This posting is from the January 30 issue of my newsletter, and so ignores recent events in Chongqing, but of course those events make my discussion of the political debate entry all the more relevant, I think. Before getting to the policy debate, I want to mention that in late January Caixin, one of my favorite magazines, had an interview with Liu Mingkang, former China Banking Regulation Commission chairman. In it Liu says:
I’ve said in the past that this economic crisis will spread from the United States to Europe and finally land in Asia. Now we can see that it’s already begun influencing Asia.
In 2008 and 2009 I argued that the crisis we were undergoing would affect every major economy in the world, but not necessarily at the same pace. I suggested that the US typically is quick to adjust and, given the pace of deleveraging that was already taking place, I expected that it would be the first major economy out of the crisis, probably in the next two to three years, as private debt levels continue to decline and public debt growth slows.
China had an even bigger adjustment to make, but I worried that there were institutional factors that would slow down the adjustment process, especially with the expected change in leadership this year. Although I did not expect to see a serious contraction in growth until after 2013, I said that China would be the last major economy to emerge from the crisis. Why? Because the huge increase in investment it engineered to postpone the domestic impact of the global crisis exacerbated the imbalances within the economy and increased its already-excessive reliance on debt and investment to generate growth.
In 2009 (and even in 2010) I think some people thought these predictions were eccentric at best. This was mainly because they did not understand the relationship between the global trade imbalances and the crisis, and that the uneven adjustment process could extend over many years. I used the LDC Debt Crisis of the 1908s as an example of how this can happen. In the late 1970s, a surge of capital inflow (recycled petrodollars) spurred frenzied investment into LDCs, especially in Latin America, that made it seem that they had managed to avoid altogether the economic crisis suffered by the US and Europe in the mid-1970s. These inflows, however, only left the region with a huge amount of debt and a more difficult adjustment once borrowing capacity ran out in the early 1980s.
I expected something similar to happen again, with the crisis hitting developing countries much later than it hit the US and Europe. According to my view China’s investment surge would allow it to postpone the impact of the contraction in global demand and would also carry with it countries that relied on commodity exports. But ultimately – since the purpose of investment today is to serve higher consumption tomorrow – this would only make the ultimate adjustment all the more difficult when China would have to adjust anyway with higher debt and a less accommodating global environment.
By now I think the prediction that the US will be among the first and China among the last to escape the crisis no longer seems as eccentric. Others are making similar predictions. There is growing awareness that China has not yet addressed the changes forced upon it by the global crisis, and will have to do so soon. It has certainly become easier to see how the crisis has spread, as Liu points out, first from the US and then to Europe and now to Asia.
The debate over reform
In the interview he explains further how this is happening:
First, domestic and external demands have taken a sharp drop, especially in the second half of 2011 and first half of 2012. I think that the pressure to increase domestic demand is picking up. That is because domestic demand is driven by business productivity.
…But the consumption capacity of low-income citizens is limited. Demand on the part of middle- and upper-classes is dropping, especially in middle-class families. Everybody’s attitude is “let’s wait and see.”
Second, there will be even more pressure to change our development path in 2012…We urgently need to transform our business development models. It has become a choice between life and death.
Third, it’s hard to be optimistic about employment and stability. If some businesses evaluate market conditions and choose to close up shop or cut half of production, especially in the first half of 2012, there will be employment problems for migrant workers after Chinese New Year.
Fourth, after ten years in the WTO, China’s reliance on exports is relatively high. China is greatly affected by changes in the global economy. Commodity prices fluctuate rapidly, impacting China’s economy directly. It’s also worth paying attention to capital flow trends. In the third quarter, net inbound capital flow became capital outflow. It’s possible that such an exodus will continue into the first half of 2012.
Liu’s claim, that the need to change the business development model has become a choice between life and death, is pretty dramatic, but I think his point is an important one and is being increasingly heard within China. For example Saturday’s South China Morning Post has an article by Edward Ding An Hua, the chief economist of China Merchants Securities, in which he says:
There are two clearly opposing camps in China’s economic circle regarding the role of government. The first objects to government intervention and stresses the role of free- market mechanisms. The second believes in the unique advantage of a strong government in driving growth.
…What is strange, however, is that the two don’t actually fiercely disagree but, rather, appear to be in remarkable accord over long-term economic issues. Both adopt the same language; such as “adjust the structure” and “change the economic growth model”.
However, regrettably, the Chinese language is a concise but not precise language that often omits the subject in a sentence. In this way, a key subject can be omitted or “harmonised”. The free-market camp unilaterally interprets the subject as the market mechanism, while the strong-government camp quietly furthers their viewpoint of strengthening the role of government in the economy.
Reforming corporate governance
It is important to note, as Ding points out, that it is not just Liu who is thinking along these lines. There were for example two other interesting articles last week in Caixin which I think are useful in understanding China. The first article, by Wang Lan, addresses the problem of SOEs in China.
Before discussing the article, I should note that last week’s issue of The Economist has a special section on state capitalism. This includes a debate on state capitalism. There was nothing especially new in the debate, and I suspect that a relatively uncontroversial claim might be that state-directed investment can be a very useful way to overcome failures of the domestic financial markets to allocate capital to projects that, especially when you include externalities, have positive returns for the economy. This was Alexander Gerschenkron’s argument back in the 1940s and 1950s.
