people. The local officials are answerable not to the local populace, but to regional officials, who, in turn, are answerable to national officials. That removes a great safety valve. And I’d be willing to bet the average person in China thinks very little of their local officials, and many seem to despise them.
There may not be rioting in the street over party rule. But how about local allocation of jobs, land, taxes, etc?
Democracy really is a good idea, even on purely practical terms.
[...] What happens if Chinese growth slows? (Michael Pettis) [...]
Oh boy, where to begin!
the credit bubble sitting under all assets was just beginning to form in the late 80′s, the Baby Boomer trend was reaching it’s full power, the techology wave was just reaching escape velocity, and China’s own policy change toward ‘to be rich is glorious’ had also just begun. To say that the Japan deflation was not as serious as believed but ignore these other gigantic waves that were happening simultaneously to cushion the deflation is silly at best.
There is far more debt in the world today than there ever was in the 80′s; there are far more government’s in trouble today and at the same time than there ever were in the 80′s, and interest rates then were high and coming down then, whereas interest rates now are as low as they can possibly be in a world the huge leverage sitting underneath it
add to this that central banker policies are now so coordinated that they are causing all asset class correlations to coverge – 1:1, such that diversification is almost impossible globally any longer, and you have the recipe for a domino effect when another Black Swan hits.
Add to those conditions the fact that 15 major countries today have housing prices that – on a price-to-income- basis make our US bubble look tame, and Bernanke on a one-way course toward more bubbles and one has to worry about how things will turn out differntly this time, than what Japan experienced
the sovereigh safety net that government’s provided in the past is potentially gone, save for the printing press and a currency devaluation race to the bottom
On the demand lead growth, as you know most mainstream economists have tended to be primarily interested in supply as the bottle neck for growth in the last 40 years.
In part I’ve felt that’s mainly because they look primarily at post-WWII data, which until 2007 was fueled the US consumer of last resort and a (nearly) never ending consumer debt expansion. And they have an accute tendency to revert to believing Say’s Law when they think no one is looking.
That said, I can’t quite make the case for growth being ‘primarily demand lead’ either. How do you see the growth process working. medium and long term.
Cool story by Bob Cringely. Sadly, the real world does not reflect his ultra-optimistic views. Yes, China will go through tremendous growing pains; however, a united country with political stability is essential to long term growth. India, while they have great multinational executives, is still impoverished with over a 50% illiteracy rate. Indians themselves still can’t get along with each other much less the Chinese. The political corruption and efficiencies in India are much greater than it is in China.
Speaking of multinational companies. The high tech companies are mainly moving to China, not India. I don’t see India making airplanes to compete with Boeing and Airbus, but China already is. As I am typing this, biotech companies are always paving the way to expand biopharmaceutical manufacturing into China.
China will go through a lot of pain, but they won’t share the same fate as Japan.
I would agree with the point of this article. So much has been said of the forthcoming gloom and doom that will beset the world if Chinese growth comes off the rails. The reality is that, as he has been saying all along, the rebalancing that will occur is necessary and ultimately healthy if done right. A shift away from an mercantilist model would necessitate that goods be manufactured/provided to a greater extent elsewhere. The resulting activity would clearly benefit GDP and importantly, employment.
But I would go further and consider the perspective people are coming from when they talk about the impact of slower Chinese growth on the rest of the world. When I think of this impact, I care less about GDP and more about equity market & sector impacts. Take a look at a chart of any industrial commodity since the early 1990s. This rapid ascent is the result of a couple of things that may all be one in the same: 1) the miracle of chinese growth – expansion causing relentless demand for commodities; and 2) loose money policy (relates to US loose money). I talk to stock brokers daily and I can attest to the fact that China has been a favorite “catalyst” for resource companies for almost the past decade, with increasing tenacity more recently. I honestly believe that regardless of what the ultimate GDP impact is to other global nations, a slowdown in Chinese growth would dramatically reduce the “China premium” in many commodities (don’t be fooled into thinking commodity prices do not have speculation premiums built in) and related equities. Moreover, to the extent that certain countries benefit from the Chinese miracle, such as Canada & Australia, it would not be a stretch to see these countries lose this GDP benefit as well.
So while I agree with Pettis’ assessment of overall global GDP impacts, when looked at from more specific angles, the consequences can not be ignored.
Michael -
You write: “the large decline in Japan’s GDP as a share of the world…meant that…as a share of global GDP, the Japanese trade surplus dropped by more than half. This means that Japan’s net demand more than doubled during this period as a share of global GDP, or more accurately, that its deficiency in net demand dropped by more than half. This would have provided an expansionary boost to the global economy.”
So, do you mean to say that any time growth slows in a country with a trade surplus, it provides a boost to growth in the rest of the world (assuming the surplus stays constant as a % of the country’s GDP)? And any time growth accelerates in a country with a trade surplus (again, assuming that the surplus stays constant as a % of GDP), growth in the rest of the world slows down?
Or are you saying that this kind of paradoxical effect can happen, but only in rare and extreme circumstances?
Because if you are saying that growth is always a zero-sum game between countries, that doesn’t make a lot of sense to me.
The India comment was interesting to say the least. Isn’t it going to be difficult for us to make a comeback in the 22nd century if the Caucasian population continues to decline? In another 20 years he average family size for whites will probably be less than 1.5 which will make the numbers go down even more quickly. At some point the United States will be primarily Hispanic and Europe will be primarily middle eastern. I’m not necessarily saying this is a bad thing for the world just pointing out that I don’t see a comeback in the cards at least for Caucasians. If anything the 22nd century will be Africa’s.
[...] Link [...]
[...] What happens if Chinese growth slows? Imagine at the time that you had been smart enough, and foolhardy enough, to predict that over the [...]
Hei Michael
Just wondering about one thing? Wouldn’t slowing down the economy and letting SOE taking the slack result in massive lay-offs or sharp decrease in job opportunities and couldn’t that have a huge effect on social unrest in the country?
From:
http://mungowitzend.blogspot.com/2010/11/what-goes-around-comes-around_15.html
Alan Blinder is up in arms at the audacity of foreign leaders calling QE2 “currency manipulation”. So is President Obama, Paul Krugman, and a host of other luminaries.
Here’s Blinder in today’s WSJ: “But calling QE2 “currency manipulation” is a grotesque abuse of language”.
His (correct) argument is that QE2 is basic everyday expansionary monetary policy just applied to a different portion of the yield curve. Sure it may have the side effect of lowering the dollar, but…..
People, the foreign reaction is a predictable consequence of our insistence in labeling China’s fixed exchange rate as “currency manipulation”.
A fixed exchange rate is a basic everyday policy regime. Bretton Woods was a system of fixed exchange rates, so the US has had a fixed exchange rate in the not so distant past. The countries of Western Europe continued to struggle to achieve a system of fixed exchange rates post Bretton Woods, culminating in the creation of the Euro which is a system of fixed exchange rates between all the participating countries.
Here’s another gem from Blinder: “the US is sovereign nation with a right to its own monetary policy”.
And China isn’t???
Our administration and elite pundits have been blaming other countries for our problems for a while now, so it’s not surprising that many other countries are enjoying their chance to throw it back into our faces.
Thank you for another well-argued piece of writing. I think you are right about both your points.
Seems to me the big question is, will the Chinese leadership allow the sort of healthy rebalancing you describe, or will they become hysterical and dangerous as they try to defend and perpetuate the development model they seem to believe in. That development model has been personally rewarding to them as individuals in one or more of three ways: enhanced power over the Chinese economy and everyday life, enhanced feeling of omnipotence and indispensability (ego strokes), and actual financial rewards.
When China’s growth slows, the Chinese government will see it as a threat to their hold on power. Their typical response to a threat is externalize it: blame it on the US, at least publicly (They may have other ideas in private.) This will focus the anger of all Chinese towards the west. This will also make the call for “eat bitterness” (suffer the hardship) from the people more palatable by the people, and so will defuse any political/social unrest. It depends on how much internal threat the Chinese government think it is facing, they may want a shooting foreign war to keep the people under control. Where it will start that war is anybody’s guess. Likely candidates are Japan, Taiwan, Philippines and Vietnam, all have territorial conflicts with China. But if all of these surrenders to China, a shooting war can be avoided.
I think you rightly draw a China and Japan equivalence. However, there are two things to point out.
