No matter how sincere its intentions, what Beijing says it will do over the next few years is meaningful only if its policies are both internally consistent and do not violate external constraints. As I proposed two weeks ago, in this post I will try to lay out as logically as possible the economic options available to Beijing, with some discussion of their limitations. Any decision made by Beijing that is not consistent with these options, I will argue, is not worth taking seriously as a prediction of the future.
To try to work out what these options might be I will begin with two key assumptions. The first is that the fundamental imbalance in China is the very low GDP share of consumption. This low GDP share of consumption, I have always argued, reflects a growth model that systematically forces up the savings rate largely by repressing consumption, which it does by effectively transferring wealth from the household sector (in the form, among others, of very low interest rates, an undervalued currency, and relatively slow wage growth) in order to subsidize and generate rapid GDP growth.
As a consequence of this consumption-repressing growth model, Chinese growth is driven largely by the need to keep investment levels extraordinarily high. What’s more, the very high growth rate in investment, combined with significant pricing distortions, especially in the cost of capital, has resulted in massive overinvestment and an unsustainable increase in debt. China cannot slow the growth in debt and resolve its internal economic problems without raising the consumption share of GDP.
My second major assumption is that China must and will rebalance in the coming years – its imbalances, in other words, cannot get much greater and we will soon see a reversal. There are two reasons for saying this, neither of which has to do with the claims being made by Beijing that they are indeed determined to rebalance the economy.
The first reason is the debt dynamics. Every country that has followed a consumption-repressing investment-driven growth model like China’s has ended with an unsustainable debt burden caused by wasted debt-financed investment. This has always led either to a debt crisis or to a “lost decade” of very low growth.
At some point the debt burden itself poses a limit to the continuation of the growth model and forces rebalancing towards a higher consumption share of GDP. How? When debt capacity limits are reached, investment must drop because it can no longer be funded quickly enough to generate growth. When this happens China will automatically rebalance, but it will rebalance through a collapse in GDP growth, which might even go negative, resulting in a rising share of consumption only because consumption does not drop as quickly as GDP.
Before any journalist reading this decides to write an article with the headline “Peking University Professor Predicts China Collapse,” I must stress that I am not saying that a collapse in growth must happen, or even that it is likely to happen. My argument here is only that if the unsustainable rise in debt isn’t addressed and reversed, China must eventually reach its debt capacity limit, and this will force a catastrophic rebalancing.
I expect however that Beijing will begin rebalancing well before we reach the debt capacity limit. I will discuss later how Beijing can engineer the rebalancing process, but the point here is just that either Beijing forces rebalancing, or rebalancing will be forced upon China in the form of a debt crisis. One way or the other, in other words, debt will force China to rebalance.
The second reason for assuming that China will rebalance is because of external constraints. Globally, savings and investment must balance. This means that for any set of countries whose savings exceed investment, like China, there must be countries whose investment exceeds savings, like the US. To put it another way, the world can function with a group of underconsuming countries only if they are balanced by a group of overconsuming countries.
For the past decade the underconsuming countries of central Europe and Asia, of which China was by far the most important, were balanced by overconsuming countries in peripheral Europe and North America. But conditions are changing. The overconsuming countries are being forced to reduce (in the former case) or are working towards reducing (in the latter case) their overconsumption.
To the extent they succeed, by definition unless there is a surge in global investment – which given the weak state of the world is very unlikely – underconsuming countries must increase their total consumption rates, or else the world economy cannot balance savings and investment. This global rebalancing must involve China. As the biggest source of global underconsumption by far, it is very hard to imagine a world that adjusts without a significant adjustment in China.
This adjustment won’t be easy, especially if Japan, as I argued two weeks ago, is attempting to resolve its excess debt problems by forcing up its savings rate. One way or the other, however, it must happen, either with a surge in consumption in the underconsuming countries or with a fall in production – both of which accomplish the same thing, albeit in very different ways.
How can China rebalance?
How plausible are my two assumptions? I think the first one may have been controversial in some quarters as recently as three years ago, and there still are a few who disagree, but it is pretty much accepted among most economists, and it has certainly been a formal part of Beijing’s discourse. Everyone from Premier Wen and Vice Premier Li on down has insisted that Beijing’s consumption imbalance has reached danger levels, and that China must and will rebalance.
Here, for example, is the South China Morning Post on the subject:
“China is landing quite well. Its inflation is down, investment and growth has slowed,” said Zhu Min, IMF deputy managing director, yesterday during his first speech in Hong Kong since assuming his new position in July of last year. “However, it still needs to carefully manage its investment-driven development model, as investment takes up about 48 per cent of gross domestic product.”
Zhu’s words echoed a string of heavyweight calls for reform, including ones from Premier Wen Jiabao and Vice-Premier Li Keqiang and scholars at China’s central bank and the national state council. Li said over the weekend that “reforms have entered a tough stage”, and that “China has reached a crucial period in changing its economic model and [change] cannot be delayed”.
The fear is that the current situation, in which exports and investment contribute to most of China’s GDP growth, is no longer sustainable. Export growth to Europe, the largest trading partner with China, had dropped almost to zero, and an investment driven economy had left the country with a huge pile of debt that could potentially go sour, economists said.
My second assumption – that China will necessarily rebalance in the next few years – is I think also very plausible. In fact over the long run it is actually more than just plausible. It is an arithmetical certainty because it can only be violated if China has unlimited borrowing capacity and if the world has unlimited appetite for rising China trade surpluses. Neither is true.
Where some analysts might disagree with my second assumption is in the issue of timing. China bulls continue to argue that there isn’t yet a significant overinvestment problem in China, which implies that debt is not rising at an unsustainable pace, or if it is, that it can continue rising for many more years before the debt burden itself becomes unsustainable. This, for example, is the view of the folks at Dragonomics, and it is a view often expressed sympathetically in The Economist.
This disagreement with my assumption also implies that the consumption imbalance is temporary and can resolve itself gradually and over time as the benefits of earlier investment begin to emerge and eventually overwhelm the total costs of those investments. Of course if this is true China does not need a surging current account surplus because if investment isn’t being wasted it can keep investment rising faster than savings for many more years. The current account surplus, remember, is just the excess of savings over investment.
The key vulnerability of my argument, then, is whether or not you think investment in the aggregate is being misallocated in China and has been for many years. If you agree that it has, and that it has reached unsustainable levels, then you must also agree that consumption must become a greater share of GDP over the next five to ten years. What’s more, you should also agree that the only way to increase the consumption share of GDP is to increase the household income (or wealth) share of GDP.*
China, in other words, must stop transferring income from households to the state and in fact must reverse those transfers. As Chinese household income and wealth become a greater share of the overall economy, so will Chinese consumption.
This is the key prediction, and it implies that one way or the other Beijing will engineer a transfer of wealth from the state sector to the hosuehold sector. As I see it, the various ways in which this transfer can take place can all be accounted for by one or more of the five following options:
- Beijing can slowly reverse the transfers, for example by gradually raising real interest rates, the foreign exchange value of the currency, and wages, or by lowering income and consumption taxes.
- Beijing can quickly reverse the transfers in the same way.
- Beijing can directly transfer wealth from the state sector to the private sector by privatizing assets and using the proceeds directly or indirectly to boost household wealth.
- Beijing can transfer wealth from the state sector to the private sector by absorbing private sector debt.
- Beijing can cut investment sharply, resulting in a collapse in growth, but it can mitigate the employment impact of this collapse by hiring unemployed workers for various make-work programs and paying their salaries out of state resources.
Notice that all of these options effectively have China doing the same thing: In each case the state share of GDP is reduced and the household share is increased. There are however very big differences in how the changes are distributed among various parts of the household sector and the state sector.
Notice also that the changing share of GDP tells us little or nothing about the actual GDP growth rate, or about the growth rate either of household wealth or of state wealth. It just tells us something very important about the relative growth rates. For example we can posit a case in which GDP grows by 9% annually while household income grows by 12-13% annually. In that case the rest of the economy would grow by roughly 5-6% annually (household income is approximately half of GDP), and the distribution of this growth would be shared between the sate sector and the business sector. This might be considered the “good case” scenario of rebalancing.
Alternatively, we can posit that annual GDP growth is 0%. In that case the annual growth in household income might be 3-4% while the state and business sectors contract at roughly 3-4%. This would be the “bad case” scenario.
The political economy of rebalancing
It is worth making three points about these different scenarios. First, in both cases China rebalances, but the way in which it rebalances can have very different growth implications. Second, notice that even in the bad case, household income growth can be quite robust, which means that fears of social instability as Chinese growth slows are very exaggerated if a slowdown in Chinese growth occurs with real rebalancing.
But – and this is the third point – that’s not all. The real cost of the rebalancing, it turns out, falls on the state sector, and we will have to keep this in mind as we consider the choices that Beijing must make.
Remember that for the past twenty years, and especially in the past ten years, the state and business share of a rapidly growing economic pie was also growing, which meant extraordinary growth in the value of assets controlled by the state sector. The household share of the growing economic pie of course contracted, but the rapid growth in the pie ensured that households nonetheless saw their income grow quite rapidly even as their share of total income declined.
When we reverse this process, as we must if there is to be rebalancing, any slowdown in GDP growth will be minimally felt by the household sector (if the rebalancing is managed in an orderly way), but even a scenario of very high GDP growth must result in much slower growth in the value of state sector income and assets. Of course if GDP growth actually slows sharply, which I expect it will, the growth in the value of state sector assets will collapse and perhaps even turn negative.
In my opinion this change in the growth rate of the state sector will be at the heart of the political economy choices, and difficulties, that Beijing will be forced to address in the next few years. It is likely to be much easier to keep political leaders happy when the value of the state sector is growing comfortably in the double-digit range than it is when it is growing in low single digits, or even contracting.
