Much of last week’s newsletter was on the data that was released on inflation, new loans, investment, etc. One thing worth noting in the current environment is that small and medium enterprises (SMEs) are hurting, and last week’s minimum reserve hike – which came out the same day as the CPI number – will undoubtedly make things worse since any withdrawal of credit is unlikely to affect the top customers (SOEs and local governments) and will fall disproportionately on marginal borrowers. In early May I wrote that the very uneven process of rebalancing in China was likely to have adverse consequences on the SME sector.
Rebalancing in the context of China means, for the most part, a significant increase in the consumption share of GDP from its astonishingly low level of 35% in 2009 (and perhaps lower last year). As regular readers know, I do not believe that China’s high savings and low consumption rates are a function of any remarkable preference on the part of Chinese households for savings over consumption.
They are simply the automatic consequence of a system in which increases in GDP growth are subsidized by transfers from the household sector, which effectively constrains the relative growth of household income and, with it, household consumption. In that case the only way for China to rebalance would be for Chinese household income to grow faster than GDP.
This requires three things above all. It requires that wages grow faster than productivity, that the currency appreciates, and that real interest rates rise. This does not seem to be happening in China, as I discussed in a blog entry last month. Wages have been rising quickly in the past year, but the currency is barely appreciating in real terms against the dollar (and is probably depreciating on a trade weighted basis), and of course real interest rates are declining sharply.
In the aggregate the impact on the growth of the household income share of GDP is probably negative, at least if the World Bank is correct in saying that consumption growth has been actually declining since early last year (and as Tuesday’s retail sales data seem to confirm). But this uneven rebalancing has another impact, I argued. If wages are rising and the cost of capital is declining, we should be seeing a shift internally in favor of capital-intensive industries, the SOE sector, for example, and away from labor-intensive industries, which includes SMEs for the most part.
I had anecdotal evidence corroborating the theory. Since last year several of my students who come from manufacturing families had told me that their parents were finding it increasingly difficult to retain workers and were getting squeezed out of business. Two months ago my central-bank-seminar student Huang Haidong, who comes form a prominent Wenzhou family (Wenzhou is often considered the cradle of the SME industry in China), sent me an email saying that according to his research a very large number of Wenzhou SMEs were facing bankruptcy.
Wages and capital
The evidence has since become more than just anecdotal. Last week I saw the following article in the current issue of Caixing:
China’s small- and medium-sized enterprises are looking at an increasingly difficult business environment amid financing difficulties and rising production and labor costs, the Ministry of Industry and Information Technology (MIIT) said in a report released on June 2.
To rein in excess liquidity, the central government has tightened its monetary policy and raised interest rates twice so far this year, but the measures also add to the difficulty for SMEs to obtain bank lending and have driven up financing costs, according to the report, which was jointly conducted by MIIT and the Chinese Academy of Social Sciences.
…The official Xinhua News Agency reported on June 2 that three “relatively big” private companies went bankrupt in Wenzhou of Zhejiang Province. Wenzhou is known as one of the largest centers of private enterprise growth in China. But a local official responded by saying they are isolated cases.
The article argued that high wages and rising borrowing costs are the key challenges facing SMEs. The latter may seem surprising given what I said about the declining real cost of capital, but remember that SMEs get little of their financing from the banking sector and have to pay very high borrowing costs for off-balance sheet and informal lending. As cheap capital has been sucked up by SOEs, real estate developers (those who can access bank lending), infrastructure investors and local and municipal governments, little has been left for less-favored entities and the result has been that their cost of capital has risen even as wages have too.
The point was picked up Friday in a very interesting article in the Financial Times. According to the article:
Small Chinese businesses are feeling the effects the government’s monetary tightening and face a cash squeeze that may be worse than during the global financial crisis in 2008, according to an official warning.
From tile manufacturers in Shanghai to shoe factories near Hong Kong, smaller businesses have driven Chinese growth over the past two decades, accounting for about 60 per cent of gross domestic product. So, a sharp slowdown in their activity would weigh heavily on the Chinese, and by extension, world economy.
The article goes on the make comparisons with the last squeeze of SMEs:
In late 2008, during the financial crisis, a collapse in global export markets and aggressive monetary tightening drove the Chinese economy to a near standstill. Beijing estimated that 20m migrant workers, many of whom were employed by the same kinds of small firms that are now short on cash, lost their jobs.