1) Japanese slowdown happened in the time when the consumption engine of the world was robust. It was driven ably by US and west. Today, I am not so sure we can say that. Thus the global growth may depend more on Chinese consumer rather than Chinese producer (or investments in China).
2) I was tempted to look at Japan as a supplier slowdown. (I know it wasn’t but just consider it for a moment). In this case, the demand is high and supply from Japan is lower. This could have dispersed the supplier base across the globe with Japanese companies establishing lower cost factories elsewhere. So it may have caused two things a marginal ease for Japanese economy (because of repatriated profits) and building of global economic muscle (through tech transfer from Japan).
Prof Pettis,
I am a little surprised that you fail to mention the credit expansion that occurred in the Europe and USA during the time that Japan was re-balancing which helped provide japan a softer landing. also why not mention Japans huge debt binge of their own. A future of higher taxes or painful inflation seems to be in the cards for Japanese households. Why omit these points?
Michael,
Very useful post that spreads the word about the limitations of GDP/cap as an indicator for various things normal people would associate with prosperity.
Maybe the following is also interesting: A diametrically opposed case (to Japan) and one very familiar to Chinese policymakers and senior party members, is Singapore. In Singapore, GDP has cult status (various public sector incentives are linked to the GDP growth rate, more or less like earnings in a corporate incentive plan), and continues to grow quite fast, while civil prosperity as measured by consumption, leisure, income security and housing affordability tends to lag behind. Singapore’s employment share of GDP (with only roughly 70K persons self employed and no farming sector) tends to be slightly larger than China”s but also below half of GDP, and private consumption tends to be pretty close to that as well, leaving doubts about the levels of private discretionary saving (no statistics available). Not that Singaporese living standards are not good (they are probably the best in Asia with the possible exception of Japan, depending on how you define it), but the local development model emphasizes competitiveness of its location (and labor) and this involves instruments which automatically adjust for cost-pull dynamics that would otherwise undermine the chosen national development strategy. One consequence of that approach is that whenever there are gaps in labor supply (at either end of the skills spectrum), a complex repertoire of immigration policies is used, and confrontational forms of labor organisation are actively discouraged. Another consequence is that corporate savings are very large and (mainly State-linked or foreign) corporations tend to accumulate them locally given a favorable tax climate. During the past ten years, the former SOEs have begun to export cap[ital on a very large scale whilst also reducing the disclosed official share. Many similarities with what a more mature form of Urban China might look like 5 years from now based on current policies, even to the point that changes in the Hukou system under consideration appear to aim at boosting internal migration at the top end of the skills spectrum (the bottom end may be monitored but appears to receive no policy treatment) like Singapore does externally.
I believe that the PRC faces a choice between the Japanese development experience (that is wrt to the urban population plus a decent level of legalisation of non city Hukou holders) and the Sinaporese one, ie that employment share levels below the Singaporean model cannot be maintained as the true rural population shrinks in absolute terms and SOEs are put under greater pressure to adopt more societally friendly approaches, but are unlikely to exceed Japanese levels of the mid-1990s. But a policy based on international competitiveness of labor and location (given large productivity increases already in the pipeline there should be no need for action now, even within such a strategy) is clearly unsuitable for a very large country that does not face, like Singapore does, an inert international trading environment (Singapore’s policies are irrelevant to the rest of the world, China’s are not). And it would lead to greater foreign pressure.
DG, the pendulum always swings from one extremity to the other. What you are speaking is typical left-wing claptrap on Africa. Before Africa can become anything more than a resource tool for the West, they must first demonstrate that they are able to achieve political and social stability.
The U.S. will never become majority Hispanic. “Free lunch” public spending is already collapsing with a multitude of states going bankrupt. If you think taxpaying Americans will sit idly to allow politicians, unions, and bankers to continue to screw the people over, then you are living in a fantasy world.
[...] What happens if Chinese growth slows? Michael Pettis. Persuasive. [...]
@DG
What do you exactly mean by “I’m not necessarily saying this is a bad thing for the world”? Do you imply that it could be a good thing for the world if Caucasian were to disappear from the face of the Earth? And what would you say if someone suggested that disappearance of Semites, Africans or East-Asians could be a good thing?
One couldn’t possibly imagine a more utterly racist predication.
China uses up a lot of raw materials, such as an estimated 40% of the world’s steel and concrete. Simply to double industrial output would require world supply of iron ore to go up 40%. And it has to do that by 2018 if China maintains the growth rates of the past few decades. Now add growth in other countries and world supply would have to grow by 2/3, at least. And this is just iron, one raw material among many facing the same kind of supply squeeze. A Chinese slowdown might therefore be good for reducing inflationary pressure worldwide.
Doesn’t this ignore the other side in terms of consumption, ie US consumption has been larger because of its trade deficit with China?
[...] Pettis says Chinese growth may slow (link) but judging by the Japanese experience, it’s not the end of the world because it isn’t [...]
Michael,
While I agree with the logic in your post, the comparison with Japan misses one important point. If a change in the growth model supports a transfer in wealth to the household sector in China, it will not have the same consequence as it did in Japan. In China the costs will be largely born by SOEs, as you pointed out, but being SOEs they are owned by households anyway. Any money put in the right pocket is coming directly from the left one. In Japan, it was largely the private sector that paid the price.
Also, I would also like to ask, you have mentioned many times that SOEs are largely profitable due to capital subsidies, but precariously so. Were Japanese companies surviving on such slim margins as well? Was their profitability as precarious? One assumption I am willing to make is that Japan Inc. was better situated to move production abroad because of the power the brand names. Toyota, Honda et al could offset declines by moving production to the US, Europe, Canada etc. At least Japan Inc. could recapture some of the losses. Profits could flow back to Japan but the GDP component would not.
I outside of Lenovo and Harier I can’t recall any Chines companies that have any name recognition.
This is an interesting argument. I wonder if something similar can applied to intra-national discussions. Basically, industries or regions that recently have appeared successful might only be doing so by using political leverage to create growth at the expense of the rest of the national economy. Here I am thinking about the U.S. Sun Belt/Red States which have wielded their disproportionate Federal power (mostly via the U.S. Senate) to appropriate more funds than they pay in taxes and to bend legislation to suit their narrow interests. And, a propos this blog and its many discussions of consumers versus producers, these regions’ policies are very dependent upon massive consumption, most significantly imports like oil. In other words, shifting away from an economy based upon their ideas of growth might be a lot less harmful than people imagine.
Gee, Michael, not once did you mention the financing of U.S. debt by the Chinese. I suppose you think this won’t have an impact on global finances and its growth?
Professor Pettis,
In your last paragraph you mention that the key to how this will all play out will depend heavily on how well policymakers can redistribute wealth among the government and household sectors. While I know that predicting policy is almost impossible, are there any specific factors to look at which would indicate which way the government is leaning?
I feel many people still look at the government in China as being completely selfserving, and that they will protect SOEs to protect their own interests (there is an intersting article in November’s Bloomberg Markets about SOEs buying up private companies, p 170). Do you feel this is still the case or are we starting to see a change? What sources for news coming out of China are some of the best places to search for this evidence?
Very good post, as usual,
Jimmy
I’ve read that 40% of China’s population is still rural and largely impoverished. I don’t think this was true in Japan at the time of its contraction. There are tremendous pressures in China to raise the standard of living whereas Japan had reached a fairly stable level of wealth much more evenly distributed.
I think this may be an important difference if the government of China has the power to make decisions between growth or contraction. If they choose contraction they will be facing a large backwash of disappointment from a large population of peasants who will feel they have been lied to. You are also assuming that China has the cultural homogeneity of Japan – and that’s not a given. China is a huge country with many diverse regions. The communist party gains its authority by its promise of a better tomorrow.
When Twain supposedly quipped that history doesn’t repeat but rhymes I think he intended to convey that looking back for a historical similarity has as much predictive ability as the similarity in meaning between two words that share the same ending sound. In other words, none. Of course that’s not the interpretation historians and economists prefer.
I find it fascinating that it is a given in so many eyes that America will not simply decline in relative power versus China and India, but that the country will not even be a superpower – it will simply be “dominated” by the Asian giants in the same way that the United States “dominates” the likes of Canada today.
I’m utterly mystified by this, and the degree to which this goes unquestioned. Short of physical destruction, I simply cannot see any way in which the United States does not remain altogether one of the most powerful nations at the table at minimum. The “unrivaled superpower”? No. A superpower? Absolutely. (Although that does get into another curiosity: the apparent belief in popular discourse that when it comes to superpowers there can be only one.)