Minxin Pei from Claremont McKenna (and also the Carnegie Endowment) implicitly makes a similar argument in a clear and intelligent recent piece for Project Syndicate. In it he says:
When sound economic advice is divorced from political reality, it probably will not be very useful advice. The history of multilateral financial institutions like the International Monetary Fund and the World Bank is littered with well-intentioned and technically feasible economic policy prescriptions that political leaders ignored. But that has not stopped these institutions from trying.
The latest attempt is the World Bank’s just-released and much-applauded report China 2030: Building a Modern, Harmonious, and Creative High-Income Society. As far as technical economic advice goes, the report is hard to top. It provides a detailed, thoughtful, and honest diagnosis of the Chinese economy’s structural and institutional flaws, and calls for coherent and bold reforms to remove these fundamental obstacles to sustainable growth.
Unfortunately, while the Bank’s report has laid out a clear economic course that Chinese leaders should pursue for the sake of China, the Bank has shied away from the most critical question: Will the Chinese government actually heed its advice and swallow the bitter medicine, given the country’s one-party political system?
Pei argues that there are serious political constraints to Beijing’s ability to force the necessary reforms recommended by the World Bank. For example when it comes to reducing the power of inefficient and wasteful state-owned enterprises:
There is little doubt that reducing the SOEs’ power would make the Chinese economy far more efficient and dynamic. But it is hard to imagine that a one-party regime would be willing to destroy its political base.
The consequences of rebalancing
In a sense Pei makes the same argument I do, but from a different angle. I say that you can discuss as much as you like what Beijing proclaims it will do, but what it actually does will necessarily be constrained by what is economically possible. Pei says you can talk all you want about what economic policies Beijing will follow, but what it actually does will necessarily be constrained by what is politically possible. If you were to superimpose Pei’s political constraints on top of my economic constraints, you would presumably be left with a much more accurate measure of what can actually happen.
I leave the politics of economic decision-making to people like Minxin Pei and UC San Diego’s Victor Shih, but in thinking about the economic constraints it might be useful to examine each of the five options I have listed above. This allows us to see what the consequences for growth each of the options might involve, what disadvantages they have, and how they would play out.
1. Beijing can slowly reverse the transfers, for example by gradually raising real interest rates, raising the foreign exchange value of the currency, and raising wages, or by lowering income and consumption taxes. This path simply means the reversal of the process over the last decade during which the imbalances were created.
Repressed interest rates transfer wealth from household depositors to state and business borrowers, so interest rates must be gradually raised to approach nominal GDP growth rates, and as this happens the hidden transfers will be reduced to zero or close to zero. An undervalued currency transfers wealth from households to the tradable goods sector, so the value of the currency must be raised, and this will cause the transfer to drop to zero. Low wage growth transfers wealth from workers to employers, so rising wages should be encouraged, and this growth in wages relative to productivity will reduce the transfer to zero.
Positives:
- This policy fits into the gradualism which has pretty much been the default setting for most Chinese economic policymaking since the dramatic reforms put into place by Zhu Rongji, China’s Vice Premier and Premier in charge of economic policymaking until 2003.
- Since China’s export success and economic growth depends heavily on hidden subsidies from the household sector, this strategy allows the subsidies to be removed slowly so that Chinese businesses have time to adapt. As they do, the adverse employment impact of removing the subsidies can be counterbalanced by the positive employment impact of rising household consumption, so that there is no surge in unemployment.
Negatives
- Rebalancing is inflationary. As rebalancing forces consumption up relative to production, we will see a reduction in China’s ability to keep inflation down even in the face of rapid monetary growth. In fact this is likely to be the case under any of the rebalancing scenarios – inflationary pressures will increase as the policies that kept inflation in check by constraining consumption growth are eased. However it is worth noting that most Chinese inflation until now has been food intensive and so has resulted in significant transfers of wealth from the poor, for whom food is an important component of consumption, to the rich, for whom it isn’t. Inflation under the rebalancing scenario will not primarily affect the food sector and is far more likely to affect the rich and middle classes. In that sense it might be less socially disruptive for the poor.
- The biggest problem with this strategy is that it is too slow and too late. Five or six years ago Beijing could have begun rebalancing gradually, but Beijing no longer has enough time. Remember that the total value of these subsidies are enormous – for example I have cited in earlier newsletters studies that suggest that the value of hidden subsidies to the SOE sector in the past decade may be anywhere from five to eight times their aggregate profitability. This means that gradually removing the subsidies at a pace the Chinese economy can handle will result in worsening domestic imbalances for many years before there has been enough of an adjustment. During this time the impact of those distortions – declining consumption relative to GDP, misallocated investment, and rising debt, above all – will continue to grow.The more bad investment China accumulates, the more costly the eventual adjustment will be and the more the adjustment process must be slowed. Gradual adjustment increases the risk of China’s reaching debt capacity limits to almost near-certainty. It is too risky, in other words, for China to adjust gradually, even though Beijing would like nothing better, and some of the policymakers in Beijing seem to realize this.
2. Beijing can quickly reverse the transfers by forcing up real interest rates in the next two years, raising the foreign exchange value of the currency in a large one-off revaluation, and raising wages quickly.
Positives:
- By adjusting very quickly Beijing would immediately put a stop to the worsening of the domestic imbalances, it would eliminate the strong incentives within China to waste money on a stability-threatening scale, and it would allow Beijing finally to get a grip on its ballooning debt.
Negatives
- Eliminating the hidden subsidies abruptly would cause a massive increase in financial distress. This would lead almost certainly to a surge in unemployment as exporters and borrowers are forced into closing down operations. In the short term, rather than see household income in the aggregate rise, we would probably see household income decline because the negative impact of rising unemployment would exceed the positive impact of reversing the wealth transfers. The feedback effect of declining household consumption could force the economy into a downward spiral, much like that of the US during the Great Depression. China’s economy would still rebalance in this case – probably through negative growth in household income and even more negative GDP growth – but it would rebalance under very difficult economic and social conditions. Needless to say this would also result in difficult political conditions.
3. Beijing can directly transfer wealth from the state sector to the private sector by effectively privatizing assets and using the proceeds directly or indirectly to boost household wealth.
Positives:
- This is the most efficient way to increase household wealth at the expense of the state sector. Beijing could transfer wealth directly, by giving peasants land, by giving households shares in state-owned companies, by privatizing state assets and using the proceeds to shore up the social safety net, or in a number of other ways. It can also do so indirectly by selling and privatizing assets and using the proceeds to shore up the banks or to clean up loans. Remember that non-performing loans, which for our purpose should include loans that would be non-performing if lending rates were raised to levels that eliminated the hidden subsidy, represent a future claim on the household sector. By eliminating this future claim, household wealth will immediately increase – and this would most likely manifest itself as higher deposit rates returned to depositors. The combination of privatization plus the elimination of subsidized capital would eliminate the tendency for the Chinese financial system to waste capital on a massive scale.
Negatives
- Transferring assets from the sate sector directly or indirectly is only meaningful in the context of a significant reform in corporate governance. As the whole “vested interests” debate in China suggests, and as the Minxin Pei essay I cited above argues, there is tremendous resistance to the loss of power and control this would impose on many important and powerful sectors and families within China.
4. Beijing can transfer wealth from the state sector to the private sector by absorbing private sector debt. This is what Japan did after 1990, when government debt rose from roughly 20% of GDP to the 200-250% of GDP as the government effectively absorbed the bad loans in the banking sector.
This may at first seem counterintuitive as a form of wealth transfer, but remember that my taking over your debt has the same net impact on your and my wealth as my giving you my assets. In either case I am transferring wealth to you. How does this benefit the household sector? Mainly because as corporate debt is absorbed by the state it allows them to stay in business (i.e. not fire workers) and expand even while wages are rising (and it is rising wages that will increase household income).
Positives:
- This turns out to be very easy to do politically because it does not entail taking away assets, or the control over those assets, from anyone.
Negatives
- As we saw in the case with Japan, this strategy eventually leaves the government after a decade or so struggling with too much debt. The debt burden itself becomes the biggest impediment to growth since the direct or hidden taxes required to service it reduce consumption-driven growth, and the size of the debt limits policy choices for the government.
- This strategy also prevents the right kind of interest rate adjustment because the burgeoning government debt forces the central bank to keep interest rates low or risk government insolvency. In the end interest rates must adjust one way or the other, and the only way Japan was able to raise real interest rates to their “natural” level, and so prevent the worsening of investment misallocation, was through annual GDP growth rates of less than 1%. Since the gap between the nominal lending rate and the nominal growth rate is essentially the measure of the subsidy that net depositors provide to net borrowers, as growth rates dropped, so did the financial repression tax.
5. Beijing can cut investment sharply, resulting in a collapse in growth, but it can mitigate the employment impact of this collapse by hiring unemployed workers for various make-work programs and paying their salaries out of state resources. Hiring unemployed and unproductive workers means a transfer of wealth from the state to the workers. If this transfer is paid for by the household sector (through explicit taxes or through hidden taxes, like higher financial repression taxes caused by expanded government borrowing), it will have a minimal impact on household consumption. If it is paid for out of state assets, it will improve household consumption.
Positives:
- This protects workers from rising unemployment.
Negatives
- Hiring and paying unproductive workers is extremely inefficient and can only be a temporary solution to the rebalancing problem. More importantly, it doesn’t address the fundamental problem of how these payments are to be funded.
How will Beijing choose?
As I see it these are ultimately the only options – or at least the major set of options – Beijing can choose to follow over the next few years if it wants to avoid a debt crisis. Of course Beijing doesn’t have to choose only one of the above options. What is more likely in fact is that policymakers end up choosing a combination.
For example we can posit the following. Beijing can choose an intermediate path between the first and second options, and raise interest rates sharply over the next two or three years while also raising the value of the RMB by 10-15% in an overnight maxi-revaluation.
In order to protect workers from the resulting surge in unemployment, Beijing can instruct state-owned companies and local governments temporarily to hire a huge number of workers for make-work programs (the fifth option) and initially pay for this by increasing borrowing (the fourth option). At the same time it can begin a massive program of privatization, which should include transferring ownership of land to peasants, and selling off assets and using the proceeds to shore up the social safety net and to pay down debt in the banking system.