Dong Tao, a Credit Suisse economist, said China could now face trouble again, as companies delay bill payments and factory owners abscond without paying wages.
“If this continues, and these smaller companies start to fail in large numbers, then the economy will slow more than the market anticipated and the government bargained for,” he said.
Most of the focus in the press has been on the effect of rising borrowing costs for SMEs, although many of these are not heavily leveraged and in my discussions with friends who own, or who are related to owners of, SMEs, wages has been at least as much of a problem. But the attempts by the PBoC to tighten credit (relative to the enormous demand from credit from infrastructure and real estate developers and local governments) have certainly made conditions tougher for those SMEs who do rely on credit. The FT article goes on to say:
The cash crunch has come despite repeated prodding by the government to help private businesses. Chinese banks have traditionally preferred to lend to state-owned groups, judging that they pose negligible credit risk due to their government backing.
This bias is especially pronounced when the government restricts credit, as it has done over the past year. China has raised benchmark lending rates by 100 basis points to 6.31 per cent, but small businesses have seen much steeper increases.
Monthly lending rates at credit unions and informal lending institutions in the entrepreneurial cities of Wenzhou and Xiamen have reached 5 per cent in the past few weeks, up from 1.5 per cent just nine months ago, according to Credit Suisse.
Earlier this week, in an effort to boost access credit, the Chinese banking regulator said it would ease tough capital rules on bank lending to smaller businesses. In one measure, loans of less than Rmb5m ($770,000) need not be counted towards banks’ loan-to-deposit ratios.
Credit quantity
This last point is interesting. Last week a CBRC circular went out that suggested a different way of accounting for small loans to SMEs which should, in principle, increase banking incentives to fund SMEs by reducing the capital requirement.
This seems to me a very complicated way of alleviating the cash crunch among SMEs. The proper way would be to reduce the demand for credit from real estate developers and infrastructure investors, but of course Beijing loves its administrative measures. Anyway the only efficient way of reducing demand from real estate developers and infrastructure investors would be to have them pay a fair cost for their capital – and remove the implicit credit support. This however would threaten to throw a huge number of essentially insolvent projects and companies into bankruptcy, so the preferred solution is to keep the cost of capital low and to keep their borrowings growing.
Will the attempt to on increase incentives to lend to SMEs work? I am not sure. It would depend on too many factors and squeezing out liquidity through hikes in the minimum reserve ratio will almost certainly fall disproportionately on SMEs. Of course if the regulators simply imposed a formal or informal quota on the banks (e.g. by the end of the year a minimum of X% of your loan portfolio must be in the form of small loans to SMEs), I suspect that they will comply, but then we run into the automobile loans problem of a few years ago. When the regulators demanded that Chinese banks increase the number of auto loans, they duly did, and within a very short time a remarkable share of those loans went non-performing. It turns out that it is very easy to meet aggressive loan target numbers, but it is a lot less easy to make good loans.
Moreover in China credit is not controlled through price, but rather through quantity. In other words we don’t use the cost of capital to decide the quantity of credit since the cost of capital is artificially set at extremely low levels – at which level the demand for loans is almost infinite.
Instead we use loan quotas. This means that if banks lend materially more to SMEs either they will also be forced to lend less to other borrowers or they will have to allow credit growth to exceed whatever target they would have otherwise set. Already there is some concern about the flow of capital into low-income housing projects. Last week‘s Beijing-based Global Times had this article:
At least 40 percent of public housing projects may not start as scheduled this year, with the loan bottleneck resulting from monetary tightening policy mainly to blame for the delay, analysts said on Monday. Construction of affordable housing in cities nationwide is far behind schedule, according to data cited in a Xinhua report.
In Shanghai, only 25 percent of scheduled affordable housing projects had started by the end of May, Xinhua reported. In Jiangsu Province, work on about 30 percent of a total of 450,000 affordable housing projects had started, while in Zhejiang Province, work on about 61,600 affordable housing units, 33.2 percent of the total, was underway.
The government plans to build 10 million units of affordable housing this year as alternatives for homebuyers in cities where average property prices have almost doubled during the past two years. Under the plan, construction of all these affordable housing projects must begin by the end of October.