At some point however it becomes very to identify such projects, but given pricing distortions and political imperatives it is also hard to pull back, in which case we typically see wasted investment and misallocated capital. This is when the process becomes value destroying rather than value enhancing, and it can occur over many years before it is finally reined in, typically by the unsustainable debt levels that accompany state-directed wasted investment.
Wang’s article addresses one consequence of state investment in his Caixin article. He says:
In recent years, the enormous profits of state-owned enterprises (SOEs), once widely considered a good thing, have come under public scrutiny. The core of the problem is monopoly. SOE bigwigs are rapidly expanding their monopolies, relying on growing scale and rising prices to extract huge profits. But these companies bring little technical or organizational innovation to the table.
The vitality of the Chinese economy is being stifled by SOEs, especially central-level, or top, SOEs, and this is borne out by research. In October 2011, the State-Owned Assets Supervision and Administration Commission of the State Council (SASAC) released a breakdown of state-owned assets and earnings information for 102 for-profit SOEs. This showed that in 2010, the capital of 102 central-level SOEs was equivalent to 61.4 percent of GDP, and their earnings equaled 42.2 percent of GDP… The second national economic census taken in 2008 reported profits of nearly 900 billion yuan by finance industry central-level SOEs. Banks accounted for 64 percent of that profit.
These gargantuan SOEs have not only failed to lead us toward a new stage of development, but they have actually inhibited the vitality of the Chinese economy by distorting resource allocation.
Wang recommends that Beijing begin a privatization process to wean SOEs from their addiction to excessively cheap capital, monopoly power, and distorted governance. This, he says, will force the SOEs to address and resolve their role in wasting capital, stifling innovation, and concentrating wealth. It will also allow China to grow in a much healthier and balanced way.
I have always thought that the least painful way for China to rebalance its economy requires that it radically redistribute income and wealth away from the state sector and to the household sector. There are many ways this can happen, some better and some worse, but privatizing SOEs and using the proceeds to clean up the banks (whose NPLs are a future claim on households), to shore up the social safety net, and to permit SME’s more scope in which to compete is, in my opinion, the most efficient ways to do so. It would also weaken sectors that are able to restrain change in the economy.
Returning to the system
Of course for that very reason there are likely to political impediments to such a solution, and for many years we were told that privatization was pretty much out of the question in China. I disagree, and have argued often that within two or three years the constraints imposed by the current growth model will ensure that policymakers and their advisors in Beijing will be discussing privatization much more actively.
In that light it is interesting to see that in the past year or two the topic has come up more and more regularly in domestic debates. Wang Lan’s article seems to be part of this debate. This discussion actually ties into the second Caixin article, by Tsinghua University sociology professor Guo Yuhua. Guo starts by referring to a deep malaise in the country:
What is the most common feeling in China today? I think many people would say disappointment. This feeling comes from the insufficient improvement in their lives that people are achieving amid rapid economic growth. It also comes from the contrast between the degree to which individual social status is rising and the idea of the “rise of a great and powerful nation.”
Guo goes on to argue that a main source of the problem is the limited and declining opportunities arising outside the state system:
The disappointment of being unable to extricate oneself from difficulty is, of course, not restricted to college graduates. In opportunities for education, employment, promotions and overall improvement of their lives, people are discovering that society’s resources and opportunities are increasingly concentrated in the hands of a few. People in the middle and lower strata of society are becoming increasingly marginalized and are finding that improving their lives is getting harder.
The 2004 China Social Mobility Report published by China Academy of Social Sciences said that people whose fathers have power or capital have an easier time becoming party cadres than people in general. Research into the changes in private businesses ownership after 1993 showed that the elite in non-business fields were more likely to own businesses today. Thus, opportunities for common people to start private businesses are fewer and fewer. It is exceedingly difficult for farmers moving to a city to find success. The registered permanent residence system and economic factors conspire to make this move very difficult.
A social trend has been captured by the phrase “returning to the system,” which refers to resorting to traditional means of advancement. The number people signing up for the national civil service examination was 600,000 in 2007, 800,000 in 2008, 1.1 million in 2009, and 1.5 million in 2010, a clearly rising trend. “Returning to the system” has become the main method for members of society to climb the social ladder.
Guo asks for a more robust social system in which the benefits of economic growth are not so heavily skewed towards a political elite and in which members of the various strata below the elite have increased opportunities of participating in the economic process:
Power is becoming too formidable and cruel. It is out of control, and without limits. It has kidnapped society and strangled reform. Facing this, finding a solution is a matter of vital importance. In a situation where special interest groups have choked off the possibility of various types of progress, building a just society and enacting reform is difficult. Moreover, there is not a ready-made civil society waiting to settle into the void.
We need to realize several things. The impetus for reform comes from society, not from authority, and reform within the system is produced under the force of social strength. Fair and just rules are formed by interaction between various forces. Civil society is produced by the participation of citizens. Extrication from stagnation and the restoration of social vitality can only come from the start of civil consciousness and civil action. Only by empowering society and enlightening citizens can the strength to reform be developed.