This would certainly work economically to rebalance China in a way that guarantees fairly high growth rates over the rest of the decade, but is it politically possible? Here I would defer to Minxin Pei, who might argue that the scale of privatization required is not possible politically. In that case China would end up being forced into rebalancing via the fourth option, with a long-term surge in government debt.
And this is my point. If you believe my assumptions are correct, then you should agree that China has no choice but to follow one or more of these paths. If privatization is not an option, then a collapse in the economy caused by a rapid adjustment in interest rates and the currency (the second option) might be. If that is ruled out, then perhaps the outcome will be a surge in government debt (the fourth option again), and so on.
This what I mean by the economic constraints that limit the choices Beijing can make. It doesn’t matter what anyone thinks or wants Beijing to do, if the plan violates the economic constraints, it cannot be done. To be really complete we should outline the political constraints, the environmental constraints, the demographic constraints, the external trade constraints, and so on, although of course this is way beyond my ability, but each of these exercises allows us to escape from the confusion of stated intentions and to focus on the possible.
This is an abbreviated version of the newsletter that went out two 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.
* Technically there is another way, and that is for household debt to surge as households borrow to fund consumption, but most evidence suggests that consumer financing is correlated with household wealth, and anyway it will take China many years to develop a robust consumer financing infrastructure.
Dear Prof Pettis,
I want to make a simple hypothesis, that there is a sustainable level of economic output for every economy and importantly that this level is determined by the private consumption component of such an economy which should be around 50 to 60%. Taking a comparable economy, like India (given the geographic size/population/history etc.) that actually has a sustainable economy as a benchmark, I say the sustainable economy of China should have around 55% Private Consumption. Currently China has only 34% Private consumption out of the 7 trillion output (which translate to around USD 2.38 trillion of Private Consumption). Assuming all of this consumption is real, the corresponding sustainable economic output should have been USD 2.38/0.55=USD 4.33 trillion and not USD 7 trillion. The difference between the two is the unsustainable component. Now doing a simple back of the envelope calculation, I extend this backwards for the last 10yrs, deflating both the numbers by 1/ 1.1 or 0.909 (a real 10% growth they have achieved in the last decade and assuming they would have done that in a sustainable economy model as well) to see the difference between sustainable and unsustainable economic output levels. This is a bit gross analysis. A better analysis would be to take the actual economic output each year and see what the comparable sustainable output would have been by scaling the private consumption to my 55% level. But my gross analysis is still quite revealing. The sum of these differences over the last 10yrs add up to USD 19.86 trillion, say USD 20 trillion. This USD 20 trillion indicates the amount of overinvestment they have made compared to what they should have made in a model where the private consumption had been a constant 55%. Certainly some of this overinvestment is not malinvestment, also my analysis is a bit gross leadiing to some possible over estimate, but even if I assume 50% of this overinvestment is useful (again let’s not forget that my sustainable economic output assumption also makes sustainable capital investments and so the above 50% is as good as it gets), that leaves a malinvestment of the size of USD 10 trillion spread across all sectors (Real estate/Export industries/Industrials/Manufacturing/ Infrastructure ). Now this USD10 trillion is 140% of the unsustainable GDP they currently have (of USD 7 trillion) or actually 230% of the Sustainable GDP they should have. I am reasonably certain all of this debt driven (i.e. future load) or if it is equity of some sort (basically some sort of current national savings) it is savings gone bad. Since in my analysis I already include the useful investments and made provision liberally for additional such capital investments, technically the USD 10trillion is all useless (there is no real immediate usage for any of it) and thus their Present Value of the future cashflows they can generate should be quite small leaving a substantial loss (i.e. the NPV should be hugely negative say USD 8 trillion or worse), which is my quantification of the malinvestment problem. Do you think this analysis makes sense?
Also, the above limits some of the choices the chinese govt have (like the slow adjustment proposal you made and ofcourse shot down). They really need to stop this malinvestment issue, which really means a substantial shrinkage in their economic output, as I don’t really see what choice they have. I guess it is bad news for the commodity countries and a whole lot of other investors selling their wares on the story of an ever growing china.
2 cents, in the book I am working on I plan to do something that is probably not too different from your exercise. I want to compare the growth rate of Chinese GDP over the last thirty years with the growth rate of Chinese household consumption, to argue that the growing gap is unsustainable since the ultimate purpose of growth, once you eliminate infinitely growing current accounts surpluses, is to increase domestic consumption, and investment must be just high enough to maintain future consumption growth.
Of course there are broadly speaking two ways the gap can narrow. Either consumption growth must speed up to exceed current GDP growth rates, or GDP growth must drop below the current consumption growth rate. Basically the optimist scenario implies the former, and further implies (even though the optimists don’t often seem to realize it) that after thirty years of very rapid consumption growth, China is about to experience ten to twenty years of supercharged consumption growth, a very unlikely prospect, especially when you consider the historical precedents.
The pessimistic scenario requires GDP growth to grow much more slowly than consumption growth, which itself is likely to slow, at least if you think the historical precedents have any informational value. That is why I expect, if the transition is not mismanaged, consumption growth to drop to 5-6% and GDP growth to drop to 3-4%, or less if Beijing waits much longer.
Notice by the way that this does not imply a disaster for ordinary people. If household consumption can sail along at 5% growth rates, Chinese households will still do well. It is the state sector whose belt will have to tighten drastically. Hence my various hints about the difficult political process we will face.
Professor Pettis,
Thank you for the excellent post. After reading your entire post, I was reminded how Indian economy itself suffers from some of the ills which are diametrically opposite to the Chinese ones. We suffer from Current Account deficit and high inflation due to supply side constraints (accentuated by infrastructure bottlenecks aka low spending on infrastructure and low productivity) and unsustainable import demand.
Professor, the only thing I could not comprehend was about high consuming countries trying to rebalance excessive consumption. The only way to reduce this excessive consumption is raising interest rates at a time when there is some recovery and wouldn’t cutting consumption make the problem of unemployment actually worse in the overconsuming economies. How would they balance without getting their unemployment rate rising to uncomfortable levels? Could you kindly throw light on my ignorance here.
Dear Professor,
May I ask two questions?
First, you said that China’s “unsustainable debt burden” could “led either to a debt crisis or to a ‘lost decade’ of very low growth”. By debt crisis, do you mean it could be a short term process, compared to the “lost decade” senario?
Second, could you explain more about the mechanism of how the “unsustainable debt burden” could “lead either to a debt crisis or to a ‘lost decade’ of very low growth”? In other words, how do you define debt capacity limit of China (specifically, central or provincial government, or the whole financial system?) Thank you.
Kind regards,
Michelle
Professor,
I understand that Chinese growth is driven largely by
(1) consumption-repressing growth model,
(2) the need to keep investment levels extraordinarily high and
(3) has resulted in massive over-investment.
But why should that result in unsustainable increase in debt ?
I quote Kenneth G. Lieberthal as a comment to your great article.
“While the production and marketing of agricultural produce are no longer monopolized by local officials, the county’s control over development assistance and investment for expanding urban infrastructure has assured a continuing—and in many cases an expanding—role for the county government in county-towns and townships.
I would say this is also true for higher levels of the political system. SOE are not the real problem here. The real issue is that the central government will lose control over the lower levels of government, because when investment is reduce so is the barganing power that follows with it. Investment is what drives the political system, so you have to come up with a way to make growth in private consumption the base on which local governments can perform. Maybe a higher VAT that goes to the local governments or other kinds of taxes that are based on consumption.
Another problem with privatization is that it creates greater inequality in a Chinese culture that already is extremly unequal. This is difficult to off set with a rise in wages. It has to come an increase in taxes of the rich.
Professor pettis,
While China has to opt for one of the options (or a combination) to rebalance the economy. It could also at the same time writeoff some debts related to social spending programs or investments made into education or health while at the same time letting some of the SOE’s to bankrupt themselves giving an indication to local governments and SOE’s to change their spending patterns. While we know that this itself will not change the structural anamolies that its economy created but its a good gesture to start with and provides an oppurtutnity for policy makers to test waters on the movement of this inevitable policy. The question nevertheless needs to ask is, do they have the time?
Krishna,
It will be interesting to see if Prof Pettis comments on your question, but please allow me to offer a suggestion in the meantime. In my work as a professional investor, I have noticed that in many developed countries, required returns on new projects have soared to very high levels. I put this down to years of capital shortage and risk aversion. Consequently I believe the marginal return on capital is currently high, and would be even higher once these countries stop importing capital and their exchange rates normalise. (Microeconomic reform helps too). Hence, I think such countries can increase both saving and investment quite a lot without an unsustainable boom forming.
Great post, Prof. Pettis.
The more I think about this subject of global imbalances and look at the required rebalancing needed in each of the major economies, the more I think of Darwin’s Theory of Evolution… At its core his theory argued that adaptability was the secret to survival, not stregth, size or even success in a [temporarily] fixed environment. Change is a given in nature [of which we are a part even if we forget so] and to survive you must be able to adapt to that change. If you are unable to adapt to suit a new and different environment (because for example, there are political impediments to such change) then your path veers off that which would be sustainable (to survival, in nature). A key therefor is: Who can best adapt? Europe has realised this too (maybe also too late) and now understands that a rigid labor market is antithetical to adaptability in a changing world. What you want is flexibility, innovation, a population and leadership that embrace change rather than fight it and fear it. Change is going to happen no matter what because nothing stays the same for ever – the question is, can you change with it? Can you embrace it, make it your ally not your enemy? Do you have the flexibility to shift as needed to ride with the wave, or are you restricted in some way that prevents you from shifting in order to keep balance as conditions change? I am very concerned about all three major economic blocks, but there is no question which one has the greater ability to adapt.