Hui Jianqiang, a senior analyst with the E-House R&D Institute, said work on at least 40 percent of affordable housing projects will not begin this year unless the central government links local officials’ performance to public housing construction. “Housing activity is anemic partly due to stricter approval procedures but mainly because of tight lending standards under current monetary tightening policy,” Hui said.
More lending to SME is undoubtedly a good thing, but if it is achieved by diverting loans from local governments, for example, it will come at the cost of lower growth and rising financial distress in the short term. And as we have seen in the past, short-term growth concerns always trump long-term sustainability issues.
Whatever the outcome I think we need to keep a close eye on the behavior of SMEs. They are by far the most efficient part of the Chinese economy and the only part creating real value. My experience in other developing countries suggest that SME owners tend to be the most sensitive to and aware of changes in risk, and if we start to see rising bankruptcies among SMEs, coupled with disinvestment and increasing capital outflows, that is almost always a very worrying sign. When SME owners start to worry, so should we.
MIT on environmental degradation
To turn to a completely different issue, lat week a friend sent me an interesting article that came out in one of the MIT magazines. According to MIT News:
A recent study released by the MIT Joint Program on the Science and Policy of Global Change quantifies the damage to the Chinese economy caused by a lack of air-quality control measures between 1975 and 2005. Not surprisingly, the MIT researchers found that air pollutants produced a substantial socio-economic cost to China over the past three decades.
…To observe how changes in pollutants, and their associated health impacts, have historically affected the Chinese economy, the MIT researchers modeled the number of cases of health incidences caused by air pollution — such as restricted-activity days, respiratory hospital admissions and asthma attacks, to name a few examples — given a pollution level and the number of people exposed. Then the model calculated the summed costs of these incidences — i.e., payments for health services and medicine, loss of labor and productivity from time off work, loss of leisure time needed for healing — to estimate the total change in available labor supply.
Similar studies conducted by the World Bank have found that air pollution in China caused damages equal to 4-5 percent of the Chinese GDP between 1995 and 2005. However, these estimates are based on static measurements that do not measure the cumulative, long-term impacts of health damages. The MIT study found a significantly higher level of damage, equaling 6-9 percent of the Chinese GDP. The dynamic, cumulative method used in the MIT study may be particularly applicable to developing countries that are experiencing rapid growth.
I mention this because I have often argued that Chinese GDP growth has been substantially overstated during much of the past thirty years. Part of the reason for the overstatement is that the future costs of environmental degradation should in principle be included as a deduction to current growth.
After all if environmental degradation reduces future economic output because of health problems, not to mention because destroying rivers, farm land, and so on is the economic equivalent of selling assets and calling the proceeds income, then the growth in economic value it generates today should be reduced by the destruction in economic value.
So what is China’s real GDP?
This is hard to do, of course, but it eventually gets accounted for in the form of lower growth in the future. If farmers produce less tomorrow because water is polluted, then future economic value added is lower. If workers spend additional money on health care tomorrow, this money is transferred from other, more productive spending.
This happens everywhere, of course, but I would argue that in many countries, where environmental degradation has been less and has occurred over a much longer period, it is already showing up in lower GDP growth today, so it probably results in a much lower overstatement of growth. In fact in rich countries where environmental degradation has slowed sharply, or even reversed, it may be causing GDP growth to be understated.
The other source of GDP overstatement in China is misallocated investment. One way of thinking about it is that if NPLs were correctly identified, the annual accumulation of the non-collectible portion of NPLs should be deducted from current GDP growth numbers to arrive at a more accurate estimate of GDP. After all growth “created” by wasting money is not really growth, and NPLs represent the amount of money that has been wasted.
In order correctly to identify NPLs we would need to include loans that might not technically be NPLs at current interest rates, but would be if interest rates were raised (by at least 400-600 basis points) to their “correct” level. Why? Because these loans are benefitting from the implicit annual debt forgiveness granted to them by household depositors – and the fact that they can pretend to be performing with the help of massive debt forgiveness should not change the fact that they are nonetheless un-repayable.
The combination of these two sources of GDP overstatement – uncounted environmental degradation and ignored NPLs – is pretty substantial. To show how substantial, assume that GDP has been overstated by anywhere from 2 to 4 percentage points over the past ten to fifteen years. This would imply that China’s GDP today is actually about 55% to 85% of its stated size – or to put it another way, that China’s economy is anywhere from 15% to 45% smaller than we think.