Reform and rigidity
Large-scale privatization, of course, is not the only, or even the main, “solution” to the problems that Guo identifies, but if done correctly it can be part of the solution by undermining entrenched power and adding flexibility to the country’s governance structure. What is especially interesting, at least to me, is that an increasing number of commentators within China are identifying the social and economic rigidities imposed by the state system as crucially important in constraining China’s future economic and political growth.
This is becoming a pretty contentious debate. Over the past several months, in fact, we have seen a noticeable surge in articles and reports like this one – often by very prominent academics and policy advisors – criticizing the power of special interests in China. Their main concern seems to be over the constraints these special interests impose on further Chinese development, with the entrenched interests that have benefitted over the last decade or two having become so powerful that they are making it increasingly difficult for China to adjust.
A lot of very smart people in China, in other words, seem to be worried that the country’s governance structure and its development model are no longer able to accommodate the needs of the economy and that it is vitally important to confront the entrenched interest that make change difficult. This is sometimes presented in the foreign press as the debate between the “Chongqing” model versus the “Guangdong” model.
I apologize for the rather abstract and dry description in this and the three previous paragraphs of what is actually a gripping and very interesting topic, but for perhaps obvious reasons this is something about which I am reluctant to say too much. Still, anyone trying to predict China’s economic outlook for the next few years should be very aware of this fierce debate.
This is an abbreviated version of the newsletter that went out three weeks ago. 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 want to buy a subscription should write to me, also at that address.
I’m not hopeful about privatisation being a driver of real economic change, since the government’s strong tendency is to co-opt everything. I can imagine something that looks like privatisation, but if you come back in a couple of years, you have companies that are ‘private with chinese characteristics’ (echoing huang yasheng’s thesis). Secondly, i don’t think terms like ‘province x model’ or ‘province y model’ to have much meaning. I don’t think battles of ideas are being played out in so geographically bounded a way. The key factor in the chinese war of economic ideas seems to be time, and the above post confirms that. It looks like everyone gets enough time to repent of triumphalism.
You only need to look back to the Thatcher years here in the UK to see the failure of privatisation. What was needed is competition.
If the entire economy was made more competitive by ensuring that the equity capital to enable competition was always available; then the SOE’s would wither on the vine from the application of direct competition.
You need to see many much smaller companies all snapping at the heels of the largest companies.
Particularly, all such new investment must be made under the rules of free enterprise.
I think one of the more interesting points to come out from Michael’s presentation (and there are many from a socio-theoretical perspective) is that “privatisation” is not always the dirty word many left-wing friends may think it is. In the case of China, for instance, it is an imperative for the social and above all political “liberalisation” of its government and polity. From a “socialist” standpoint particularly, economic and social “progress” or “emancipation” have always been interpreted as synonymous with “State intervention in the economy” – a theoretical prejudice shared by many Keynesians – which omits a discussion of what is meant by “State intervention”.
Again, I think that Michael’s discussion ultimately bears on the notion of what is meant by “State” and how what I call “constituted power” conditions and prevents or hampers the development of “participatory democracy” – another description of what is called more roughly “domestic demand” or “consumer power”, bearing in mind that “consumerism” does not stand for “democracy” and yet it does stand for greater decision-making power in the “pockets” of the vast majority of the population – all those people who need to work! So here is yet again another example of the way in which Professor Pettis uses the categories of “economics and finance” in an admirably enlightening manner – something alas that too few “economists” do in a way that challenges the theoretical concepts they adopt (I am thinking of Paul Krugman or Joe Stiglitz, for instance). Keep up the good work!
Welcome back!!!!
The Organization Department of the CCP dominates the HR decision making in every stae owned enterprise, leading to the occasional embarrassment where the department annonuces the rotation of key executives among the largest companies but forgets or ignores that some of these firms are publicly listed and have boards that are supposed to approve their hires. It happened in the airlines asnd oil I believe. I just wonder if the Party will give up this key contorl point, which i think is central to the separation of political and commercial constituencies.
While privatisation might be a good first step, it is not as big a step as we would all think as long as the master puppeteer keeps tight control on the personnel strings. Until executives see their fortunes tied more to pleasing shareholders than pleasing the party, not much will change and the bridges to nowhere will still get built.
Vam, the World Bank will release a study Monday which will include some discussion of privatization, and apparently they, like you, think privatization may be politically unfeasible. My guess is that eventually we are going to have to consider privatization because the alternatives are just not very good.
Chris Coles, yes, I agree that merely privatizing without real governance reform is probably not much good in reforming the economy, but there are two separate issues here. One is how to fund wealth transfers from the state to the private sector and the other is what is the best way to create efficiency in the economy. I am really addressing the first.
Thanks Joseph. What is interesting to me is how fervent the debate within China is on just these issues.
HuaQiao, I agree with you but again I would refer to my response to Chris Coles’ comment. We have two very important and very different issues with which to contend and different means of addressing them.
I think we will see privatization under license. This means that more participants in selected sectors of the economy will be granted the right to operate under market conditions, but with a few mother companies taking home the largest part of the profits.