On the issue raised by 2 cents, I think that once the crisis has been overcome (assuming there is still food on the supermarket shelves), the most important issue in macro economics will be the study of structural economic sustainability. The gold standard had its flaws but it would have nipped in the bud this major doozie the world has gotten itself into after the last 20+ years of unimpeded imbalances. Without it, there was no self regulating mechanism to prevent us from veering so far off the sustainable path. As with the relationship between an Income statement and a Balance sheet, the annual imbalances (flows) have gone on for so long now that the balance sheets (stocks) are grotesquely distorted; hence the difficulty that China now has: what they have and what they need to have are very far from each other. I think the issue now – again assuming we don’t have a complete systemic breakdown at some point – is (1) Whose distortions are the greatest?, and, (2) Who has the system with the adaptability to successfully work their way out of this mess?
this is really great stuff. Thank you and keep them coming.
Professor,
Extending what krishna said above, which country do you think is in bigger trouble, India or China? One could argue that low investment in India will keep its economy in a rut, whereas Chinese investment (at least some of it) will promote consumption growth and efficiency in the future. We’ve seen ways that China can move towards higher levels of consumption, but how can you increase Indian investment levels?
I know India does not have the same political barriers, but what are the structural economic barriers?
Fantastic and insightful post. I have been following along with your blog for some time and I am in full agreement with your analysis. Keep it up!
Chinese GDP growth is not going to drop to 3% a year unless they decide that the inland areas are not worth developing from now on.
As for consumption, just increase spending on healthcare from current 2% of GDP to 10%, and increase social welfare spending to 5% of GDP, the consumption is brought up to 50% of GDP immediately.
IMF and World bank always advocate 2 things, regardless of the country: privatization and deregulation. Both can be delayed in China, after spending in healthcare and social welfare is increased significantly. Afterwards, privatization can only proceed slowly and cautiously, to avoid the Russian “shock therapy”, which caused millions of premature deaths and significantly reduced infertility.
Good piece!
Regarding the first choice (policy reversal), when you argue that its biggest problem is that it is too late, you mention analyses indicating that SOEs hidden subsidies amount to about 5-8 times their total profitability. Don’t you think that their aggregate profitability would climb as consumption increases? I mean that consumption could somehow compensate, at least partially, the loss of subsidies. If so, that could help the rebalancing process.
Prof. Pettis,
When you list the options and future paths for China, what are the corresponding effects on the rest of the world if China makes some of the changes you illustrate? ie, I assume if they raise exchange rate, the rebalancing means exports from places like the EU and US to China must increase to balance out. But some of the other items I am not so clear on what the direct international re-balancing would be.
Sir:
How would you imagine recent proposals to legitimize informal lending a la the “Wenzhou Experiment” (per this week’s Economist) might impact your analysis, if it all?
Going over these options, it is clear that there is in fact only ONE option that might resolve issues in the long run. Choosing this specific option, will bring with it some other options into the package, eventually. The rest, at best, are a temporary band-aid, the wound would open up again quickly.
“If household consumption can sail along at 5% growth rates, Chinese households will still do well. It is the state sector whose belt will have to tighten drastically. Hence my various hints about the difficult political process we will face.”
Even if there will be no difficult political process, and all involved would happily comply it would still be quite impossible considering the huge portion the state has directly or indirectly in the economy.
Countless of businesses and households are linked to it in one way or another. How can such a change be successfully managed in just a few years? (I’m not being rhetorical, I’d really like to know). It all look nice on paper arithmetic but in practice…
Krishna, actually India’s problems, which include excess demand (a trade deficit) and poor infrastructure may end up being a strength. In a world of very weak demand the trick is to increase demand in a sustainable way. Increased infrastructure spending and increased trade intervention are two ways of doing just that. As for your second point, in China, unlike in most other countries without repressed financial systems, raising interest rates actually increases consumption, by increasing household wealth.
Your main point, however, is correct. Rebalancing will mean much slower growth, and this could mean rising unemployment (in which case consumption growth might drop, requiring even greater reductions in GDP growth for rebalancing to occur). That is why it must be accompanied with real wealth transfer from the state sector. Households must be protected from the consequences of slower growth otherwise the rebalancing can be extremely disruptive. There is no efficient way to do this except via privatization and the transfer of proceeds directly or indirectly to households.
Michelle, yes a debt crisis could be violent and short, but I think Beijing will do whatever possible to prevent this kind of resolution. I can’t answer your second question in a short comment, but it is something I have written about extensively in this blog and will do again many more times.
RN, there would be an unsustainable increase in debt mainly because overinvestment means that debt is rising faster than the capacity to service it.
Anders, I agree with you and that is why I think rebalancing will be more difficult for the political elite than for the lower and middle classes. I don’t like to be too explicit about this, but it seems to me that the real fireworks will occur when the growth rate in the accumulation of assets that can be distributed to powerful state sector interest drops to zero from its 13-15% levels for the past decade.
Krishna, debts will be written off, but that is only the beginning of the analysis. Someone has to pay for the write-off and that is usually the household sector, but rebalancing requires that the household sector stop paying for everything. So we are left with the problem of who pays for the debt write-off.
Seatrus, the inland areas are clearly not worth developing. Their productivity levels are too low and the amount of investment there has been much more wasteful than in the coastal areas. Developing the interior is just an extension of the idea that if you have no budget constraints and no debt capacity limits, you can generate as much growth as you like for as long as you like. Unfortunately too many analysts see the empty interior as a new source of growth, but it is actually a new source of wealth destruction, and it doesn’t resolve the capacity limits.
By the way you talk about increasing spending on health care and the social safety net – so, by the way, do the IMF and the World Bank – but like them you don’t specify who pays for the increase in spending. In the past it has been the household sector and so of course for all the talk it has had no effect in raising consumption. And why should it? There s no evidence that countries with better social safety nets have higher consumption rates. The key is household wealth, not the state of the social safety net, and if the latter is improved at the expense of the former, the net impact will be zero, as it has been for the past few years.
Ignacio, yes, rising consumption could help the SOEs regain profitability but only if the subsidies are removed gradually. The problem is that I am not sure China has enough time to do it gradually.
Stefan, that is another question which requires too long an answer, but it is also something I discuss a great deal in this blog.
JGW, the Wenzhou Experiment is a step in the right direction, but it is marginal. If China doesn’t push for corporate governance reform in the banking system and the liberalization of interest rates it won’t really matter. Of course it is good to stop squeezing the most efficient part of the economy so hard, but it is not enough.
Hi Michael,
There is certainly a lot of thoughtful insight in your work. I always enjoy reading your blog. I think you write very well.
With regard to your idea that China’s Economy must/will slow down in order to “rebalance” away from relative savings/investment and towards relative consumption, I would like to point out (to all the people following your blog) that this is precisely what happened in China during the nineties. You can see clear evidence of this in the World Bank data for China.
—
China rebalances its economy with—-
(i) Falling GDP growth rates (Focus 1994-2000)
http://www.tradingeconomics.com/china/gdp-growth-annual-percent-wb-data.html
(ii) Rising relative Household & Final Consumption (Focus 1995-2001)
http://www.tradingeconomics.com/china/final-consumption-expenditure-etc-percent-of-gdp-wb-data.html
(iii) Falling relative Domestic & National Savings (Focus 1995-2001)
http://www.tradingeconomics.com/china/gross-savings-percent-of-gdp-wb-data.html
(iv) Falling relative Investment (Focus 1994-2001)
http://www.tradingeconomics.com/china/gross-capital-formation-percent-of-gdp-wb-data.html
Note that during this period (~1993-2001), China was still (except 1994) running a current account surplus (i.e. Savings > Investment) and this can be double checked at
http://www.tradingeconomics.com/china/current-account-to-gdp (Focus 1992-2001).
—
So it appears that China has some experience with rebalancing as they have done this in the past. Any thoughts on how they did this (i.e. exact mechanism or policy change)? Was it a privatization drive? Or a interest policy change?
Nominal Interest rates paid to depositing households during the period seem to be falling, but then consumer inflation was falling much faster as seen here (Focus 1994-2001):
http://www.tradingeconomics.com/china/deposit-interest-rate-percent-wb-data.html
http://www.tradingeconomics.com/china/inflation-cpi
So was it a rise in the Real Interest (i.e. Nominal minus inflation) rates paid to household depositors that fuelled the rebalancing by putting more money in the hands of consumers?
http://www.tradingeconomics.com/china/real-interest-rate-percent-wb-data.html
—
Interestingly enough, the nominal lending rate to SOEs was falling during this period, but the real interest rates charged to them was rising along with a more dramatic rise in the banking-system spreads (lending-deposit rate).
http://www.tradingeconomics.com/china/lending-interest-rate-percent-wb-data.html
http://www.tradingeconomics.com/china/real-interest-rate-percent-wb-data.html
http://www.tradingeconomics.com/china/interest-rate-spread-lending-rate-minus-deposit-rate-percent-wb-data.html
So it is correct to say that in this rebalancing period (1990s) money was taken away from SOE and moved into the pockets of the banks (presumably to cover bad loans) and also into the pockets of households?
Does this moving away of money from the SOEs (or other corporations) explain the slow-down in investment and the faster rise in consumption (i.e. rebalancing)?
—
And do you know why they suddenly turned around in 2001 and went back to towards an imbalanced economy? Was it because of the market panic associated with bursting of the internet bubble? Did they go on an fixed-investment binge similar to the one in 2009? Or was it a because the CPC was scared by the 1997 asian crisis and did not want that to happen to Red China?
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In addition, if they have done this rebalancing once before, do you think they can do the same thing again? Or will it be more difficult this time around?
It also seems to me that instead of asking:”They must rebalance. How will they rebalance?”, we could instead ask: “They must rebalance. In fact, they have rebalanced in the past (1990s). So how did they rebalance before?” It seems logical that we should examine the past in order to learn something about the future.
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Thank you.