This is a pretty big haircut. I have no idea what the correct deduction is (none of my numbers seem especially implausible), but even very rough ballpark numbers suggest that China’s GDP may be sharply overstated. At the very least they also suggest that all those breathless predictions about when China will have the world’s largest GDP may turn out to be as simple-minded as the same predictions made about the USSR in the 1960s or, perhaps a little more plausibly, about Japan in the 1980s. And for the same reasons: in each case we start from the assumption that the country’s real GDP, inflated as it is by misallocated environmental costs and overstated investment numbers, is much larger than it really is. Much, much larger.
By the way notice that if we discount GDP by 20-40%, the astonishingly low household consumption share of China’s GDP – 35% in 2009 – rises to 44-59% – still very low by global standards, but not quite as surreal. Could it be that much of China’s GDP really is overstated, and with it total savings too?
This is an abbreviated version of the newsletter that went out last week. Academics, journalists, and government and NGO officials who want to subscribe to the newsletter should write to me at chinfinpettis@yahoo.com, stating your affiliation, please. Investors who are clients of Shenyin Wanguo Securities will already receive the newsletter. Investors who are not clients but who want to buy a subscription should write to me, also at that address.
There is something weird about your RSS feed; when this showed up, the clickable title link was “BUY Coreg ONLINE WITHOUT PRESCRIPTION”, and definitely not “Small companies feel the pain in China”: http://imgur.com/0Wbto
Michael,
Very good comments. Regarding the SME access to credit, if you can get a Chinese banker to open up they will tell you the following:
For the small companies, you have to take a micro lending approach, which means go local. Hire loan officers who live in the communities and can perform site visits easier. Of course, this increases the chance of “friend to friend” fraud. But you need to know where their familes are. It’s also imperative to have the deposit account and have control of money flows. Monitor utility expenses as a way to determine activity output. Forget about tax records. Everybody cheats on those.
For medium size companies, you could reduce your number of site visits. Get financials but don’t take them at face value. Grab all the collateral you can. The most effective collateral is cash deposits (which doesn’t help the borrower’s capital need) and real estate. Control the deposit account.
There are many very good, upstanding SMEs. But my colleagues say to beware: SMEs are wolves (or hyenas). They exist on the economic periphery of the feeding trough dominated by the SOEs. They are often driven to have to do things illegally or unethically. China has a morass of rules and regulations that are impossible to successfully adhere to while running a profitable enterprise. If you are a connected SOE, you can cut through this. If you are not connected (and most SMEs) don’t have strong connections, you are driven to survive another way. Not to say that all SMEs cheat, but there is a big caution when you finance them.
Unfortunately, China has made little progress in assisting creditors ito create a more consistent and transparent lending environment. There is not Dun & Bradstreet like credit reporting system to help lenders evaluate historical payment performance. The CBRC has a system but it only covers member bank loans. Court process for enforcement of contracts is slow and inconsistent and often dominated by local political considerations. There is no effective UCC like filing system for personal property like equipment or chattel paper. These institutional changes would help greatly in improving lender comfort. But the CBRC would just shrug its shoulders and say “not my department”.
So as the swimming pool is being drained of liquidity, the SMEs are being left to flip flop in the shallow end with only the trusts and the shadow banking sharks to give them life support (sorry for the mixed metaphor).
Prof Pettis
As usual, the NPL situation is worrying. The SME situation aside, pretty sure part of that informal lending is making its way (unintended or otherwise) to real estate and other unstated sources. SME discomfort => labour unrest=> lack of “harmony” the kind of situation successive Chinese administrations have tried to avoid and will probably like to avoid all the more in view of the handover next year. So, the “quickest but probably least palatable” solution would be used – quotas.
The point on the GDP discount factor is interesting, but honestly, doesn’t it apply to every developed and developing country out there? Environmental study groups, industrial lobby groups and class action suits are only part of the story in developed nations, for developing nations like India, the problems are ignored because how else can industries march on in the unrelenting thunder of progress?
Hi Pettis,
I would like to ask you how much % of the workforce in china is hired by SMEs. From my understanding in singapore even though our economy is considered developed, more than 60% of our workforce works for a SME. So if China economy is more under developed, does it means that the percentage of workforce hired by these SME is higher?