I do not view my position as wishful thinking, nor do I minimize the challenges posted by China and India, nor do I question their likely trajectories toward becoming economic and, at least in the case of China, likely military superpowers. Nor do I minimize the fiscal and economic issues facing the United States. I simply do not see a nation of 310+ million with the vast built-in and already-acquired advantages, powers and capabilities of the United States simply dropping into also-ran territory.
[...] What happens if Chinese growth slows? [...]
Cool article. I like it when thinkers back up their arguments with logical historical examples. Well played.
I don’t think China will be like Japan though, but only because, while it is true history has a way of repeating itself, circumstance is as important as the specific facts within the country. Let me elaborate just a bit. The circumstances in China today and Japan in 1990 appear very similar in many respects. Actually, though, the world is a terribly different place than it was 30 years ago. The Eurozone is in trouble. The US consumer is on the rocks. (some evidence of a resurgence, but as a Legal Aid lawyer, I know the human suffering has surged these past few years) Thus, while I agree with you that it’s not clear horrible things will happen in China, and I do think Japan is a great example of how predictions can be wrong, I also do not think it’s likely we’ll repeat the history of Japan with China. The economy of the world is just far shakier than with Japan in 1990.
There is an internal component as well. China is a totalitarian state with serious limits on individual freedom. Japan, despite its largely homogeneous society, has been remade into a thriving democracy, and was so throughout the last 30 years and change. It seems quite possible that the democratic system which governs Japan allowed the people not to be docile, but to be more understanding about the circumstances surrounding their economic slide. (all things in life being temporary of course) More importantly, though, it very unclear how the Chinese citizenry, a very different sort in many ways from the Japanese, will react when they have no democratic outlet through which to express their displeasure with failed economic policies, should they come to light.
We certainly saw how American’s reacted to the economy the past few years. How would they have reacted had they had no democratic outlet to express their anger with the government? Today, America is still at peace in part because of democracy, and one wonders too if this is true in Japan? So, what part does that play in China? There is always a pink elephant in the room when we talk about China, and totalitarian governments always collapse. Often, they just need a push.
[...] What happens if China’s growth [...]
Q: “What happens if Chinese growth slows?”
A: The world will be a better place.
Had anyone believed you (and of course no one would have believed you), they would have almost certainly made two very obvious predictions. First, a collapse of that magnitude in the Japanese growth rate would create an enormous drag for the rest of the world.
I think you are mistaken about the conventional wisdom re Japan circa 1990 (while I acknowledge that commonplace perceptions may themselves be distant from reality).
I think most people today perceive that (a) Western companies have moved a lot of their production to China, and benefited from doing so; and (b) Western companies are selling lots of goods to Chinese consumers and have the potential to sell lots more in future. Thus, there is good reason to think that problems in China could mean problems for Western businesses as well.
In 1990, Japan was not acting as the provider of manufacturing services for Western companies, or at least it was not perceived that way. Instead, Japanese companies were perceived more as direct rivals competing with and displacing Western brand names. Also, it was common knowledge that Japanese exports dwarfed imports, and Japan was perceived as a frustratingly closed market, not a vital driver of demand for Western goods.
So I do not think most people would have assumed in 1990 that a slowdown in Japan implied a slowdown in the U.S. If anything, more of a zero-sum mentality prevailed at the time.
This would be a great article…if it was about Japan in the 1990s.
In an article about China in 2010, you devoted 16 of the 19 paragraphs to the Land of the Rising Sun. Take out the Intro and the Conclusion…and we’re left with 1 paragraph of cogent, scintillating analysis.
Gimme a break.
haiguike,
China’s literacy rates are declining, India’s are growing. The fact that China can cobble together a jet proves what? The Russians also had a great aerospace sector but so what? Its true that a more centralized state like China can engage in white elephant projects significantly easier than India but so what?
Michael,
I agree with one of the above commentators about the global context of growth. Most of your posts are always placed into a pretty good, global context but this one seems to miss that a bit. The 1980s, the coming collapse of Communism, the drop of growth rates, the ultra cheap oil prices [compared to now], all seem to be a significantly more benign environment in which demand can collapse than it is now.
Is your broader point that a global re balancing is necessary before a virtuous growth cycle can begin? [And thus break away from the current model where the American consumer holds up half of heaven while China subsidizes this and propels the growth of countries like Brazil and Indonesia that provide it with inputs?
Unless our fearless global leaders figure out who is actually going to buy stuff most of these discussions end up about which country is going dump their problems onto the other. Apparently the US isn’t going to buy stuff, nor Europe, and for now – not China in relation to production. A disdain for the peasants has some nasty ramifications in a global capitalist economy based on selling stuff; there’s only so many yachts a finance titan can buy (with apologies to Mathus and his dream of an engorged surplus-consuming nobility).
Before Obama the US external deficit was about 200b. From the collapse in trade I’m estimating the external US deficit is probably only slightly bigger than that now. The trillions are all funny money.
China could take over the deficit role. Then China could export inflation. 
Noah – it should be apparent. The amount of demand provided
by China to the global economy is greatly exceeded by the supply it produces… Thus the trade surplus. A slowdown in Chinese growth is no boon, however every decrease in China’s trade surplus represents an increase in demand for ROW – which in turn means greater growth ex-China.
I don’t understand Bob’s point vis a vis India. If the question is GNP, then a “diaspora” of talent and skill is the opposite of what you really want. What
bodes well for Indians does not necessarily bode well for India.
Michael, can you please give some more concrete examples? Why will growth merely moderate and not turn into the popping of the property bubble, a massive drop in asset values and net worth, a resulting drop in demand, bankruptcy of low margin businesses, and unemployment?
In the last ten years, Chinese demand, resulting from property and infrastructure build-outs, has contributed greatly to huge moves in the prices of commodities and equipment. It has boosted the fortunes of Germany’s heavy infrastructure companies, South American, Australian, and African commodity companies, even North American agriculture and Iranian energy companies. It’s hard to see how a slowdown in Chinese demand wouldn’t have tremendous worldwide ramifications.
When Japan crashed, the US and Europe were healthy, the Asian tigers were booming, China was starting to progress, and so on. But take out China demand today, with austerity governments in the developed world–where does the demand come from? It feels like the world could could enter a negative spin cycle, so to speak. I may not be articulate enough to articulate this in economic terms, but I think you can grasp my questions.
[...] Source [...]
It’s not like this blog posts a dozen times a day:
“Japanese per capital [sic] household consumption…” — per capita
“But it does man [sic] that a slowdown in Chinese…” — mean
“…mean a social or political disaster domestically It depends on how serious…” — missing period
Also – “Since the Chinese, like everyone else, probably measures…”
Really not possible to forward posts like this to friends with this kind of stuff. I’m all for substance over style, but…
Sloppy.
Dwayne, I suspect that over the next few years countries with strong domestic demand will fare better than countries with deficient domestic demand, and as a member of the former, India will do fine, but I think claims that the 21st Century will belong to India are as farfetched as the claims that it will belong to China or, as we all knew to be true in the 1980s, to Japan. In the late 1950s and 1960s it was the USSR that was generating furious growth and it was widely believed that the 21st century was undoubtedly for the USSR who was expected to overtake the US economically well before 2000. Brazil in the 1960s and 1970s also generated outsized expectations. As all these examples suggest, many countries have experienced decades of furious but unbalanced growth but none of them lived up to their promise, although I agree that Indian growth is not nearly as unbalanced as the other examples I mention. The historical evidence suggests that only countries that experience good, albeit slower, longer-lasting, balanced and sustainable growth, in which there is a well-functioning system of economic checks and balances (that prevent distortions from being taken too far) and a more-or-less equitable distribution of the benefits of growth that are able to pull it off. I say that this is what history suggests, but I also acknowledge that there are so few examples of countries that have pulled it off, that even this is not wholly certain.
Bob, I agree with much of what you say, and perhaps this is what I mean by economic checks and balances mentioned above, but whereas I believe that democracy has been a fundamental part of nearly every sustainable long-term growth story, I don’t know if it is democracy per se, or if it is because of an institutional structure that is common in democracies but not necessarily limited to them. To me, what democracy brings is flexibility, economic checks and balances, and reasonable distribution of growth, but it isn’t obvious to me that only democracy can bring these things.