During the rebalance ,China will push foreign companies to provide capital intensive investment in order to stay in their market. Some of them might include petroleum refineries, auto industries, construction equipment factories, etc. Lets face, 5% of China population is rich enough to provide consumption to foreign companies they will claim.. China will pursue export markets in Africa and in other low developed countries. So not all investment has to come from the state.
Mr. Pettis, after reading your past 3 posts, let me get this clear. I want to be sure I absolutely understand your post, because I find your posts very educational, and do not want to misunderstand at all. I am a physicist, and have little experience in economics, so please explain like you would to a baby. Is the following what you wanted to say?
1. Inland regions are not worth developing because they are empty and unproductive. This is despite the fact, not opinion, that more than half the population does not live in a province bordering the coastline, and the fact, not opinion, that most of China’s hydroelectricity, coal, natural gas, oil and mineral resources are located in West China, and the fact, not opinion, that these provinces have the lowest share of exports as proportion of GDP.
2. The state owned sector must transfer money to the household sector to rebalance the economy. This is despite the fact, not opinion, that the biggest employers in China are the state owned Sinopec and State Grid and any losses that is passed on to employees of said companies would reduce their household income, possibly to zero.
3. Infrastructure investment does not increase household income whatsoever through decreased logistics costs, increased labor mobility, direct employment, or demand for raw materials.
4. India having life expectancy in the 60′s, potholed infrastructure and some of the highest child death rates in the world is a strength because that “increases demand in a sustainable way”. Thus, the correct thing for China to do would be to revert to an Indian level life expectancy, account balance, infrastructure development level and child mortality rate and “transfer wealth from the state to the households” by putting state medical expenditures and state educational expenditures to near zero and handing out that money to people. Then private enterprise can provide these services, charge money for them instead of having them be paid through taxes, and this would “create demand”.
5. Households and private businesses in China do not borrow any money from the banks and thus low interest rates benefit only state owned corporations, not households.
@31 Objective
The professor is the expert here, but here are my views.
1) In my experience in sourcing and export, everyone has been talking for years about Hunan or Henan being the next Guangdong, but it never happens. There are many reasons why not, but generally, you can’t find the talent in these provinces. Try going to Gansu and setting up a factory with experienced engineers, purchasing teams, and workers. The talent isn’t there, and Shenzhen workers aren’t going to take a huge pay cut AND move to a place that offers a lower quality of life. Can you imagine if the US government suddenly decided Pierre, SD needed to be a major manufacturing and world financial hub? It’s silly to force things when the ingredients for success aren’t there. If you’re a textile company, it’s already much cheaper to move to Vietnam instead of interior China. I think the inland advantage is vastly overrated. If it wasn’t, inland provinces would already be providing base components for assembly on the coast, when in fact both base components and assembly are still all taking place in the Pearl and Yangtze river deltas, just as they have for 30 years.
2) When these state owned companies make wasteful investments, the entire country pays for it. The too big to fail conglomerates get cheap loans paid for by low interest rates to depositors, less money available to small-medium business loans, and outright taxation. Remember, SOEs are not allowed to go bankrupt. Also, SOEs are not very profitable. If they were replaced by numerous more efficient firms, perhaps they could offer stock options or other profit sharing to employees. Wages would likely rise, and these private companies would provide investment opportunities for mutual fund investors and the like.
3) Infrastructure is nice, but a ton of it is wasteful and/or shoddily produced. I’ve been on lots of shiny new expressways that are close to empty, and are also EXPENSIVE to drive on. Tolls are very high on Chinese highways. Also, despite years of super-high levels of infrastructure investment, logistics costs in China are much higher than India (18% vs 13%) and double that of the US.
http://english.peopledaily.com.cn/90778/7707773.html
http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/Documents/Logistics-in-India-Part-1.pdf
4) This is just silly. I am sorry India pillaged your farm and killed your cattle.
5) They borrow a lot less from banks than they should. Hence we have massive private investment schemes. It’s hard to get money in and out of China too, so it’s not like foreign banking is going to provide any relief.
Why do you only talk in absolutes? Based on your tone it seems very much like you have an ax to grind.
@objective questions
Not sure if there is such a thing as objective questions in social science, but I will try to answer your questions based on my own merits.
@1) “This is despite the fact, not opinion, that more than half the population does not live in a province bordering the coastline,”
Beijing does not have a coastline, Chongqing does not have a coastline. Both places are well developed. As for Henan, Hunan, Jiangxi and Shaanxi. All these provinces cannot fuel a rise in exports, as they are not competative (transportation problems, higher wages, higher prices on input commodeties) with the East coast or other parts of East Asian. Why do think low tech job are going to Vietnam, Indonesia etc. ? There is a reason why these provinces were not choosen in the first place.
@ “2. The state owned sector must transfer money to the household sector to rebalance the economy. This is despite the fact, not opinion, that the biggest employers in China are the state owned Sinopec and State Grid and any losses that is passed on to employees of said companies would reduce their household income, possibly to zero”
I think the argument is that SOEs destroy value, and that the liquidity they take from banks could be used by more effective parts of the economy (The private sector). Who would then in return employ those (and more) who would leave the SOE sector.
As a question to you. Do you think that the market reforms in the 1980s, where SOE and the state sector had to cut back, helped the Chinese economy grow or shrink?
Objective, I used to be a physicist too, and you’re right it doesn’t help much in economics. I think your questions are actually arguments, in which you keep insisting that gross is the same as net, but anyway here goes:
1. Of course every inhabited part of the world is “worth” developing but what is happening in inland China is not “worth” it in the sense that the economic costs of development exceed the economic benefits. For some reason people find this an astonishingly difficult concept to grasp, but whereas there may be good political or social reasons to invest in very poor, low productivity areas, if the additional productivity created by the investment is less than the cost of the investment, then the investment is wealth destroying and the losses must be paid for by someone, even if most of the people in the region are better off.
If the investment is merely to extract commodities or energy, that is one thing and easier to justify, but are you seriously proposing that the bulk of investment in China’s interior is for commodity extraction? And to add a bit of history, don’t you find it at least a little bit curious that the massive eastern expansion of the USSR and the western expansion of Brazil – again in regions that were rich in commodities and energy – during their own periods of investment-driven growth miracles led not to sustainable increases in wealth but rather unsustainable increases in GDP followed by debt crises? This really isn’t such a shocking claim.
2. You have confused this so much that it really cannot be unraveled easily. Let me try to restate. The state sector includes ownership of the equity in SOEs and lots of other assets. If you want the household sector’s wealth to grow relative to that of the state sector, we need a period in which household income growth exceeds GDP growth, which itself exceeds state sector growth (the opposite of the past thirty years). There are many ways this can happen but all of them require either a sharp slowdown in the growth rate of the state sector or a transfer of assets from the state sector to the household sector.
3. Honestly it is a little hard to see how you discovered from my writings that “infrastructure investment does not increase household income whatsoever”. This claim would just be silly. Of course every kind of investment will increase household income if you simply assume the costs are zero, but that is a pretty unreasonable assumption. The real question is whether or not the additions to household income exceed the costs to household income. I am sure you would agree, for example, that the enormous expenditures on the Olympics benefitted many people and increased their income, and yet it still was an economic loss for the country. Again, I am not sure why this is difficult.
4. Sorry, but now this is a little silly. If your thought is that I am recommending that China become poorer in order to solve its economic problem, I should suggest that whenever you interpret someone as saying something that silly there is a pretty high probability that you have misunderstood. My point is that in a world of weak demand, countries with sustainable sources of new demand are likely to grow faster than countries without sustainable sources of new demand. That’s all. By the way, if China were really to revert to an Indian level of development, you might want to consider what happens to the debt. Does it simply disappear?
5. Once again you are confusing net and gross. The point is not that households do not borrow any money from the bank. The point is that they borrow very little and lend a huge amount. They are net lenders, not net borrowers. Changes in interest rates affect them in the aggregate as lenders.
Michael, while off topic, I would like to ask you if any of the imbalances in wages and opportunity have been reflected in the Music scene? A lot of western R&R in tthe 70′s reflected the economic enviroment.
Hi Michael,
Unless I am mistaken, your points regarding China’s most-likely format for rebalancing in the near future are as follows:
(1) Annual Growth Rate of GDP must DECREASE,
AND
(2) Household Consumption Growth Rate must either,
(i) Increase, OR,
(ii) Stay the same, OR,
(iii) Decrease, but at slower pace than GDP growth rate
Of the three options in (2), your favorite seems to be (iii).
I just looked up past data from the 1990s, when China did manage to rebalance their economy before (see my previouscomment #7835).
I see the following:
(1) Annual growth rate of GDP decreased (i.e. Trend) from 12-14% to 6-8% with CAGR of 9% from 1992-2000.
http://www.tradingeconomics.com/china/gdp-growth-annual-percent-wb-data.html
AND
(2) Household Consumption Growth Rate (and Total Consumption [i.e. Household plus Government] Growth Rate) STAYED the SAME (i.e no trend) at average of 10%.
http://www.tradingeconomics.com/china/household-final-consumption-expenditure-etc-annual-percent-growth-wb-data.html
So the (somewhat slow) rebalancing of the 1990s took place in the context of falling GDP growth rates and CONSTANT consumption growth rates.
So your idea that falling GDP growth rate will affect consumption growth rate negatively–and that there may be a race to the bottom–does not seem to be supported by the data during the last rebalancing from the 1990s.
Still further, it appears that CAGR of consumption (no trend) was 1% higher than CAGR of total GDP (falling trend) and that this slowly rebalanced the economy in the 1990s.
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In addition, it is interesting to note that the CAGR of consumption in the Aughties (i.e. 2000s) DROPPED suddenly (no trend) to 6%, while GDP growth rate increased (clear trend) from 6-8% (2000) to 12-14% (2010) moving the CAGR for GDP up to 10% — hence leading to the current state of a horribly-imbalanced economy.