SOEs don´t need to be handed over to the public to function as wealth transfers. They just need to be more inclusive. The problem being “who” they include and “why” they are included.
Still we end up with the question of demand. And the answer to that lies in the consumption pattern of the average Chinese. I am getting to the conclusion that the saving is forced upon the Chinese public by their system. Every encounter with lower level government representatives will require cash or gifts. Almost all problem or legal matters will have to be settled in cash and family issues are settled in cash. The need to have an extremely large amount of wealth in ready to use cash means that private consumption is not an option for most Chinese. They may buy real estate, but that is because it has the same function as cash. It is tradable and safe.
Another issue I have not seen mentioned is the working patterns in China. First of all no Chinese retires at 63 like official statistics say. I have seen numbers from an investigation done by Chinese Academy of Social Sciences in Beijing, where most women would be retired by 52 and men would be retired by 54.
Now Beijing is not representative for the rest of China, so I expect the retirement age to be a little higher, but nowhere near the 63. This means that most Chinese work no more than 36 years in average, but they live close to 72 in average I would guess. This means that the generation working now will have to save because they can expect a fairly long retirement age, but they have not saved because this was not implemented before 2003 in any useful way, so they hold back on consumption now. I know there are benefits but they are still insufficient to sustain a “reasonable” life style in today´s China.
I don´t see the low interest in Bank deposits as the main problem with getting consumption going. What is needed is to create an environment where cash is not the solution to every problem encountered. That is much more difficult then privatizing parts of the economy.
On bloomberg yesterday, global head of FX Strategy for DB was on and to a question on China’s Economics prospect, he said that China has 60% of GDP as foreign reserves and can use this to bail out the banks. I am not surprised when journalist make such statement as they are more of generalist with limited knowledge but this is quite surprising coming out from “expert” from top banks, with power to put bank’s balance sheet at risk.
Michael, I am sure that you would have several such discussions with respected fund manager, who put their capital at risk, and have FX reserves as single biggest argument. What is their retort to your argument about domestic vs foreign currency? I means is there something really simple that all these guys know?
I was reading a recent article on WSJ (http://online.wsj.com/article/SB10001424052970203430404577093800108132274.html) and it partially describes, how the bail out partially on the back of FX reserves was done in past in China. Where you put foreign reserve $ as capital but convert it over a period of time. This is effectively government committing upfront but providing support over a period of time. (I guess you can just give a promise and wont really need to use FX reserve to do this.) But, is this something that can be done or soemthing that can work later as a tool for the government?
Prof Pettis –
Apologies but another question for you. I started reading your blog recently, so still trying to clear up inventory reading old ones every now and then.
One of the critiques of China growth story and as highlighted by you as well – that inflow of hot money and trade surplus forced an expansion of domestic supply of money far beyond the needs.
If that something evident in the data? The money supply growth figure growth was very high in 2009-2010 but it seem be around the same level as what other countries did to stimulate growth during crisis. China does have a very high level of RRR compared to norm, and it could be that the doemstic supply of money is sterlized properly.
If thats the case, it seems to me then that inflation would not be a big problem unless household interest income increases, which will not happen due to financial repression and consumption as a share of GDP will keep going down. I diverge from your view here so let me know your views.
There are other problem obviously as this causes distortion but inflation doesnt seem to be the one.
I still get surprised everytime banks research report stating that demand is magically going increase in china without any transformation and it will cover the slack in drop in GDP from other sources.
Andeli, I think you are confusing household savings with total savings. Whatever the reason for high Chinese household savings (and they are high but not extraordinarily high), it does not explain why national savings are the highest ever recorded. This has more to do with the repression of household income than the need for Chinese to hold cash.
Luhar, for your first comment, reserves cannot be used to bail out the banks, and they weren’t in the last bailout. Part of the capital injection was in the form U dollars, but it could just as easily been in the form of RMB and there would have been no difference. By the way after 15 years on Wall street, I do not expect, perhaps unlike you, that bankers understand basic economics and so I am not terribly surprised by comments like that.
As for your second comment, I am not sure I understand, but aside from the fact that M2 growth is systematically understated, as even the PBoC acknowledges, in a financially repressed system the monetary aggregates work differently. This is one of the reasons why I have argued that as long as we don’t see wholesale liquidation of deposits by households, we are unlikely to see inflation last very long.
Macroeconomic reform appears to be under political stress that has deformed it. We saw this in the financial markets (remember the 2005 currency reforms?), in the SOE’s (remember the talk about their reform in the late 1990′s?), and in other areas such as urban/rural administration (remember hukou reform?). We wait upon the outcome of the 2009 stimulus and the housing price controls…
The disturbing trends are political. We have weaker central leadership with each generation, SOE’s who seem to have stopped shrinking from the economy, a central government that is dealing with compromises to its economic policy tools (the shadow banking sector, for example), and a political cycle which is obsessed with continuity. Basically the system is leaning towards leveraging everything to buy time against painful reforms. Privatization will be top on the agenda to delay, because once it becomes an allowable solution, the political fallout will be wide.
Michael,
Very good to see you back and in excellent form. In tenebris lucens!