Dear Prof.,
As someone on the ground in China involved with an SME what you say is very obvious here, however, I would suggest paying special attention to the following point:
“had told me that their parents were finding it increasingly difficult to retain workers and were getting squeezed out of business. ”
You mentioned Wenzhou, that’s a well known manufacturing area close to the coast. 1st, and 2nd tier cities SMEs will close in masses, and are feeling the squeeze as you mention, due to lack of workshop workers. Factories which last year had 1000 people might find only 50 this year. Many SME are starting up in the center and inner cities where the costs and salaries are much lower. They are able to find employees. So it would be helpful to make a distinction between the “old SMEs” and the “new SMEs”. Another interesting phenomenon, is that at the same time so many factories have problems, and many will close, at the same areas new factories pop up like mushrooms after the rain, only to encounter the same issue of lack of workers.
It would be very interesting to have an idea of the whole picture, and not just the situation at the 1st and 2nd tier cities. That is, no doubt there is financial pressure on SMEs in the 1st and 2nd, but the main reason is that there are no workers. Even if you increase salaries by 50% or 100% compared to last year you might not find people. The migrant workers just did not come back.
It would also be very interesting to understand what would happen at the 1st and 2nd tier cities, when the masses of SMEs will actually close and to all their “office workers and manager”. Plenty of local employees depend on these SMEs. Huge amounts.
What will fill this vacuum?
Thanks again for your post.
Julia
How would you compare true GDP number of China to the true GDP of the United States?
Is the United States GDP overstated in any way. It would seem that if one stripped out gov’t transfer payments and Medicare health care expenditures US GDP would have to drop 5-10%
GDP is simply a poor measure of economic health, because it simply measures activity, even if that activity is uneconomic. The greater amount of uneconomic activity, the worse a measure of an economy it is. Thus Japanese bridges to nowhere counted. US real estate bubble frenzy activity counted. Professor Pettis should spiral this back to the Austrian school. Jim Walker has written at length about Chinese “malinvestment”, as well as the general flaws of GDP accounting.
Judy and RS – I think the reason that China’s “true GDP” is so scrutinized is because it attempts to quantify a rapid, erratic growth trajectory, the difficulty of which is magnified by its occurrence in a developing country which manages and measures its economy with relatively blunt instruments. Comparing it to the “true GDP” of the US would seem to miss the point, being a real exercise in apples/oranges since the US has been a developed country for 150 years and currently follows a slower, perhaps steadier growth trajectory. Perhaps there is a gap between the reported US figures and the real figures, but I doubt it would compare to that in China, due to China’s particularly rapid growth pattern over the last 30+ years. The economic development of the USSR and postwar Japan also resulted in faulty data that didn’t account for the context of rapid, uneven growth that took a toll on the environment and the nations’ households.
Alex
I don’t think that US/China is a apples/mandarin orange comparison. Both countries have an asset value problem (debt is rising much faster than asset values). You can argue that the US is more stable but the trajectory of rising debt is the same.
The USA is, I expect significantly understated. One way to illustrate this versus banging the table with hegemon claims is to apply a rough inverse Kalecki-Levy on all profits of the major USA firms and then solve for their defacto GDP coverage. I suspect this might point out the USA is about 40% understated in terms of the GDP which determines the US yield curve and fortunes. Another way to look at China is consider what happened to Japan. Japan lost asset value in the assets generated via trade that were kept in US dollars equal to the percentage that the Yen was undervalued. Most seem to feel the Yuan is undervalued by about 33%, so this means if China suffers the mercantalist fate Japan did they will lose about $1 trillion on their US reserves – that implies that your 20% to 40% becomes 30% to 50%. If the same logic is applied to the USA it means that the USA has reasonable expectations for a gain of about $1 1/2 trillion in first losing in a very surprising way their trade deficit, but then gaining significant value as mercantalist gains are taken away from the likes fo China. Where this leaves China is about 1/4 to 1/3 the size of the USA and with about 1/4 the current excess growth to the USA than most report. In short a GDP per capita on par with Ghana. The real problem then is all the FDI which actually “believes” the $9 trillion plus reported China GDP and the Chinese themselves who will perceive this final accounting as if they were robbed and assaulted. Then the frustration and dislocation that results are the stress which world war is from.