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Any comments? Not neccessarily from Michael, but also from any other knowledgeable person or persons following this blog? Would welcome comments from any former students of Michael who may now have a few years of in situ (i.e. inside Red China) experience into the underlying nature of the economy there.
—
Thank you.
It is very hard for me to envision a future China where most of the 1.5 billion people are crammed into the coastal and adjacent areas, living in apartment forests like Singaporeans, while large swathes in the West are a vast waste land. I guess the more likely scenario would be like the development of Mid-west, where the less developed areas will eventually catch up. I think many coastal areas have already slowed down to a growth rate of 2-3%. But the overall growth rate is still more than 8%, because China overall remains under-developed. The situation is in stark contrast with Japan at its peak. Other poor countries remain undeveloped because of poor economic policies. Take India: it probably will never catch China in our life time, because their elites refuse to spend more on infrastructures and education for labors. Without these, foreign investors will never come. Like in the U.S. the elites refuse any attempt to use their money for public projects. Both will remain stagnant for a long time.
As for consumption, China can increase consumption immediately without large scale privatization by spending more on healthcare and welfare. Diverting funds from some of the more wasteful investments probably will be enough. China can do this because annual healthcare expenditure is only 4% of GDP. As a comparison, U.S. spends 17% of GDP on healthcare for less than 400 million people. Mal-investment is not the only way to waste money. The key is that affordable healthcare, like many other infrastructure projects, is a public project. Using household deposit on these is justified. China tried private healthcare for the last 20 years, it was a disaster. Only rapid growth in GDP and income saved the day. Healthcare and welfare spending stabilizes the society. What is the price of that? Both should take precedent over any schemes of privatization and deregulation. You cannot privatize first, because like India and U.S., once the money is transferred to households, it will inevitably be concentrated in the hands of the 0.01%. After that, forget about any large scale public project.
Increase in productivity, GDP, and real wages are more beneficial to ordinary people than raising the real interest rate, which not only runs the risk of slowing down the economy, but also mostly benefits the super-rich only.
IMHO, among GDP growth, healthcare, welfare spending, and rebalance, rebalance is the last thing China should worry about.
Ok, thank you for answering my questions patiently. I am still learning.
For Point 1, you’re right that the USSR and Brazil in their expansions did not create wealth, but the US in its expansion westward did. What was the difference? Also, I think the difference is that we may be talking about different “interiors”. The interior I had in mind was places like Sichuan, Shaanxi, Guizhou, etc. where there are many people already living there – in fact, more people than in all the US. I am not understanding why it would be wealth destroying to invest in a highly populated, resource rich area with an already balanced economy and instead invest in resource poor areas with an unbalanced economy (the coast). What I learned in my basic economics classes was that marginal return on investment from undeveloped areas tends to be larger than from more developed areas. Is that not true?
For Point 2, yes, I understand that there needs to be a transfer of wealth from the state sector to the household sector. Thanks for clearing that up.
For Point 3, I was not thinking of the Olympics as a useful example, and as a percentage of total investment, it is tiny anyhow. What I was thinking of are things like the high speed trains which have been said to represent misallocated capital. As you must know, logistics costs in China are some of the highest in the world, and high speed trains taking pressure off the ordinary railway system and allowing more freight trains to run seems to be a sound investment that is going to pay itself back to taxpayers and households in the aggregate, not just directly through user fees but through decreasing logistics costs, stimulation of labor mobility, demand for raw materials, engineering design and operations. I am having a very hard time imagining why this would in any way be a net wealth destroyer.
For Point 4, my question is, does India actually have a sustained source of demand beyond the basics of education, food and healthcare, which China more or less already has met?
Finally, may I suggest that China’s consumption is radically underestimated due to the bulk of consumption in developed countries is due to services consumption, and China’s services sector is not well developed or underestimated in GDP measurements? Thank you.
Another great article, Michael. China’s unbalanced and unsustainable economic development model indeed concerns me much.
Who are the winners? (1) coastal provinces (2) Exporters (uncertain now) (3) commercial banks (4) property developers (5) governmental agencies such as the Ministry of Finance and the Ministry of Commerce
Who are the losers? (1) inbound provinces (2) importers and consumers (3) savers (4) First-time Homebuyers (5) PBoC
All these might change and should be altered. Political reform is indispensable.
Hi michael,
Great post as usual from you. I have a question to ask. Supposedly US goes ahead with a QE3 slightly larger than QE2, will any of the above assumption change? And does it affect any other 3rd countries?
Objective,
Pettis has already addressed very convincingly the issue of the difference between the US westward expansion and that of the Chinese, Brazilian and Russian ones. His argument is that the US expansion was driven mainly by private sector profit motives, as American settlers poured west to improve their living standards and make money. When the government followed, by expanding infrastructure, this infrastructure was usually wealth enhancing (although not always) because it supported a real need and because it was usually paid for by the profits generated by the project. If I remember my railroad history, the main subsidy railroad operators got was the land grants on either side of the railways they built, and the very fact of the railway made this land so valuable that railroad builders could get rich suggests that the railroads created real economic value.
In the other cases the move to the interior wasn’t led by private individuals trying to make money. On the contrary no one wanted to go to the interior of those countries without generous subsidies and strong spending by the government. The government paid for it all because otherwise no one would have moved to the interior. With the exception of mining, which actually needs very little infrastructure except direct investment costs, there was just very little economic incentive to go to these very poor, very unproductive areas with very low education and low worker’s productivity. Of course the right kind of investment would be in primary schools and hospitals, and only many years later in bigger projects, but this was too slow, generated growth in the future and not in the present, and anyway there was the risk that all the educated peasants, rather than wait until there was critical mass, would simply move to the east.
Objective,
To continue with your next point, Pettis has also one of the first to argue that having the most advanced high-speed rail network in a country not much richer than Ecuador made no sense, and almost everybody agrees with him now. Or at least the China bulls no longer cite the high-speed rail network as often as they used to as an indication of Chinese success. You would have to read his earlier entries to get the full argument, but I don’t think it is wrong to reject the claim that it doesn’t matter how poor and backward a country is in judging the value of infrastructure. He argues, and so do most technology economists, that technology has to be appropriate to the level of society for it to be valuable. If not, it would be pretty easy to solve world poverty – just build lots of the most advanced infrastructure in every poor country in the world. The problem is that although this would certainly generate growth, it would leave each country saddled with unpayable debt, as it seems to be doing with China.
Objective,
Finally, I can’t address your point 4 because I don’t know what you mean but your point 5 comes up many times in the debate. The problem with the argument that China doesn’t have a serious consumption problem is that regardless of how accurately consumption is measured, all the indicators point to China’s indeed having a serious consumption problem: the high reliance on investment and trade, soaring M2, the very low household income share of GDP, and most importantly, just the simple accounting identities that express China’s very high current account surplus as the excess of savings over its incredibly high investment rate. For a country to have a high investment rate (and China’s is the highest ever) and a high trade surplus (and China’s is one of the highest ever), it cannot help but be true that it must have a savings rate that is “astonishingly” high, to use one of Pettis’ favorite descriptions of the savings rate. Of course this implies an “astonishingly” low consumption rate.
Another important consideration might be this. Every serious economic advisor or economic policymaker in China, after years of being prodded by people like Pettis and Andy Xie and Yu Yongding, is insisting now that excessively low consumption is one of the most serious problems China faces. If they know what they are talking about, there must be a reason for their believing it, and if they don’t, I would have thought that it would be all the more reason to be pessimistic about China’s prospects.
Sorry I have gone on so long.
@seatrus
The slowest growing administrative region in China was Shanghai last year, at 8% growth. That’s a long way from 2-3%
http://www.china-briefing.com/news/2012/01/27/chinas-provincial-gdp-figures-in-2011.html
I don’t think a fully developed China would have a western “wasteland”, but most economic activity is going to take place at borders or coasts regardless. Nothing is going to change that. The hukou system was supposed to, but all that resulted in was tens of millions of temporary workers in Guangdong with no welfare benefits. Urban areas in China developed over thousands of years, so its hard to believe that suddenly all the coasties are going to rush to Xinjiang to start the next Silicon Valley.
Canadians live along the US border, Australians live along the coasts, Russians prefer Moscow over Siberia, etc. Instead of fighting it, just adapt. Or keep building more Ordoses, whatever works.
Seatrus,
Are you really saying that China shouldn’t privatize because then wealth will be highly concentrated? I have two responses. First, just because Rusia privatized badly doesn’t mean that this is the only possible outcome, and the real issue anyway is whether things are better overall. Second, you are not suggesting, are you, that right now a non-privatized China doesn’t already have one of the worst wealth concentrations in the world? If privileged families already fully control the SOEs, can it really be so hard to design a privatization program where they control it a little less? It seems almost any kind of program however bad will likely reduce their control.
What I like about Pettis is that he discusses such emotional topics like privatization dispassionately, while for most people either privatization is automatically the correct answer to every economic question, or (and perhaps this includes you?) privatization is such a bad word that it should never be mentioned outside a whorehouse. In truth, it is likely to improve conditions in some cases and make conditions worse in others.
I read today in BBerg that in the first quarter economic growth in China fell to 8,1% from a 8,9% rate the previous quarter. It would be nice to know if this slowdown goes with consumption/investment rebalancing or not.
The chinese GDP components are calculated verty differently than western countries. How can nobody in this blog take this into consideration?!!
For example: Many items are categoried into Comsumption in USA, but into Investment in China.
For another example, about 10% GDP in USA is about rent/living generated in housing sector, and in China, this part is not counted into GDP at all.
for one more example: there are much bigger hiden comsumption in China which are not reported into GDP number.
Overall, when using the same USA stat standard, the comsumption in Chinese GDP is much higher than current 33% number. If the actual comsumption ratios is 50%, most of the reasoning in this blog doesnt hold at all.
Objective
The three provinces you mention are about 14% of the Chinese population (plus you would then further have to subtract any migrant workers on the coast).