MAJ, it is sort of annoying when people try to make their trivial observations sound more intelligent by putting forward the silliest possible interpretation of someone else’s argument, but most of your points are either irrelevant or obvious. I suggest however that you try reading my post again. I did not say that the collapse in Japanese growth was why the world grew. I said something very different – that contrary to expectations it did not cause a collapse in global growth, and this is because the rebalancing of Japan’s economy while if contracted contributed to, not detracted from, global growth.
OGT, I am not sure I agree. I believe most Keynesians would focus on the growth of aggregate demand
Peter, I agree that a contraction in China’s growth is not necessarily neutral for everyone. Clearly commodity producers will be hurt and manufacturers will benefit disproportionately. I am only considering the aggregate impact.
Noah, no. My point is only that a country’s “contribution” to global growth, especially in the next decade during which time I expect consumption growth to be feeble, is measured by the net demand a country provides to the rest of the world. Notice today that every country is trying to grow by acquiring a larger share of global demand, especially US demand.
Michael, it might. If it occurs too quickly, this is exactly what would happen, as Premier Wen told President Obama a few weeks ago. The pace of the adjustment is likely to be a key factor in the social stability argument. Remember that Japan has been adjusting over twenty years. My working assumption is that a slow adjustment is worse for the economy in the long run but better for social stability.
Litz, the Fed’s QE2 may be the right or wrong policy, but domestic monetary management is the job of the Fed. No one has yet (as far as I know) excoriated the PBoC for its domestic sterilization policies or for chnaging the minimum reserve requirement so many times. Since these are basically equivalent policies, I am not sure why foreign considerations should prevent the Fed from similar domestic monetary management. Remember that QE2 is mainly a problem for countries that insist on intervening, and heavily interventionist countries with undervalued currencies should very obviously protect themselves from QE2 by cutting back on intervention. It doesn’t make sense to me for countries engaged in currency war to oppose countries that respond. The only fair criticism of QR2 is that it might not be good for the US economy.
Rahul, I do not disagree with anything you say, but please remember that I am not arguing that global growth on the 1990s was caused by Japan’s slowdown, only that the nature of the slowdown was expansionary, not contractionary, for the world.
RS, in fact I have mentioned Japan’s credit and interest rate policies many times as a key factor both in the buildup of domestic imbalances and in the rebalancing effort. I am increasingly convinced that understanding the implications of financial repression is key to understanding the Japanese and Chinese growth stories.
Interesting comment, Rien. I am of course very aware of the success of Singapore but because I think managing a tiny city-state creates a very different set of economic, political and financial dynamics, I haven’t looked at it too closely.
Glen, for your first point, since GDP growth was much greater than the growth in household income, this means almost by definition that a disproportionate share of wealth created went to SOEs (and other government entities). For your second point, yes, my understanding is the in the 1980s, and certainly in the last few years, more than 100% of the profitability of the largest banks and corporations was explained by the low interest rate plus speculative financial transactions.
Tortoro, I have mentioned foreign financing many, many times in the past four years and I am rather proud of the fact (or so I have been told) that I have helped kill off the idea that US growth depended on foreign financing of the US fiscal deficit. On the contrary, the less foreign financing, the higher US growth is likely to be. This follows from the accounting identity between the current and capital account balances.
Jimmy B, I think there are many things to look at, but I am skeptical of the claim that the Chinese government is especially self-serving, or at least more so than other governments. I believe that government interests and actions respond to domestic incentives and power bases in China as they do anywhere else. It is important (but not easy) to figure out how the different interests are served and how they affect policy-making.
LJR, the urban-rural difference (along with the income difference) is often invoked as a reason why China cannot follow Japan’s route, but although I acknowledge the difference (how could I not?), I have never been given a sufficiently good reason as to exactly why it matters. I think there is a kind of fallacy here that assumes that if you can identify one “major” difference between Japan and China, all comparisons are invalid, but there are counterexamples. Other countries with unbalanced investment-driven growth and with income and rural ratios equal to or worse than China’s have had similarly difficult adjustments. Brazil in the 1970s (and perhaps the USSR in the 1960s) immediately comes to mind. One additional point – remember that urban immigration is pro-cyclical, not a permanent and unchanging process.
Dan, the article is about how Japans’ experience might illuminate expected Chinese experience. Under these circumstances it would have been hard (and a little strange) not to mention Japan.
Amused, please see my comments above. I think people are misreading the article. In no way would I claim that global growth was caused 9or even primarily caused) by Japan’s rebalancing.
Daniel, please see some of my earlier posts, especially about how the last banking “disaster” was averted (July 4, for example).
REW, it is not easy to write a long entry while traveling, but I do try to edit this as well as I can. Since the blog is free, however, it really doesn’t make sense for me to hire an editor. By the way, Paul Krugman has already jumped on my back for misspelling principle.
Dear Professor Pettis,
I have a question on the PBoC balance sheet for a while. The assets of PBoC have a significant portion are in foreign currencies, e.g. USD, while the liabilities are in Chinese Yuan. If China allows Yuan to appreciate, there will be a huge loss on the balance sheet, such as the Swiss Central Bank made in last summer. I think in an early article, http://mpettis.com/2010/02/what-the-pboc-cannot-do-with-its-reserves/, you mentioned that the loss won’t be so dangerous since it is only the way of paying foreign debt. However, I think the PBoC still have to balance its liabilities with its assets. I can’t find a way to do it besides a government backup for the PBoC.
Please let me know what is your opinion on this topic.
[...] short blog post from Michael [...]
Many good points in prior posts–but hoping other powers fail thru “instability”, demographics, corruption is not exactly strategic planning.
[...] What happens if Chinese growth slows ? – http://mpettis.com/2010/11/what-happens-if-chinese-growth-slows/ [...]
Another well done post.
I think that the outcome of QE2 and the G20 reaction is that the US will not stand for high-unemployment & continuing the trend towards deflation for much longer, no matter what other countries say. The US in a deflation scenario wound be a disaster for everyone.
IF QE2 does not work because the Chinese stubbornly resist revaluing the peg (which is what I expect), protectionist tariffs are are right around the corner.
<>
You are completely misinterpreting my post. As many others pointed out after me, my main point was the global economic backdrop couldn’t be more different than it was for Japan in the 90′s, so comparing the two outcomes today is like stopping 20% of the way through an argument.
If you’re going to make a bold comparison, at least take the argument further than you have and don’t end it at what is essentially ‘Japan’s outcome was a surprise, so might China’s well too be’
China continues to play, what Victor Shih so rightly calls ‘Endless Moral Hazard’, and that is the single best argument as for why they might escape a bad outcome (yet again) to the bain of all their critics like Chanos and the rest.
http://www.industrystudies.pitt.edu/chicago10/2010%20Papers/Shih%20-%20Endless%20Moral%20Hazard.pdf
[...] Pettis: What happens when China growth slows? (Source) [...]
Michael:
“My point is only that a country’s “contribution” to global growth, especially in the next decade during which time I expect consumption growth to be feeble, is measured by the net demand a country provides to the rest of the world. Notice today that every country is trying to grow by acquiring a larger share of global demand, especially US demand.”
I cannot see how this theory holds in general. Suppose that, due to slower growth in Japan (with the Japanese trade balance held constant), our exports to Japan decrease by $100B and our imports from Japan decrease by $150B (and all else constant). Our net exports have gone up by $50B, and Japan’s contribution to net demand has therefore been positive. But it is quite possible that, as a result of this change, U.S. GDP will fall. Specifically, this will happen if U.S. domestic demand growth as a result of this change is less than $100B (since the $150B drop in import consumption must be balanced out by a combination of the $50B rise in net exports, increased consumption of domestically produced goods, and increased domestic investment).
So it is possible for our own GDP to fall even if our trading partners’ net demand rises and our own consumption shows slow (or even negative) growth. Thus, I still don’t understand how we can deduce that Japan’s growth slowdown delivered a boost to global growth.
Prof Pettis
I would appreciate if you entertain two more questions. How much do you feel the US dollar will rebalance against the Chinese RMB? Does gold play at all in the story?
RS: I might add a couple of perspectives on a few things.
Gold is only useful insofar as it can make jewelry and look pretty around peoples appendages. There are no fundamentals under gold, 13% of all the gold that was ever mined, hangs around the appendages of Indian women. 20% is held by Central banks, unless you want Russia running around melting the tundra; which would require massive infrastructure investments prior to exploitation, beyond capability, necessity, or demographic potential within, or even between countries for utility. As far as trade goes, Gold at record highs would have to go to many, many multiples of current level, there would have to be a mechanism to account for increase in the value, and for differentiation between countries values, so its utility to trade and development is nil. Although, relatively speaking, even relative to Indian women, the US would fare well under such conditions.