Sorry to kind of change the subject but the reason I read this blog often is because of the quality of the reader comments (in addition, of course, to the great posts of Professor Pettis). Perhaps someone can lead me to income distribution numbers in China. We talk a lot about the gap and the Gini coefficient but I can’t seem to locate data on this. The South China Morning Post today reports that the monthly tax exemption from individual income tax will be raised from 2000RMB to 3,5000RMB. The article quotes a Finance Ministry spokesman as saying that will reduce the number of IIT paying individuals from 28% to 7.7% and will reduce IIT collected by 48% or 160 billion RMB. I know the bulk of Chinese taxes come not from IIT but from consumption taxes, VAT and user fees. I also know that income includes business owner earnings and other investment earnings that would not be included in this tax. And of course, in China, there is the grey income problem. But if the benchmark for middle class in China is a monthly income of 10,000 RMB (as the article points out) then this would suggest that less than 8% of individuals are in this category (even if you assume dual household income). So we’re talking about 100 million or so people and the other 1.2 billion are lower class, struggling to make ends meet? Does that sound right?
hua qiao
what you wrote sounds like very eastern europe to me. But probably SMEs are the same in all small-middle income countries.
Julia:
this situation very similar to that of EU.
lot of companies moving production from rich western EU countries to eastern EU.
employment in western EU goes for services instead.
China’s services are low compared to industry. so it has a lot os space to grow.
note it will boost inflation big time. Balassa Samuelson effect I think.
Yes, SMEs are starting to fail in bigger numbers and it is getting coverage on the financial news website. The head of Wenzhou SME Association says that 25 to 30% of Wenzhou SMEs are in dire streets. http://economy.caixun.com/content/20110629/NE02ohn8.html
I think worker shortage and credit short fall have different implication for the Chinese economic development.
The labor shortage makes good labor economics sense. As the infrastructure development catches up in inner China, more factories are built there (‘NEW SME’ defined by Julia), which drives up the local wage. To make the worker equivalent between working locally and migrant, the coastal factories (“old SME” ) must raise wage. However, due to higher capital cost and large price demand elasticity, they can’t. Therefore, they will and shall be driven out of the business. Ideally, capital shall be reinvested in business where marginal productivity is high enough to justify higher wage.
It is a good thing because it stabilizes employment, balances Chinese regional economy and increases capital efficiency.
The downside, as you pointed out, is that China does not have the financial institution to facilitate such change. Instead, China fosters a shadow banking system that impedes the change. The slow death of the manufacturing evolves into a ticking bomb of credit crisis. God knows what will be the impact on the shadow banking system and the broad economy if the coastal industrial production heads for an implosion, combined with a possible collapse of real estate.
Unfortunately, we may soon have the opportunity to find out.
Judy, whenever someone points out distortions in the Chinese economy there is almost always a counterargument that these distortions exist elsewhere too. I would counter with three things. First whether or not they exist elsewhere is irrelevant if you are trying to describe the Chinese economy. Second, they may exist elsewhere, but do they exist to nearly the same degree? If not, what is the point of the comparison? After all it is not enough, for example, to dismiss the impact of corruption in China by pointing put that there is also corruption in Switzerland. There may very well be, but not at a high enough levels to have anywhere near the impact in Switzerland that it might in China.
That brings me to the third point. As I mention in the article, not only is environmental degradation much more significant in China than it is in most other countries, and certainly in developed countries, and so therefore the impact of GDP overstatement likely to be higher, but more importantly since much of the degradation is recent in China, the net result is likely to be an overstatement of current growth in favor of lower future growth. Since environmental degradation in most other countries, especially in the developed world, is much older, we are now discounting the impact of earlier periods of degradation on current growth – in which case there may be no overstatement at all. It is even plausible to argue that real GDP growth might be higher than recorded growth because some of the net costs that are being taken today should have more accurately been taken in the past.
Liaogz82, I am not sure what the answer is partly because there is a lot of change from one sector to the other depending on lots of variables, including the level of state-sponsored investment, and partly because it is hard to define the various sectors in the Chinese economy. It is not always clear which is SME, which state-owned, and which large private sector. I know there are fairly plausible estimates, but I am not sure what they are. My guess is probably at least 40%.