So, just to put it into perspective, from a global development perspective:
about 1/2 the population of the US; for that matter, 19% the population of Africa or India, less than the population of Indonesia or Brazil, around the same size as Pakistan or Bangladesh, around 1/3 the population of Europe
Your perspectives related to resources seem to be be overestimated relative to overall Chinese resources.
Liangpi how many times does MP (and the rest of us) have to go through this same old argument? You’re wrong about “If the actual consumption ratios is 50%, most of the reasoning in this blog doesn’t hold at all” because that would still be the lowest for almost any economy in the world except maybe a copule of oil ministates. Also it is stupid to compare China with the US as if that’s the only comparison when in fact China is so poor and undeveloped and the US is so rich. Why not compare China to other poor countries? If you do compare it to the US why do you say 50% consumption isn’t low? It is much lower than the US. Finally
By the way if you read JackW’s comments you can see that the balance of payments arithmetic proves that China’s savings are “astonishingly” high. And as he says if the Chinese government says consumption is dangerously low, don’t you think that maybe it is dangerously low? Or do you think they’re just kidding?
Professor,
I have an interesting case study to share (which was similar to your post). After the liberalization in India in 1991, the economic reforms were initiated and socialist polices were abandoned to the extent politically possible. In doing so, the SOE sector, which was as big as China’s now, was slowly dismantled. India had a matured financial markets (though very poor Governance record) ensured that Private institutions seized oppurtunity and grown into successful Industries with reasonably good corporate governance.
The Government in order to speed up the reforms and to encourage Industrial activity, closed down some SOE’s and invested a little in infrastructure necessary to sustain whatever private Industry needed to survive. But primarily some of the SOE’s were closed down, subsidies rolledback and health spending reduced relative to the GDP.
The Government of the day used the money to give back to the people in three ways,
1)The Central Government diluted (or sold off) stakes in Government SOE’s with the result that emerging middle classes and established business elite bought off those shares and grew relatively richer. The Government suffered political setbacks and this idea has been shelved off politically (they refused to take credit for this even though they continued to do it) as people in SOE’s lost jobs and ensuing transfer of wealth from SOE’s only benefitted enlightened elite (top 5 of 10 SOE’s are still monopolies and so no loss on shares).
2) The provincial Governments (state Governments we call it) sold of SOE’s and its related assets and started spending on Education and Health, but this huge spending ended with 2008 crisis and we were left with huge entitlements and angry people demanding them at any cost. Painlyfully these entitlements were being abandoned slowly and to come back to more balanced budgets (taxes that got them from land sales during boom years were now history) .
3) Finally some Governments deviced an idea and started to provide credit to poor enterprises and micro industries at lower interest rates (they used the short term Current account surplus for providing cheap credit). Middle classes were happy because atleast the money was being used productively and better than above 2 options where in the first option, there was only small elite which was gaining while in the second case entire economy was being distroyed. We now have every year Government claiming write off of the loans of farmers or small industries which is being payed up by the household sector. We realized late that we have so many small scale industries (or MSME’s) that have grew in number and have really organized into an elite of their own refusing to compete in the open market and make them efficient,competetive but at the same time demanding doles from the Government. And this is all happening amidst falling growth and rising wages.
Professor, until I read your articles, I believed the third option as the right one since neither the elite beging gained (1st option) nor fiscal deficits been going over the roof (2nd option) but have now realized that we are still paying even in the third case.
My Question is in unequal societies, (India economically and china both politically and economically) how do we ensure transfer of SOE assets (which are a must to rebalance) result in larger public good without the moeny being trapped only by the elite or ending in policy of entitlements which destroy budgets? Politicians worry more about the stability of the system they build and inequality (the envy of seing your neighbour richer) is the major threat (or the only threat) for politicos.
The Third option which you have explained so thoroughly in many of your articles lead to addiction of low interest rates (even in difficult times and divorced from market conditions) and ensures no pressure to improve efficiency or competency and ultimately leads to more difficulties.
Is there any way out and is there a best way?
Professor,
I have also to thank you for the way you explain things and I have learned so much in your blogs and surprised as to why even good economists fail to explain economic factors (and indicators) in such simple terms.
I am also thankful to many of the commentators here whose keen insight, on some of the questions that were put, was brilliant to say the least.
Professor,
To just add to my previous post, I was asking you that, Although privatization and liberalization have generally done good to the economy, How could the Governments utilize the initial profits of this policy without frittering the moeny.
@ 47 liangpi,
I am very interested in your thoughts and would like to have further discussion. Could you send me your email address to visitor0475@yahoo.com
I would like to exchange some ideas with you.
thanks very much!
@Adam,
I agree coastal areas are usually more prosperous.
@XXu,
No, I am not blindly opposing privatization. I am just worried that if privatization take place now, no public objectives, from affordable healthcare to affordable education, can be achieved – just like the current situation in the U.S. I just do not think privatization is the most urgent issue right now. Furthermore, You do not want to make the inequality problem in China worse now. Although there is wealth concentration in China, overall their share of the national wealth cannot be compared with that of the government. This is different from the U.S., where there are not only the super-rich and uber-rich, but their share of the national wealth is also overwhelming. That is why its so difficult to implement public projects now in the U.S.
Objective: “For Point 4, my question is, does India actually have a sustained source of demand beyond the basics of education, food and healthcare, which China more or less already has met?”
Objective, If you are unware of the “service sector”, as a proportion of GDP its actually bigger in India than China. This tells us that for people whose education,food and healthcare needs are already met there is reasonable Service sector to service other needs. This tells that Indian growth story is not based on credit binge which will have to be repayed at some point of time. India’s growth is all about private sector growth based on household consumption which is sustainable. While answering one of my questions Mr.Pettis himself pointed out that having Current Account deficit means we can continue to invest in infrastructure and have trade intervention (by import taxes) to manage the growing demand. Remember infrastructure spending must meet the requirements of Indians (not Americans or American media) and the spending must be good enough to give sensible returns to that investment. For example, creating super-express ways and super-express railway lines to match first world are not the objectives but what works and whether cashflows of that investment can pay up the debt which it helps growing and sustaining demand for goods and services.
Unless one is really ignorant or biased these two countries are really really different growth models to start with. Remember Soviet Union and Cuba are one of the first countries to attain 100% literacy better healthcare and food security than many of the countries which followed Capitalistic policies and added democratic polity later(South Korea or some South American Countries) but the growth of the former (USSR and Cuba) ended there owing to huge debt and lack of real markets, they could not outgrow as low income earning countries. The case of India is poor Governance record on education and Health (though only incremental improvement at slow rate) while the existence of rule of law ensures private wealth is respected and monetary policy tuned to market conditions resulting in long lasting change. When you compare a country, you need to compare it with its own past, its past conditions and see whether its moving ahead or not (pace is important but not first priority, the same reason Chienese politicos are so worried about inequality) and in a sustainable way. This is not a rat race among countries as though we have a goal to claim some championship. It takes decades to fraction of a century to call a country successful and the it will be more of a challenge when the country is extremely diverse (like in India). India’s demography and liberalization patterns matches with what Chinese had 13-14 years ago. While at that time Chinese had more literacy, India had a mature financial markets and rule of law.
Liangpi:
Admittedly GDP is a difficult thing of calculate, so much of it previous assumption,
different things calculated and a smoothing….but your specifics are interesting…..
you should provide us with a link to how composition is comprised
As to a China US dialogue, that is a worthwhile perspective however rather shortsighted….the Uprising in the Middle East was about opportunities,
Problems in Brazilian, Australian, New Zealander, Chilean, Italian, Spanish, Greek, Eastern European, African and other MANUFACTURING, and also in the US, are caused due to mechanisms, although you would point to QE’s and such as it would put the issue of the moment to highlight that undermines the underlying fundamentals……but anyway, yes, in Asia, low-level street services might comprise a much higher percentage than is mentioned, which points to how the ECONOMY should work with money cycling around the economy, rather than stopping in the coffers of SOE’s, or in the Reserve Banks of Countries, where, yes the manufacturing sectors of other countries matter to the residents of those countries, and siphoning off of global growth, under more fair terms, if it does provide a function for domestic growth, and employment, might not bode well more widely. And Yes, there is an entire globe to develop, where structural imbalances as exist at present, might not be beneficial. It is a useful strategy to continue to try and place this as a US China dialogue, but it is, structurally, and otherwise, much more than this. Time to move from NME status, and beneficial for the average Chinese to do so, unless words are more important than reality to you. Infant Industry Theory en masse, and so broadly across categories, has never worked, and never within such time frames. I tend to think Michael is talking about what is good for China, and the world. Do send us the place where we can see how China’s GDP is compiled each quarter.
Unfortunately corporate management style has had so much success that it philosophically influences our thinking on managing a country as well. Some of the things prof. Pettis says seem so counterintuitive( they are very logical) because most of people are familiar just with the corporate management and think in terms of external demand. Imagine a situation where a company has it’s employees as it’s consumers and things change so drastically.
Why is the state so constrained by debt? It can just print money, as it has done before.
The difference would seem to be that now export growth and capital inflow will be reduced or reversed.
They can declare the 2009 – 2011 loan batch to be “bad bank” loans, recap the banks and dilute the foreigners, and push through more “loans”…limited only by inflation.
Why is there a debt capacity limit if there isn’t inflation? Isn’t the difference between the current batch of non performers and the past group that foreign money is no longer pouring in to hide the fiscal spending?
Guys, what are we to make of the recent massive loan figures from China–for March, I think? Where is that money going?
Professor Pettis –
You must find a way to debate Jim Rogers substantively. He is the greatest western China bull that there is.
His most recent bullish comments on China seem to be the same day as this post.
Prof Pettis:
Any thoughts on The Economist piece this week that China’s “overinvestment” is vastly overstated?