SDRs, as well, unless the structural mechanism changes, simply undermining the competitiveness of a wider slew of countries, then simply the US, where it is believed the USD is overvalued, as countries use the acquistion of asset/debt instruments to grow by undermining the competitiveness of others.
Where the RMB devalued 60% in 1994, as the economy has grown incredibly, it wouldn’t be hard to imagine that it should trend upwards, perhaps significantly, but who knows as to actual debt levels, or functions related to the real value of land in this development puzzle.
Noah:
Japans undervalued currency, coupled to structural, non-market factors, gave it advantages that enabled it to siphon off demand that could have been more widely spread, leading to an expansion in trade relationships, and eventually higher levels of demand. The factors of production, where mechanisms geared toward capital, are but one component of the milieu, led
to an imbalance where options, under the system at the time, limited the development opportunities of a wider range of countries, trade relationships and similar. That could be one argument.
In reference to Japan, rather than an hypothesis, the actual numbers would have been better. Those numbers in comparison to the overall growth during the periods in questions, with an anlysis of dynamics, before and afterwards.
So, a lessening of demand from Japan, could lessen their exports to the US, and the Japanese Imports from the US, but a slew of other factors would have to be included to understand, or make a guestimate as to the overall trend of trade relationships, under this dynamic scenario. A simple problem, gets a simple answer, and probably the wrong one at that, seemingly more important to simple a very simple assumptions, within a much larger set of beliefs (based on porous assumptions).
The fact is things will change, they can change amenably, or undergo occurences that would be more severe impediment to the global growth trajectory, the most populous, in resources per capita, will be the most disadvantaged, where this were to occur.
With Japan, it might be that the structural mechanisms in place, enabled them to siphon off growth that could have been more widely distributed, which due to other factors within the overall system, differences in cost structures, development needs, potentials and opportunities, could have been a limiting function on overall global growth. Where one the functions altered, so did the focus and tempo of development potentials elsewhere, leading to greater global growth, if the reduction to a bilateral trade relationship, makes it harder to make sense of the wider components at play. For example, the very many number of new participants in the global trading system, enhancement of manufacturing capacity, even if for meeting needs in domestic economies globally, were very good for Japanese and German, perhaps even American, Polish, Czech, South Korean, Malaysian, South African, Chinese, Canadian, Australian, Russian, British, Italian, Austrian, Turkish, Thai, and other nations who may compete in the manufacture of one, or many classes, of High End Machinery or another.
So I guess, it is just not quite that simple as trying to see this through a bilateral lense, but important to note how systemic functions, can distort, perhaps even lessen, a greater degree, of multi-lateral trade relationships. And where these relationships may be useful, even virtuous to a point, when the portend to present a new model, they only will lead to a bastardization of the system, and much less opportunity to all, where small commodity producers, even were the benefits distributed more widely, could never replace the demand engines that enable global development.
? Ok, China could survive. what about other countries?
About the cool story by Bob Cringely? Why would China slow down, cause india to boom? What a joke. Both authors compare between 2 countries, and forget about the rest of the world!
Noah:
So now that I said that, it might be that that is not the case. That Japan in enablign the growht of its industries has led to a slew of benefits and innovations that have lent positively to the growth of industries and efficiencies across a slew of sectors and geographies in the global economy. That the Flying Geese model of development, in which JPIC provides loans, has provided loans across a range of nations in the developing world has enabled the select development of industry which enables a mutual prosperity between the developed country and the developing country. That as Japan relative wealth increased, due to rises in the value of its currency, its citizenry experienced many advantages, including the ability to imports wider range of products, and that this increased their standard of living, while advancing standards of living intheir trade partners. That these structures were the prime movers in advancing the status of other NIE’s and similar advancement of the Tigers, while offering advantages to all parties involved, consumers, capital, manufacturing, service providers, etc….
Certainly, there is much more of that to do, on a wider basis, globally, perhaps, even needed to do, considering youth bulges and a slew of other development and demographic challenges. But that is really the issue, assuming that the goals are clear, the steps toward them become less fuzzy. If it is to portend alterations to a much maligned system, movements toward such may very well negatively impact those in most need of development.
All nations have development needs, were we to be more clear on the objectives, the steps toward them would be considerably less opaque. One mans seeming pessimism, may just be hope springing eternally with a liberal sprinkling of optimism toward a more liberal distribution globally.
Problems of income inequality and functions that limit the potential toward such ends, will only slow the pace but then most of the dialogue around these issues are just pandering to stakeholder dialogues and currently perceived perspectives relative to such, which may be true or false, in some, one, or all cases.
Thanks allo allo. Until now I was worried that the pothead contingent hadn’t joined the debate and so were underrepresented.
MAI, I think you still don’t see the argument, which is a typical Pettis insight — unexpected until you think about it, after which it seems almost obvious. And I really doubt he is arguing that the next ten years will look like the 1990s. In fact I have been reading him for nearly three years and it is pretty clear that he believes we are at the end of a secular growth period. He is saying that the slowdown in Japan’s growth came with a relative contraction in its trade surplus, so the effect was to increase demand for the rest of the world, not to reduce it. I am not sure it is possible to put the point more simply. By the way I also read a lot of Victor Shih’s excellent work on China, and he is definitely in Pettis camp when it comes to China. I think he would be very surprised to hear you claim that his is the “single best argument as for why they might escape a bad outcome (yet again) to the bain (sic) of all their critics like Chanos and the rest.” His latest piece in the WSJ said the exact opposite.
Michael, why do you think that the Chinese trade surplus will fall if Chinese growth slows down? As others have said, don’t you think the SOEs will prevent the rebalancing from taking place?
[...] coal surplus aggregates to the point where it is unsupportable? Don’t misunderstand, Professor Pettis is a brilliant economist, he seems to miss the big picture. Pettis does not answer … Even if China’s current account and trade imbalances vanished tomorrow with the US and the [...]
So let’s look at the nature of perspectives:
1.) Mine a Global Development Perspective, with knowledge that this could alter, and postulations as to outcomes.
2.) Others, a righteous perspective, this is something deserved due to this or that historical perspective over a certain period of time, I usually disregard such perspectives as dynamics usually change when the timeframes are altered, even the place of something nebulous called a nation in respect to their positions in the dynamic under question.
3.) Another, it is this group or that group, who did this or that, and has led to this or that situation. It was policies, it was perspectives, something inate within their being, it was a set of occurrences and that is why things are they way they are (coupled to, and now things are hopeless). People failed to follow, what I know to be true, based on a set of unerring assumptions, and such has led to the dire circumstances we find today
4.) Some, the end of the world is on this or that nations doorstep, others even believe this or that nation is deserving of it, or rather that groups of people within nations, perhaps, even, whole regions, ethnicities, or, often races, and so forth. For reasons why I ignore such, refer to point number two or three (or both)
From the state of nature there has been a progression, in some ways (even in every way relative to your psychology and espoused needs) perhaps a regression, but a progression in the advance of technology from a pre-agrarian society through the various levels of modernity in which we find ourselves.
The impact of such a progression (movement) rarely escapes the lives of any living thing, even the lives of indigenous people in jungles of Papua New Guinea or the Amazon. Easily this profound, and eternal, movement, can be confusing, even distressing to those who find themselves caught up within it, leading to reactions, postulations, even overly fictional characterizations of what is going on and why, as if each progression, is new, while it often may be ground-breaking, the very notion of such a picturesque terminology, reinforces the long-held nature of the process. Where wildly distraught protestations and even, indignation to “what is going on”, might be just be self-righteous pandering, where even the “type” most opposed to present manifestations of this longer term movement, something with much historical precedent, opposition that is, wouldn’t refuse to eat this product reinforced with vegetable proteins sourced half- a world away or that product which is culturally acceptable.
So while, it is useful to note that, as Henri Bergson said, “the only thing that is continuous is change”, or where others admonish, “that things always stay the same”, it should be important to note we need guard against petrification and purification especially as to our viewpoints, because there is a measure of truth in either of those former statements. More importantly, we want to be very clear on our goals, rather than simply believe in stale assumptions. Mine are very simple, people want to explore their options in life, and there needs to be an enabling environment for such where it need be the desire and perspective of every society, and any worthy of leading, to work toward such ends. Further, that this offers more spiritual, and material, benefits than any other path but that short-sightedness and the parochial nature of Man limits their vision, even their evaluation.