Could the drive behind SOE growth be a result of attempts to become TBTF? Wheras obtaining a critical size, not viability, becomes the number one factor in survival?
@Glen,
There are a lot of drivers behind SOE growth. Chinese companies are driven by asset size and sales. Market share is everything. When people talk about the number 1 firm, they talk of sales and market share. Profit, as long as there is profit is not a big driver. With excess capacity in about every industry and the government working to force shotgun marriages (mergers), the CEO running the larger (not better) firm will get the nod to run the merged company.
The question becomes this then:
why China?
other countries also have state owned finance, rail, telecom, oil and chemical monopolies. Why should China open these sectors to foreign competition and allow profits to flow from China to foreign investors?
Is that not the exact same imbalance as profits flowing to the state?
But at least government officials are spending their money in China, while foreign investors in general, do not. I fail to see how privatization, which is often just a code name for allowing foreign competition, is useful for increasing the share of household consumption. It would simply be diverting from a national elite to an international elite, and this international elite would have far less interests in keeping China working than the national elite. This is not even talking about the fact that rail, oil, finance, telecom and chemicals are all strategic, national security related sectors. Why should they be opened? If the economy has to suffer a bit to maintain national security, why not?
If being private means that they live and die by the whims of the market, then why did the US governments intervene in the financial markets after the collapse of Bear Sterns and Fannie Mae/Freddie Mac? Is that not also state intervention in the economy and diverting of public money to a small elite? Why is it absolutely correct for the US to do this, and absolutely wrong for China to do this? Why should China privatize?
Are Samsung, Hyundai, Mitsubishi and Mitsui private, or are they state owned, or are they something in between? Did having connections to their governments stifle them, or make them better? Do Japan and South Korea share the same problems? If not, then why should China open strategic markets?
@BFP
Thanks for validating the protectionist thinking that goes on in the mainland. So much for the Free Market Status that China so desperately wants from the WTO. At least there is someone willing to tell the honest truth about why China builds such barriers to competition in its markets.
@BFP
I like Obama’s definition of state-owned versus private, the one he used it with regards to the Trans-Pacific Partnership. “Private” companies should be majority-owned by an entity or entities other than the government, and the company leadership must not be determined by the government or based on political reasons. Sure it can be hard to quantify both, but when you look at all the Chinese SOEs, including those publicly listed in the US or Hong Kong, they are all managed by politicians, not businessmen. Every few years they all rotate to work at another bank or into an official government post. In other words, the CEO of Bank of China is beholden to the Communist Party, not shareholders.
You are concerned about the opening of markets leading to foreign profiteering, but how is that different from what happens right now? Bank CEOs first and foremost want to preserve the rule of the Communist Party, not the well-being of the Chinese people. This is where the principal-agent relationship lies. If the leaders at Bank of China have terrible earning results this quarter but channel funds to the right projects, they build enough guanxi to keep their jobs. If they decide to make small loans out to small, innovative companies instead (but make bigger profits), they can lose their jobs. Foreign domination might actually be preferable to Party domination in the sense that economically worthy projects get approved and financed regardless of who proposes them. In the current system, only politically popular projects do.
Letting shareholders (Chinese or foreign) determine the management of Chinese SOEs will make them more efficient and beholden to performance, rather than political discipline. Furthermore, selling shares held by state banks to private citizens will allow them to directly profit from the success of these companies. Right now the vast majority of SOE shares are held by banks or state-controlled entities that reap the true gains from what is essentially public property.
Perhaps the best immediate solution is to privatize SOEs but restrict foreigners from owning shares in these companies for 30 years. That way the national interests you suggest are preserved.
Bfp:
Michaels point do not editorialize to the oppositional, conspiratorial, and lessor prospected, as is obvious by the nature of your discussion.
Several factors that were true prior to the recent downturn:
The world population is growing
The world population is young
Trade is cooperation and partnership, not of necessity
Such structures as exist lessen the long term trajectory of china and the globe lessening outcomes for all
The system as exists, although plaited as a developing…developed dialogue, is rather a developing…developed one.
Sure, there are considerations of impacts globally, but mechanisms lessen the standards and qualities of life, opportunity, important emotions/feelings, whatehaveyou, for what the future holds, while playing into a tired set of memes with greater relevance to another era. The structure lessens the ability of a bulk of the worlds people to evolve more naturally and online with reality. It’s rigidity sets the stage for great instability, not simply within china, but regionally and globally.
The world will have to shift to models more understanding of the great amount of young people in the world.
Some Australians may benefit from commodity exports, certainly not industry. The same is true of others, brazil, African resource exporters, etc….
In the early stages of the industrial revolution the world had 1 billion people, or less. By the time the US was the largest economy in the world, less than 1.5 billion. Now 7 billion. You talk of elite transfer of wealth. The markets in China are not completely open to foreign investment, certainly not portfolio flows, and privatization would create a broader category of assets for people to invest in, internally, where they would operate on market terms. Inefficiencies which limit the market status of China will lead to responses that acknowledge it’s non market status. In a world of 7 billion people,where some projections have Africa alone at 3 to 15 billion people by the end of the 21st century, surely illustrates that supply is muchless important in many categories of trade, in the present era that it had been in the past, if demand ever lost it’s primacy.