Thanks for the color, Julia.
RS, I am not sure transfers artificially overstate GDP. The recipients increase their expenditures but the payers reduce their expenditures by the same amount. At any rate in considering adjustments to China’s GDP I would ignore all the “normal” adjustments every country ahs to make and just focus on areas where China’s GDP adjustment is likely to be systematically higher or lower than that of other countries. After all none of these numbers have much meaning to us except in comparable terms.
RS, as for your second point, actually debt in the US is declining fairly sharply and net savings rising quite quickly.
George, I am not sure I understand how you revise US GDP. I’d be curious to see a fuller write-up. Unfortunately I agree with the prediction in the latter part of your comment. No matter how many times it is pointed out that the growth model is unsustainable, the adjustment will almost certainly be blamed on the machinations of foreigners. Mind you, the Chinese are not the only ones who engage in this kind of foolishness.
Interesting points, Junchen. I would add that excessively low capital p[rices means that there is no real incentive for businesses (that have access to cheap loans) worry about improving the productivity of capital. We would need to liberalize interest rates before that could happen.
Michael,
I have to disagree about your point about debt in the U.S. It’s true that some categories have fallen, but few have fallen sharply. And the broadest category used most often, non-financial debt, has risen.
Household debt is down 4-5% from the peak. But nonfinancial corporate debt is 8-9% higher than when the recession started. State and local debt is up about the same.
Looked at another way, household debt is down $400B, but government debt had to rise over $3T to allow for the adjustment.
http://www.federalreserve.gov/releases/z1/Current/z1r-2.pdf
What’s amazing is how little household debt has fallen given all the millions of defaults, foreclosures, bankruptcies, etc.
Here’s household debt/income and gdp. The sharp fall has merely brought the levels back to what they were in 2005, 2-3 years before the recession.
http://research.stlouisfed.org/fred2/graph/?g=ZC
“The point on the GDP discount factor is interesting, but honestly, doesn’t it apply to every developed and developing country out there?”
Such as, cigarette use leading to higher health costs and diverted resources. But trying to determine the ‘productive’ part of GDP is not very useful, because of the number of factors that are not included at all such household labour, which in some countries might be done for payment, or any of the number of factors listed at (testing link removal for comment submission)
And while it does not directly relate to the problems of small and medium enterprises, it might be useful to understand how to address the wealth disparities that are arising in China’s economy: (testing link removal for comment submission)
Note that China must be aware of the possibility of its currency strengthening, and financing the US’s consumerist tendencies is just a pragmatic way for China to develop its industry. “Losing” a trillion USD worth of foreign reserves due to an adjustment of rates is secondary to the continuing increase in standard of living resulting from a competitive market.
Furthermore, if an exchange rate adjustment does take place, labour in China will still probably be much cheaper than in the US and there is no reason for it to result in a change in trade balance proportional to the exchange rate adjustment.
“The point on the GDP discount factor is interesting, but honestly, doesn’t it apply to every developed and developing country out there?”
Such as, cigarette use leading to higher health costs and diverted resources. But trying to determine the ‘productive’ part of GDP is not very useful, because of the number of factors that are not included at all such household labour, which in some countries might be done for payment, or any of the number of factors listed at http://en.wikipedia?.org?/wiki/Gross_domestic_product#Limitations_of_GDP_to_judge_the_health_of_an_economy.
And while it does not directly relate to the problems of small and medium enterprises, it might be useful to understand how to address the wealth disparities that are arising in China’s economy: http://pastebin?.com?/Q86Zhgs9
Note that China must be aware of the possibility of its currency strengthening, and financing the US’s consumerist tendencies is just a pragmatic way for China to develop its industry. “Losing” a trillion USD worth of foreign reserves due to an adjustment of rates is secondary to the continuing increase in standard of living resulting from a competitive market.
Furthermore, if an exchange rate adjustment does take place, labour in China will still probably be much cheaper than in the US and there is no reason for it to result in a change in trade balance proportional to the exchange rate adjustment.
Another article from caixin (I’m amazed how good this site is, and how it is allowed to keep publishing…)
http://english.caing.com/2011-07-05/100275974.html
“Wu noted the current growth model is unsustainable and has been built on investment that exploits resources and damages the environment.”