Peter, yes, the PBoC has a mismatched balance sheet in the opposite way, for example, Mexico in 1994 or Korea in 1997 had, and so unlike those countries, which were susceptible to currency depreciation, it is susceptible to appreciation. What I said on my PBoC entry was that although an appreciating RMB will impose large losses on the PBoC, this should not be equated with large losses for China. It would mainly be a redistribution of wealth from the PBoC to households. But that doesn’t mean it is not a problem. As you point out, it would result in an increase in what are already high government debt levels.
Mary, I am not sure why you think this post is about hoping that others fail. I would have said that it is about how a slowdown in Chinese growth might not be as painful for the world as many think.
MAI, I don’t think I can express the argument more simply than TR does below. Please read it, and in case there is too much other stuff around it let me quote the relevant part: “He is saying that the slowdown in Japan’s growth came with a relative contraction in its trade surplus, so the effect was to increase demand for the rest of the world, not to reduce it.” And I don’t want to speak for Victor Shih, but I too believe he would be very surprised by your interpretation of his work.
Noah, of course it is possible for US GDP to decline even while Chinese trade surpluses decline. It would be hard to argue that in the 1930s Europe grew even as the US trade surplus declined. The point is that contrary to conventional; wisdom, a slowdown in Chinese growth does not have to result in a slowdown in ROW growth. In logical terms I am saying that the claim (if A, then B) is not true. This is not the same as saying that the claim (if A, then not B) is true. I then go on to suggest why in the Japanese case it turned out not to be true. Please reread the second paragraph of my piece: “I disagree with both claims — not that they are necessarily wrong but rather that they are not obviously true, and depend heavily on the way China rebalances. “
RS, I don’t think it is meaningful to argue that the RMB is undervalued by X amount. Remember that 1)the differential growth rates between wages and productivity and 2)the low interest rates are, in my model, of far more importance than the undervaluation of the currency in explaining the trade imbalance. If real wages or real interest rates were to increase substantially, there might be no need to appreciate the RMB.
Thanks TR. I think you should write your own blog. You rather acerbic sense of humor makes me laugh. I don’t know if China’s trade surplus will necessarily fall as a consequence of a growth slowdown, but I do think it will fall because of the reduced capacity of the US and deficit Europe to absorb the current levels of trade surpluses. The key is the means by which Chinese growth slows, and if it occurs as part of a real domestic rebalancing, as Premier Wen and, according to rumors, successors Xi, Li, and Wang have called for, it might be good for global growth, not to mention the long-term sustainability of Chinese growth. A Chinese friend who is preparing a report on the subject asked me if I thought there was any way a sharp slowdown would not be socially disruptive and this is the answer I came up with – that it depends on the steps taken towards rebalancing wealth.
Professor,
I am sure i don’t need to explain to you that the internet encourages a kind of discourse in which the less a person knows and the more impressed he is with himself the dumber his comments and the worse his invective. Thank you not only for providing one of the best economic websites in the world. maybe even the best, but also for being so patient. I am impressed that you so rarely get angry or dismissive even with readers who haven’t a clue. Even if two of your former students hadn’t told me (I am a banker in Hong Kong) that your students love you and keep constantly in touch with you, I would have already guessed it.
You are all obviously totally misunderunderstanding the whole thing. The future belongs to Bangladesh, because we in Bangeladesh have such a huge growing population, and 90% of us are under 21 years old. We will power world growth for many years to come, until we catch up with India in population and gdp.
Michael -
Fair enough, but I just don’t see the the evidence for a strong statement like: “On that score it is pretty clear that Japan’s contribution in the past two decades to the rest of the world was positive.”
I take this to mean “It is pretty clear Japan’s growth slowdown was expansionary for the ROW”. If I am misinterpreting the statement, please correct me.
Since Japan’s economy slowed in the 90s-00s while maintaining a relatively constant trade surplus, your claim here seems to be that the substitution effect (ROW buying more ROW-made goods and fewer Japanese goods) outweighed the income effect (Japan buying fewer ROW-made goods). Is this “pretty clear”? Have there been papers or studies that showed this? I cannot find any.
Logically, correlation does not imply causation, so a priori it seems perfectly possible to me that Japan’s slowdown exerted a slight drag on ROW growth, and that this slight drag was simply vastly outweighed by positive shocks from the liberalization of the Chinese, Indian, and other economies. Why should we reject this explanation?
Sorry to be so dogged on this subject…I don’t mean to be a pain.
Very interesting article and comments. This topic should be discussed in greater details. The importance of economic decline in USA could be directly related to this.
Once again, using nominal GDP will under-estimate Japan’s economic performance because nominal GDP shrinks as a result of price deflation, not just as a result of real output. Since Japan has had price deflation over the past 15 years, nominal GDP will give a too distorted picture of Japan’s decline.
The reality is that Japan was never 17 percent of world GDP in 1990. The US was 25 percent of the world’s GDP in 1990, and Japan has about 40% of the population of the us. so for this to be true, the average japanese would have had to have been twice as rich in 1990 as the average american by income. this is obviously not true and was never true. sure, japan in the 1980′s was prosperous and confident, but the average japanese was never living twice as well as the average american.
by ppp, which adjusts for price differences, japan’s share of global gdp fell only from 7.6 percent in 2000 to 6 percent in 2010. that’s smaller than the drop in us share of world gdp, which was 23.8 percent in 2000 and only 20.4 percent in 2010. by this measure, the us should have been more of a drag on world growth in the past 10 years than japan.
the biggest problem though with the comparison of china to japan is that in 1990, japan did have a higher per capita gdp than the us. not twice as high as you imply, but slightly higher. it is a developed country. china’s per capita gdp in contrast is only 6,600 compared to 46,000 for the us. it is still a developing country.
before you attack ppp, this about this; according to nominal gdp, china had the world’s second largest economy in the 1960s, under mao. deng xiaoping didn’t make china rich, he impoverished it. under him, the exchange rate went from 2 yuan per dollar to 8.3 yuan per dollar. ppp is not perfect but it’s better than nominal gdp.
What about Chinese food inflation and it’s impact on Asia and EM generally? I supose the ones letting their currency rise will have an easier time coping, but more marginal players like Vietnam seem more vulnerable to inflationary shocks.
China will not stop like Japan in 1990, because Japan’s economy matured by 1990, their per capita level of development was comparable to the US, while Japan’s population was 125 million, or 50% of the United States. Japan’s nominal GDP was 60% of the US’s, per capita income was 20% higher.
Note that in 1980, Japan’s GDP was 40% of the US’s, in 1990, it was 60%, an increase of 50%. In 2000, China’s nominal gdp was 10% of the United States, this year, it will be 40%, an increase of 300%!! China’s nominal per capita income would is still 10% of the US’s in 2010 (4,500 dollars to 46,000 dollars). Plenty of room to growth.
China will overtake the US in GDP with complete certainty, the question is “in what year in the [2015-2025] set?”. India can also overtake the US, but it will take more time, they could do it by 2040-2050, not sooner.
Michael Pettis wrote:
“Dwayne, I suspect that over the next few years countries with strong domestic demand will fare better than countries with deficient domestic demand, and as a member of the former, India will do fine, but I think claims that the 21st Century will belong to India are as farfetched as the claims that it will belong to China or, as we all knew to be true in the 1980s, to Japan.”
They are not far fetched, because India has 1.2 billion people. The economic potential of a country is determined by it’s population. The development of this potential is determined by basic institutions like the protection of private property and contracts, a healthy financial system and political and macroeconomic stability.
Japan in 1990 had only 50% of the population of the United States.
“In the late 1950s and 1960s it was the USSR that was generating furious growth and it was widely believed that the 21st century was undoubtedly for the USSR who was expected to overtake the US economically well before 2000.”
Smart people knew that the USSR wasn’t going far. They actually had the potential to become equal to the US (however, they couldn’t completely surpass the US, since the population of the USSR was only 20% greater than the US’s, so their potential GDP wasn’t much greater than the US’s), but their terrible economic system failed to capitalize on the potential.
“Brazil in the 1960s and 1970s also generated outsized expectations.”
Brazil in 1960 had a GDP of 3.5% the size of the US’s, today (2010) Brazil’s GDP is 13% of the US’s. Nearly quadrupled in relation to the US in these 50 years. However, since Brazil’s population is smaller than the US, they can never surpass the US, but Brazil can become another Japan (today Brazil’s population is 60% of the US’s).