So, it’s about making transformations that will encourage growth, internally and externally. All want to manufacture, the attempt to create industry champions across each category of industry, has, can not, and will not work, in the present era.
If populations and markets are the holy grail, than Africa will have upwards of the population of India and china, in 20 or 30 years, perhaps both combined.
So, more is at stke in the discussion than a paranoid projection of the interplay between global elites in the present discussion and I suspect, they, themselves, realize this, were they cognizant of the need To maintain their positions then likely the pendulum of income inequality will swing back. You seem to forget, in your rather narrow, toward naive discussion, that Michale is talking about what is beneficial, not speaking to the needs of global elites.
[...] I expected that it would be the first major economy out of the crisis, probably in the next two to three years, as private debt levels continue to decline and public debt growth slows. [...]
So the Exorbitant Burden point you made about the monetary stystem is absolutely right, but while you made that point professor, I think you failed to recognize that someday it would change and that this change would make the GDP figures of hte US DRASTICALLY and CATASTROPHICALLY lower.
The distortion of money and the ability to always print the currency to pay for imports IS the cause for lack of incentives in manufacturing in the US not the “strong dollar”. Japan FX rate was at 450 Yuan to a Dollar back after world war II, where is it now and how this the weaker dollar helped US exports to Japan. The lawyers fees, the Moody´s ratings, BAC+GS+JPM+C, housing, and all the “services” good economy are all non tradable and all questionable to the core if we had not a monetary regime as such in the US. How would service sector look if the US had to sell something to the rest of hte world in order to be able to buy something from the rest of the world? That is the real question.
As for US recovery. Have you check the divergence between electricity consumption, people on foodstamp, labor rate participation in the US and official B(L)S data on employment? THe problem is the following: If you get the inflation index on soft commodities up 8.6% annualized over 10 years, gasoline up 9% annualized over 10 years, Beef is up 8.2%, Poultry up 7.6% and Pork 5.8% in the US. Now the median income increased at 1.76% in 10 years. Meaning that basic necessary items (inelastic demand) grow much faster than median income. That means the general population is getting poorer. How in those conditions would more leverage help the consumer? The US total Gov debt is at 600% to GDP (Bill Gross), you add consumer debt and corporate debt and you end with monetary system based on US never ending increasing in leverage to eliminate savings function and result in either overconsumption or malinvestment (Stock bubble, real estate bubble) which is absolutely toast, since sitting idle (Savings without being cheated that Gold money has been eliminated.
Sorry Professor, even with an elastic monetary system which was supposed never to have the problem of a Gold metal leash on credit excess, M3 tried to contract in 2008 proving Keynes and Friedman wrong. I think one should read “A propos of Everything” from QB Capital. http://www.ritholtz.com/blog/2011/04/apropos-of-everything/
The idea that there is never no limit in increase in leverage because we have a rubberband money as opposed to metal chain money just means that the debt flushing or money sacrifice (that is the only sad choice available) happens after far more accumulation of excess than under a fixed money which never sacrifices the money in favor of the debtors, the toilet flushing happens much more often in the debt accumulation cycle with fixed money. Better hygiene essentially. The West has 50 years to flush. Good luck with debt forms of money… (Fed Reserve bank notes, Bank deposits, Treasuries that is).
If China were to float is Yuan, USD would drop like a stone because it is the USD which is pegged to the Yuan (since China has much more impact of physical commodities -soft and hard- in China which should how a stable paper money should looked upon – “Von Hayek denationalization of money”, also the tradable sector of China is huge). And since China lends so much to subsidize US consumption, should the Yuan be floated, the USD would plunge. The purchasing power parity would reverse in an extremely bizarre way and the strong Yuan would mean domestic demand would be small engine that would absord a tiny fraction of the manufacturing capacity of China. It begs the question why would the US want to have the Yuan revalued or even floated, it would catstrophic for both the US and China but more for the US than for China actually.
So China would hurt a lot but while China faces a investment bubble and banking issue. Europe faces a currency and sovereign issue and the US a currency crisis. I would rather take an intermediary crunch in China than a game over crunch for the USD and cope with new monetary system.
It both ironic and bizarre how the privatized economies of the western world are bankrupting the entire state, mired in bailouts after bailout.
Yet everyone here seems to think privatization will somehow magically make everything all goes better in China even though her economy is running just fine.
The innovative private banker are not in anyway shape or form acting in the interest of shareholders. They are actually acting in the interest of themselves, the bankers on wall street used shareholder money to finance the biggest bubble in recent history, and handed large bonuses to themselves during good years, while dumping all the toxic debt on shareholders and tax payer after the bubble went bust.
Now fortunately the 2008 financial collapse has decimated the liberalization side within the party (along with all the wall street zombie banks), so we can safely assume none of stuff the IMF or world bank is going to have any sway on CCP. Also the CCP doesn’t care about a largely symbolic market economy status from WTO as one of poster here thinks.