All:
For just a few consider the following.
When looking do not stare wide eyed, neither amazed nor congratulatory. Take a step back, look at the years look at the time frames, consider your memory of the time period, what happened before, what happened afterward, and what is occurring now.
Understand where this is beneficial on not simply a national regional, or human level but a global one. Consider its benefits, detriments, imbalances, pace, and the desired longer term trajectory. Consider the desired long term potential then reconsider pace and similar.
Now look more broadly. Look across the globe consider the nature of regions of nations within regions of movements. Consider opportunities, consider needs of the people, the nation regions, world, and other nations. Consider ultimate trajectories.
Do this over and over and over. Not simply apply mechanistic theoretical foundations but feel this.
Friedman wrote a book and said the world is flat. No my friends the world is quite bumpy. If when abroad, one leaves the four seasons spends time at small little hotels in the developing world in the developed world eats at not simply the finer restaurants, but the local, shops at not simply the nicer supermarkets, but the little ones especially the ones that seem dirty or at least undeveloped. And then review such things, one gets a much better persepctive of these. To sit in an office in Zurich London Hong Kong or even Jakarta and be amazed at the rising price of this or that in this place or that belies that if a house costs USD 300,000 (often over a million in some of these cities). And if a person in the middle class comfortably makes USD 500 a month than a 50000 USD house would require 100 months of work. That is 8.33 years, no nothing clothes nothing etc…. At 300000 USd that would be 50 years of work. At a million 2000, and so forth. Remember the local party official with 54 houses worth 29 million extrapolate to loss of opportunity costs across the economy. Anyway, review the stats below…
Historical RMB USD Exchange Rates:
http://www.chinability.com/Rmb.htm
the person who said what about Mao wrong just look above……although look for years before when pegged at 2.5 to dollar
2000-2008 Global growth Anomaly
Current Account China
http://www.chinability.com/CurrentAccount.htm
China’s foreign exchange reserves, 1977-2010
http://www.chinability.com/Reserves.htm
Trade Stats
http://www.chinability.com/Trade.htm
Chinas Money Supply Growth (M0 M1 M2) 2006 to 2009
China’s money supply
Natural resources
http://www.chinability.com/chinas_land_and_resources.htm
Chinas WTO Accession Agreement
http://www.chinability.com/WTO.htmhttp://www.chinability.com/WTO.htm
So no this is neither a new or viable model and yes there is more fiat in the world than just the greenback and no precious metals will never be able to replace fiat paper and yes, neither will, growth models that portend what they don’t even espouse let alone practice. And no economic decline as envisioned for some popualtions is not in the offing, and yes, these things need be addressed or strcutures will alter, and no, these “new” structures as postulated are neither beneficial nor sustainable in the world economy, and yes even though commodity sellers in Brazil may benefit its industry isn’t, and yes, this is a global occurrence which will hit a wall, where, yes, although due to belief constructs built to influence decision-makers during the Non-aligned movement, even reinforced in educational systems globally via “history”, will not hide the nature of the functions at play and if not addressed, there will be adverse consequences because, no, although commodity suppliers may be benefiting industries globally are not not simply in the advanced and industrialized world, even though due to frames, even histories as taught, may offer select psychologies some validation of their perspectives.
[...] course, as Michael Pettis hinted last week — it’s not so much a misvalued dollar peg that the US has a problem with, but the [...]
Noah sais: “Logically, correlation does not imply causation, so a priori it seems perfectly possible to me that Japan’s slowdown exerted a slight drag on ROW growth, and that **this slight drag was simply vastly outweighed by positive shocks from the liberalization of the Chinese, Indian, and other economies**. Why should we reject this explanation?”
TR and Prof Michael P: this argument that Noah puts forth states a lot more clearly what I was trying to get across as well, especially the part inside the ** asterisks**.
Michael,
I’d like to second Patricia’s comment that this one of the best economic sites on the Web and it is much appreciated, especially the the way you entertain discussion. TR’s coment, “…a typical Pettis insight — unexpected until you think about it, after which it seems almost obvious”, really sums it up.
Thanks!
Rafael,
I’m not sure where you are getting your data. I have Brazil’s GDP at 4.1% of the U.S. in 1960, 8.4% of the U.S. in 1980 (peak), then a drop to 6.6% in 1999, and a partial recovery to and 7.6% in 2009.
2010 GDP figures are not even out yet.
In any case, the Brazil story is interesting. Household consumption was reliably 70% of GDP during the boom period, which was an enormous boom, and then it dropped to 60% and stayed there. Government consumption of output was the reverse, i.e. 10% during the boom and 20% during the bust. The current account was roughly balanced during the boom, and swung into a surplus during the bust.
Perhaps I’m misreading the data, but I don’t see this as immiserating growth, which begs the question — what was so different in Brazil that allowed consumption to remain high while capital formation was subsidized. I think there is more to this story than just an artificially low cost of capital; If the rents are passed onto households, then perhaps consumption can remain high, and households get back in rents what they lost in consumption taxes. Alternately, the net effect might be that households working in the non-industrial sector subsidize those working in the industrial sector, but if this happens on a large enough scale, then overall transfers remain high, and we end up with Alfred Marshall’s economic growth dictum to tax agriculture and subsidize increasing return industries.
Rafael Guthmann -
Are you familiar with the “400 Million Consumers” trope from the early 20th century? Some Americans were always viewing China (and to a lesser extent, India) as vast untapped consumer markets. The Opium Wars, for one, would not have occurred if this mindset had not enjoyed currency in corridors of power around the world. These dreams are not new. They also have not become realities.
You said: “They are not far fetched, because India has 1.2 billion people. The economic potential of a country is determined by it’s population. The development of this potential is determined by basic institutions like the protection of private property and contracts, a healthy financial system and political and macroeconomic stability.”
You seem to say that “population matters, except when it does not.” India is lacking in many of the institutions you mention, as is China. Moreover, the vast populations of both countries are not purely assets, but liabilities too. China’s demographic unevenness will be costly in the coming decades, while India’s enormous demographic expansion will create its own set of problems and strains.
I think it’s unfair to say that “smart people knew the USSR was going nowhere.” That is easy to say in hindsight. But even the CIA predicted the USSR’s complete eclipse of the US before 2000; they even thought it would reach an overall output equal to three times US output. The USSR had more people, more land, more resources, and a ruthlessly efficient growth model. Its triumph was seen as inevitable.
I think it is a mistake to see China’s economic rise as either inevitable or permanent, if and when it comes about. China could have been construed as “number one” centuries ago, but it was eventually outstripped by countries with far smaller populations for centuries; size of population is not a permanent advantage, so I am wary of simply using “China/India have large populations, which ensures eventual dominance” as an argument.
Prof Pettis
I’m afraid I will have to disagree on both counts. When you talk about demand, surely population size comes into consideration, even at its largest, the Japanese population size would have at most just about matched the USA’s. The Chinese population is at the least 3 times that ( and we aren’t even talking about including “restive” regions where people prefer not to be included in the chinese count) of the USA’s at present, whatever demand decrease that comes from a slowdown cannot be comfortably absorbed by the USA and the EU. Particularly not in the present state that their economies are in. There is a fundamental difference here.
If you are saying the “rebalancing” shifted income from businesses back to households and did wonders for Japanese consumption, you are ignoring the stats and reams written on the anemic state of Japanese consumption: the present generation of working middle class have been so traumatised by the financial slowdown their economy has been experiencing that they are ‘afraid’ to spend. Most of the ‘stimulus’ packages enacted by the various governments have fallen flat because the Japanese people are not going out and spending like there’s no tomorrow. Sure, living standards and cost of living are high, yet many small businesses are barely surviving and people are not spending the way they used to.
As for politics, it’s less a case of crying wolf and more about being cautious because of precedents. Living in the capital, it’s hard for you to miss the almost regular demonstrations and the stifling air of security, looking at the past of the country, it’s not that hard to guess why. In a country that runs on numbers that dwarf just about everyone else, it’s strength but also a reminder that the power of the mob is just that one step away. Just because preceding generations have put up with terrible conditions does not mean the present generation will and the grab for power and anarchy that may ensue should the economy really crash and burn will horrify most of us. Perhaps this last note is what sums up all this talk: the Chinese are not anything like the Japanese. And that is probably what keeps those analysts worried.
While a slowdown in Chinese growth may not affect global growth overall, how will it affect countries that are now highly-leveraged to the current Chinese fixed-asset investment boom, such as Australia? Pretty much everyone in Australia, from the Treasury Secretary down is convinced Chinese resources demand will grow strongly for at least another decade. To suggest otherwise is bordering on heresy.
@Alex 83
The trope you refer to is quite familiar, however, I think you are missing an important point in the “comparative” study and correlation you are drawing between the 2. Let’s just remember India was for all intents and purposes a colony, there is not much you can expect in way of consumption demand when a majority of the populace is paid barely enough to sustain life and watches its resources exploited by the colonial masters. China, whilst officially an independent country ruled by the Manchurians was in effect very much a series of colonies/”spheres” of influence dominated by different nations, who were also interested in 2 things, demand, but also resources. The populace needs the disposable income to even begin to sustain demand.
Due to political and economic factors(especially the economic stage at which both economies were in at that time), neither country could reach projections for consumption demand. Perhaps things are very different this time round? Of course, we could be mistaken.
Sorry everyone, know this is bad form, heads up to Csteven and huizer reply in last comment on previous post (haven’t visited site for some time).
@ Judy 86
While I certainly concede that India was under Britain’s economic dominion, I disagree that China underachieved simply because of foreign interference. If anything, such interference was looking to profit directly off of China’s numerous potential consumers. I know that the “Century of Shame” (or gunboat diplomacy, or Western meddling) is a popular explanation for China’s underachievement over such a long stretch of time, but it seems to me like it brushes away centuries of history. Why, for example, did China sit out the industrial and internet revolutions in their original iterations? How did it become so isolated in the first place? For a country that carries such demographic weight, resolving these questions is difficult, and any explanation must account either for some fundamental geopolitical weakness of China or (more transiently) for bad policy within the country itself, either of which is likely well alive in the country today.
Chinese consumption in theory ought to improve: after all, it cannot be much worse than it is at present. The international commerce environment, however, seems to be worsening and moving away from the relatively tranquil norms of the past 30 years. Adjustment toward consumption seems inevitable, given that demand in the US and Europe is not going to sufficient. But it likely will not be an easy process. It was not easy even for Japan, a country with a much more manageable demographic base and a more developed social safety net. India has its own set of problems, which admittedly I am not as familiar with.
If anything, I think commentary that intently focuses on the 21st century “belonging” to any country is just silly. The 20th century did not even “belong” to the US in the way that many imagine: certainly not for the first 50 years, when Europe was the center of gravity, and arguably not even after that, when the US frequently got its nose bloodied against the USSR, or in Vietnam, or under the phantom of Japanese economic domination. Its economic power was doubted at every juncture. We are seeing the emergence of additional large economies in Asia, but looking out for who the century will “belong to” seems as fruitless and frustrating as trying to figure out, for example, who the “next Beatles” will be.
@Alex 88
>>>While I certainly concede that India was under Britain’s economic dominion, I disagree that China underachieved simply because of foreign interference. If anything, such interference was looking to profit directly off of China’s numerous potential consumers. I know that the “Century of Shame” (or gunboat diplomacy, or Western meddling) is a popular explanation for China’s underachievement over such a long stretch of time, but it seems to me like it brushes away centuries of history.
There is no doubt that foreign powers were looking to profit off the potential consumer story and perhaps the Opium trade was one of the more negative aspects of that. However, resources is another aspect that foreign powers looked to China for. The “interference” you referred to was hardly superficial and at the very least worsened an already dismal state of affairs which owes its existence to many factors, one of which would be misgovernment and mindsets. The inward looking mindset that caused China to be inward looking for centuries has been the topic of many Eastern philosophy and sociology texts, which could probably explain things a lot better than I could. (Coincidentally, the Japanese were philosophically and politically in pretty much of a mess till the Meiji Restoration and the conscious move towards modernization.) Make no mistake, I am not assigning blame totally to foreign “colonialism” in all its forms. However, underestimating the foreign element would further skew views.
>> Adjustment toward consumption seems inevitable, given that demand in the US and Europe is not going to sufficient. But it likely will not be an easy process. It was not easy even for Japan, a country with a much more manageable demographic base and a more developed social safety net. India has its own set of problems, which admittedly I am not as familiar with.
No one is really questioning the need to rebalance the economy (for China) and no one really thinks it’s any way approximating easy. The only question is really how? (how hard would the landing be? how far are the powers that be willing to go? how much “suffering” can the Chinese and the rest of the world take in this round of rebalancing?) The NYT has a special feature on this that has that touch of balance that many pieces on the subject lack, could be a good reference.
The 21st century belongs to..all humanity because we are likely to find
out whether we have just run out of resources we are dependent on
[...] Last week in his China Financial Markets blog, Michael Pettis raised the interesting question What happens IF Chinese growth slows?. His answer may surprise you, and mine is quite different, even though I agree with most of his [...]
[...] Last week in his China Financial Markets blog, Michael Pettis raised the interesting question What happens IF Chinese growth slows?. His answer may surprise you, and mine is quite different, even though I agree with most of his [...]
[...] week in his China Financial Markets blog, Michael Pettis raised the interesting question What happens IF Chinese growth slows?. His answer may surprise you, and mine is quite different, even though I agree with most of his [...]
[...] http://mpettis.com/2010/11/what-happens-if-chinese-growth-slows/ [...]
[...] week in his China Financial Markets blog, Michael Pettis raised the interesting question What happens IF Chinese growth slows?. His answer may surprise you, and mine is quite different, even though I agree with most of his [...]
[...] week in his China Financial Markets blog, Michael Pettis raised the interesting question What happens IF Chinese growth slows?. His answer may surprise you, and mine is quite different, even though I agree with most of his [...]
[...] better off Chinese households as their global purchasing power increases. This explains why in a recent article, Michael Pettis argues that slowing Chinese growth will cause neither social unrest, nor negatively [...]
[...] China Financial Markets » What happens if Chinese growth slows? (tags: economy china india economics blog growth japan markets finance inflation usa obama demand debt) [...]
[...] Will the Fed shift course, even in a rosier environment? Doubtful, at least near term. They will likely see the current plan through to its fruition, while holding rates at rock bottom levels until it is quite evident that the output gap is closing, which will take a few years even if growth accelerates sustainably to 4%. Will more be forthcoming? Also doubtful, especially as the composition of the FOMC turns more hawkish. Moreover, enough risks remain to keep Fed officials from sleeping too soundly at night. The European debt crisis runs hot and cold. The trade story could turn against us. Again. And uncertainty over the economic direction of China will be an ongoing challenge. I suspect the Fed will adopt the widely accepted view that a China slowdown would be a net negative to the global economy. Michael Pettis makes a convincing argument to the contrary. [...]
[...] high growth rate in household income and consumption. I discussed this in more detail in an entry last [...]
[...] high growth rate in household income and consumption. I discussed this in more detail in an entry last [...]
[...] high growth rate in household income and consumption. I discussed this in more detail in an entry last [...]
[...] high growth rate in household income and consumption. I discussed this in more detail in an entry last [...]
[...] And by the way, it is not clear that we did China any favors either by the strong Dollar policy, as they are now faced with a massive internal rebalancing act – there is no guarantee anymore that China is the future, nor that China will escape the fate of Japan. [...]
all you experts with your word`s of wisdom need to travel to the place, not even a need to travel extensively , just visit some random spots and it will come to you what has been going on in china and most importantly what the future will hold for such “strategic endeavors” undertaken by central planning minds.
Michael,
If you check Angus Maddison’s growth data you will find that post-1970(3} has been significantly slower than that of the immediade postwar decades.
For example:
1950-73 GDP per capita [arithmatic avg.] for the 16 most advanced nations was 3.80% but fell to 1.87 for the 1973-01 period [and no doubt still less for the immediately past decade].
GDP dropped from 4.83 to 2.38 for the same periods.
‘Fluctuations in the momentum of growth within the capitalist epoch’
http://ideas.repec.org/a/afc/cliome/v1y2007i2p145-175.html
Maddison and others, including myself, have found a post-1970 decade by decade slowing of Global GDP relative to the 1950-1970 period. While not generally brought out this seems directly related less to money supply than to changes in the Rate of profit [not earnings] and capital/labor ratios, the former trending down, the latter up.
Regards
AJS
Michael,
BTW, very good analysis. I simply felt the gllobal growth ststement required re-ststing/correction.
Thanks