Also the US and European government has blocked multiple acquisition attempt for technology companies initiated by Chinese private and SOEs alike. Why do IMF and WB continue to sell their privatization poison when there’s still enormous barrier in their own countries. Also what is with the scorn with politicians working as businessmen? The US government is practically infested with former wall street bankers, why isn’t that an issue?
Of course the most absurd thing the blogger seem to suggest is that the US will be the first to recover. Are you living in an imaginary world doing God’s work with Goldman Sachs? US has never recovered and in fact probably never will in the foreseeable decades. The US “recovery” story is just a fraudulent lie told by manipulated BLS statistics using accounting standard that makes even Enron blush.
Frankly the best advice to China has already been told, the ongoing train wreck of the US and European are examples of how not to run an economy. And CCP has already realized that economies are best managed when they do the exactly opposite of what IMF and WB tells them to do.
@ Jiang
Just keep drinking the Kool Aid my man, while your state owned banks continue to finance bridges to nowhere and then extend and pretend. What you guys call investment is just consumption of steel and concrete that won’t pay back in your lifetime or mine.. unless of course, your local cadres continue to steal land to sell to developers to build more empty buildings financed by banks that have no clue about cash flow. Of course nothing will blow up as long as the PBOC and CBRC can keep deposits in the banks by surpressing investment alternatives and the banks can misreport portfolio quality and capital. All fed by a system where the 1.2 billion lao bai xing get screwed so the 100 million or so connected ones can have their gambling trips to Macao and their shopping orgies at Herrods. I hope for your sake you are one of the latter.
“…even though her economy is running just fine.”
Have you ever read anything other than People’s Daily or Global Times?
Situations in equity markets will get worse this year, gambling China’s future on the next leader of China will be very dangerous if there have no real actions in both political reform and economic reform.
If your arguments are that everything ever told by the CCP is a lie, then there’s not much to discuss.
There are certainly mal investment going on whenever there’s a flood of liquidity coming down as it did during 2008, but that’s the exception not the norm. Corruption and inefficiencies are regulatory problems, not systemic problems.
Big four are great revenue generator that can reduce the tax burden on rest of the population. The private bankers on wall street financed the dot com bubble and the on going MBS ponzi scheme.
The resulting collapse evicted many Americans out of their homes and bankrupted many investors and pension funds. If this is the paradise the west want to sell to Chinese, then you got some work to do.
FrParlentAuxFr- “I think one should read “A propos of Everything” from QB Capital. http://www.ritholtz.com/blog/2011/04/apropos-of-everything/”
The article you posted has little to do with your post, but I want to address it because it is miserably off target.
According to these people
“Exhibit A is thevirtual consensus – not even up for debate among rational people – that Treasury and the Fed saved the economyfrom Depression in 2008 and that doing so was a good thing.Would we be mad to think otherwise? It is a matter of preference…
However, if the 1930s are any guide, weak banks including many of the largest ones would have failed, asset priceswould have adjusted to provide positive
real rates of return, wage rates would have been revalued to a morecompetitive global scale, workers would have shifted towards more sustainable industries, and employment and asset prices would already be starting to rise…
Would enduring a difficult period of necessary digestion have been worth it?”
This article was written in March 2011, 2.5 years after the crash of September 2008. Tell me, were employment and asset prices already starting to rise in the US 2.5 years after the Great Depression began? That’s April 1932 if you’re counting. In fact those indicators began to rise in March 1933 when the government promised to throw unlimited sums of money at the banking system. Which makes referring to the Great Depression as “necessary digestion” and comparing it favorably to the Fed’s response in 2008 an astonishing misstatement of history.
Another choice quote. qbamco, 2011
“The Great Depression was a credit event, brought about by excessive net unreserved lending in the 1920s. A better term for it would be “The Great De-Leveraging” because the notional value of credit contracted suddenly and severely to reconcile the amount of actual money in the system (which then was the quantity of dollarsexchangeable into gold). The gold-exchange standard did not allow policy makers to fight credit contraction in the 1930s by issuing even more unreserved credit. As a result, bank loans could not be paid back, which forced banks to write down the value of their assets or, more predominantly, to close.”
Irving Fisher, 1933:
“By March, 1933, liquidation had reduced the debts about 20 per cent, but had increased the dollar about 75 per cent, so that the /real/ debt, that is the debt as measured in terms of commodities, was increased about 40 per cent.”
So in fact during the Great Depression, while policy makers were powerless to fight credit contraction the country became more leveraged to the tune of 40 per cent.
I think one should avoid reading “Apropos of Everything” unless one desires a feeling of despair and irritation.
A couple of things I really want to clear up. Although I really want justifications for why Wall Street is apparently the future for China even though it’s probably one of the most corrupt and fraudulent place on earth.
Shenzen was once a ghost city when it was built. So the status of ghost city eventually change over time. Also, these projects are overwhelmingly funded by private property developers, if they made the wrong investment decision, they lose money or go bankrupt.
Also, most road and bridges built are definitely going somewhere. As for the few that really did went no where. Well those projects are much more profitable than road that goes somewhere because the surrounding land are immediate worth more value which can be sold at higher value to property developers or manufacturers.
@29
Parts of Shenzhen are still empty, and not just on the factory fringe areas either. Multiple abandoned skyscrapers (30+ stories) in Dongmen, the busiest shopping area in town. An entire sub-city of apartments, hotels, and retail built around the “Universiade” site, that is not only in the middle of nowhere, but is also totally empty. If you drive out of town to Dongguan, you can also see the world’s largest shopping mall “South China Mall” which was probably 90 percent abandoned when I visited there about 3 years ago. And this is supposed to be the most prosperous and fastest growing part of China.
One of the most obvious wastes of money to me is the countless stadiums I’ve seen across Shenzhen and other cities. Who is using these? Shenzhen has a single pro sports team but it must have a dozen or more professional sized stadiums. Go check out the Shenzhen Bay Stadium in Nanshan district. It’s a colossal waste of money.
I’m not going to stick up for the US real estate market or Wall Street, but the situation in China is definitely already a mess.
Not suggesting you adopt Wall Street. Just saying that your confidence in your system is unfounded. You’re cadres in blind pursuit of gdp growth have laid a ticking bomb that will explode soon. The only way to avoid it is keeping monetizing the banks, try to continue steroidal growth in the economy and hope that inflation doesn’t go crazy as you grow the money supply.
Go look at the financials of your SOEs. Those companies in power, steel, cement, solar, aluminum, ship building, paper, fertilizer, chemicals and just about every other industry are barely profitable. Your local government financing platforms are a joke. Many SMEs are dying on the vine. If any lender asks to get paid back on his loan, none of these companies has the operational cash generating ability to do so.
You say you don’t want a model like wall street. That’s fine. But there are many things that your banks are doing that mirror what wall street was doing. Your wealth management products are just informal securitizations of another name, which, unlike the US securitizations are worse in that the wealth management products carry an implied bank guarantee. And the banking regulator, the CBRC, after initially taking a hard line on local government financing platforms, went in on a local basis and overturned the classification of just about every LGFP (calling them commercial) so that these cash starved entities could continue to borrow from banks in a classic example of regulator impotence or cronyism or both. The bailout of the US banks, which was anathema to many in the US (including a lot of Wall Streeters) happens routinely in China, resulting in an attitude by bankers that “it’s all ye ye’s money. From one pocket of grandfather to another”. This is the ultimate moral hazard.
The era of bailing out state owned industry and banks in China is over. The recent down fall in industry profitability or even losses is not exclusive to SOE or China, rather it is a systematic deleveraging in local real estate market, the export market, and rising input cost due to rising wage and energy cost.
I’m well aware of the fact that mal investments has been made and are continue being made in China and everywhere else in the world, and the investors are probably never going to recover the cost. But I am inclined to believe that people tend to make logical decisions and those mistakes are exception rather than the norm.
I acknowledge the trend in financial innovation in banking sector, the ongoing problem in shadow banking sector, the disaster in local government balance sheet. And ofc the blind pursuit of GDP figure by local governments. But those issue can only be solved by improving regulatory efficiency, and cannot be solved by opening up certain economic sectors or privatizing existing SOEs.
Improving regulatory efficiency? Good Luck with that. That is one area where I am right along side of you in taking shots at the west.
I disagree on your notion that the era of bailing out is over. Now the bailing out comes in the form of forced shotgun weddings. Eastern Airlines merger with Shanghai Airlines is a recent example. Look at all the mergers in steel. These are just the government forcing sick state owned entities to merge to make larger sick state owned entities. I would also suggest that the lack of profitability has as much to do with overcapacity driven by the mal-investment you refer to. Certainly that is the case in shipping, aluminum, steel, and solar. I guess we can agree to disagree.
Great argument Emperor. Do you have a blog of your own? I would like to read more of what you have to say.
It seems like we are actually near a tipping pt. How does less foreign money coming in via capital investment and trade and capital outflow affect bank reserves, and how will that affect lending? It seems that China can only continue on the same path by devaluation. No?
Wiretap you are mixing cause and effect,that is bust is NEVER EVER THE PROBLEM, it is a consequence of boom, study cycles of 1825-1850 inthe UK, study currency school (who predicted with 100% Bretton woods collapse which is a Gold standard without the 1848 Bank Charter discipline.) Go back to school and understand that bust is a consequence of monetary boom. CONTRACTION IS GOOD AND NECESSARY. If circulation contraction happens early in the cycle you have stability. If you postpone it you risk collapse of US gov bond market when thevmarket (which has more power than any central bank decides to overpower the Fed.
In other words wiretap, mini bust and circulation contraction ever 4-5 years are the way to go. By avoiding the mini bust you create a larger bust later. The great depression was due to excessive rate decrease by Strong in 1927 to help Montagu with his stupid insistence on getting back to a too low price of Gold versus pound and the Genoa convention which double counted Gold and notes creating a massive monetary expansion, its 1925 Florida consequence and its massive stock bubble. Inflation = over issuance of liquidity, deflation liquidation =derangement of debt instruments (not to be confused with mild deflatiin under Gold standard), hyperinflation = inability of a country to finance its borrowing needs. So it is actually likely that the Bust this time could come from the US Gov bond market. China has some issues but does not face sovereign bond bust. BTW the fact that some piece of research is optimistic or depressing is irrelevant.