“Qu Hongbin, chief China economist at HSBC, estimates that China’s capital stock per person is less than 8% of America’s and 17% of South Korea’s. Another study, by Andrew Batson and Janet Zhang at GK Dragonomics, a Beijing-based research firm, finds that China still has less than one-quarter as much capital per person as America had achieved in 1930, when it was at roughly the same level of development as China today.”
Luhar:
Do explain further. As far as a company that had its employees as consumers, that would have been Ford, who raised employee wages so that they could afford the companies products. One hundred years ago.
As to your management perspectives, please elaborate, I don’t see the link.
Although there is some desire, in unified theories of this or that, to take a characteristic of life, that is experienced and find a analogy to other spheres of life, this is not always a possibility (although often profitable for creating the image of a thousand words where the internal collection of perspectives drives anyone into the frames of relevance they rely on for making sense of the issues around them; which can be a profitable or diabolical practice dependent upon intention of the actor progressing such).
Anyway, please elaborate further.
Mr Pettis, I hope China listens to you. This is a truly brilliant post. The scary part is: “or else the world economy cannot balance savings and investment.” That means re balancing through chaos transition. Yikes.
56cstevens
I have those material in Chinese. I think most people on this blog don’t read Chinese, i will see whether i can get some English version.
Chinese Stat system is heavily impacted by the old USSR statistics system, and the comsumption component is highly highly under-estimated. I agree Chinese comsumption rate is still low, but not as rediculously low as many of you think here.
My bet is that the actual Chinese comsumption ratio is arround 50% in GDP.
my point is that When using western econ ideas/theories to anylaze Chinese GDP number, when comparing China to USA or Japan or Indian or Russian, we should adjust the difference in the stat rules. otherwise it is comparing apples to bananas.
49DM
you post says nothing but just personal attack, i don’t wanna waste my time with you. I will ignore your posts going forward.
@65 Liangpi
A lot of people say China’s numbers are calculated differently and no one can understand the Chinese situation because it is unique to China, until that proves false (which happens all the time).
I read Chinese and many here do as well, so please share those sites if you can. I would also like to read more.
I very much enjoy reading your posts. I just have a quick question: one of your key assumptions is that the Chinese system “forces up the savings rate largely by repressing consumption, which it does by effectively transferring wealth from the household sector (in the form, among others, of very low interest rates, an undervalued currency, and relatively slow wage growth)…” The part that I was confused on was the impact of very low interest rates. Don’t low interest rates reduce savings and spur consumption by (1) making it cheaper to borrow and (2) lowering the opportunity cost of saving, or raising the returns on savings? You could argue that #1 is mitigated by the lack of lending to households at these rates (hence the high rates in the “shadow lending market”), but I’m still confused as to how “very low interest rates” result in repressed consumption. Thanks in advance for your insights!
@67 Dan
Because in repressed systems, raising the interest rate raises consumption. There have been studies that show savers in repressed systems (like China) tend to have a financial target in mind when planning for retirement. Higher interest rates would allow them to reach the retirement target more quickly, so the “extra” money can then be spent.
Here is an interesting article:
China’s “overinvestment” problem may be greatly overstated
http://www.economist.com/node/21552555
THE IMF says so. Academics and Western governments agree. China invests too much. It is an article of faith that China needs to rebalance its economy by investing less and consuming more. Otherwise, it is argued, diminishing returns on capital will cramp future growth; or, worse still, massive overcapacity will cause a slump in investment, bringing the economy crashing down. So where exactly is all this excessive investment?
Most people point to the rapid growth in China’s capital spending and its unusually high share of GDP. Fixed-asset investment (the most widely cited figure, because it is reported monthly) has grown at a breathtaking annual rate of 26% over the past seven years. Yet these numbers are misleading. They are not adjusted for inflation and they include purchases of existing assets, such as land, that are inflated by the rising value of land and property. A more reliable measure, and the one used in other countries, is real fixed-capital formation, which is measured on a value-added basis like GDP. This has increased by a less alarming annual average of 12% over the past seven years, not that much faster than the 11% growth rate in GDP in that period.
Related topics
• China
The level of fixed-capital formation does look unusually high, at an estimated 48% of GDP in 2011 (see left-hand chart). By comparison, the ratio peaked at just under 40% in Japan and South Korea. In most developed countries it is now around 20% or less. But an annual investment-to-GDP ratio does not actually reveal whether there has been too much investment. To determine that you need to look at the size of the total capital stock—the value of all past investment, adjusted for depreciation. Qu Hongbin, chief China economist at HSBC, estimates that China’s capital stock per person is less than 8% of America’s and 17% of South Korea’s (see right-hand chart). Another study, by Andrew Batson and Janet Zhang at GK Dragonomics, a Beijing-based research firm, finds that China still has less than one-quarter as much capital per person as America had achieved in 1930, when it was at roughly the same level of development as China today.
Some claim that a rise in the ratio of China’s capital stock to GDP is evidence that new investment is becoming less efficient: a given increase in capital leads to a smaller increase in GDP. But a rising capital-output ratio is perfectly normal when a poor country shifts from agriculture to more capital-intensive industry. GK Dragonomics estimates that China’s ratio of 2.4 in 2010 is well within the range of 2 to 3 seen in most countries.
Another yardstick is the return on capital, which should be falling if there is huge spare capacity. Yet average industrial profit margins and the rate of return on capital of listed firms have been fairly steady over the past decade after adjusting for the cycle. Although many firms, particularly state-owned ones, benefit from cheap loans, the average real cost of borrowing across the whole economy is much higher, so this distortion is more likely to lead to a misallocation of investment than to excess overall investment. The growth rate in China’s “total factor productivity” (TFP), a measure of the efficiency with which both labour and capital are used, has also been one of the fastest in the world.
TFP growth has probably fallen in the past few years, but that largely reflects a spurt in infrastructure investments, which deliver modest immediate gains but will boost productivity over the next 20 or 30 years. Although sceptics dismiss many of these projects as white elephants, a report by BCA Research suggests that the country’s infrastructure is still lagging behind demand. The total length of railway track has increased by 50% since 1995, for example, but passenger numbers have doubled and freight traffic has increased by 150%. China has around 6% of the world’s total railway network, yet carries 24% of global freight volumes. And despite all the new property construction in recent years, there is still an overall shortage of housing in China. Roughly one-third of urban residents live in poor-quality collective housing. This means that many more houses need to be built. Again, the problem is misallocation of investment rather than oversupply. There is huge unsatisfied demand from people who cannot afford to buy at current prices, while a rising number of richer households own more than one home, often as an investment.
Flawed figures?
China’s rising investment and falling consumption as a share of GDP are commonly portrayed as an economic anomaly. Yet this pattern is normal in a rapidly industrialising country. In a traditional agricultural economy farmers consume most of their income, but once industrialisation gets under way a rising share of national income goes to owners of capital, who invest it in factories and the like. Investment rises as a share of GDP, and consumption falls. During their peak periods of industrialisation, South Korea and Japan saw an even sharper rise in investment relative to GDP than China has seen over the past 20 years.
As for that oddly high level in its investment-to-GDP ratio, one explanation is that China’s statistical system (set up when it was a command economy) is better at recording investment than consumer spending. Many think consumption (especially of services) is undermeasured as a share of GDP, and hence that investment is overstated. A report by Morgan Stanley suggests that China’s true investment-to-GDP ratio may be up to ten percentage points lower than officially reported (ie, 38% rather than 48%).
Given China’s rapid growth, cheap loans and the big role played by state-owned banks, it is inevitable that capital has been wasted in some industries. But the evidence suggests that China has not seriously overinvested. That does not mean rebalancing is unnecessary. Under China’s capital-heavy model of growth, owners of capital have been getting much richer than workers. The main reason for shifting from capital-intensive production to the more labour-intensive, consumer-friendly sort is not to sustain economic growth, but to reduce inequality. Workers could then enjoy more of the rewards of China’s past investment.
66Adam
This is a long article analyzing the GDP statistics system in China, with details of which part of comsumption is not counted or under-counted in China, Which part of GDP is counted as comsumption in western system but as investment in China, etc.
http://www.tianya.cn/new/publicforum/Content.asp?strItem=stocks&idArticle=246120&flag=1
Liangpi
There is not a western or Chinese or South East South North (asian, european african or american) bias regarding ideas or theories in regards to economics in repsonse to “western econ ideas/theories to anylaze Chinese GDP number”
GDP, as accepted, is GDP. And under-reporting as another poster notes, is systemic, most likely an assumption exists for it. Where reliability tends to be more importantly related to institutional development and behaviors in the population. As far as theory goes, related to GDP, and controversies within the dialogue, is the existence and utility of PPP measures, and then the Bhutanese Gross National Happiness measure, which would be more of a value-laden approach, and likely able under conditions similar to Bhutanese circumstance and development.
As I stated, and you would know, that, in developing counties, there is a significant amount of low level selling that could go unreported, perhaps not unassumed via assumption and characterization modeling, yet, similar would occur. For example in a village, neighbors might help a neighbor put a roof on a house, they might even trade of such, and this occurs globally, or an asset, a car or boat or other item on an online auction or at markets is sold, bartered and traded, and such goes unreported, but a level of assumption is warranted.
Regardless, relative to the circumstances globally, and specifically as to policies existent, in respect to the models as expressed with assumptions as expressed, in comparison to others of similar experience in the past, where similarities are existent, the current situation doesn’t lend to stability for an ongoing optimal sustainable development of the globe. While, motivations exist on many different levels around any dialogue, the ability to jump in and out of many shoes on this issue will show that much need be done to ensure that received gains to present are stabilized and future, and global, gains are sought consistent with a fundamental understanding of the many actors and forces, impacted and impacting, around this issue to hold a non-parochial perspective on this issue. Time will settle this issue, lengthy (as if the dialogue isn’t extending well into the past already) shirking motions will lead to unnecessary reactions globally. Dialogues and diatribes, diversions and such wane in importance. Of Necessities will eventually coalesce into rather different courses and events; as we listlessly toss back and forth upon these seas of mental construction, in “specificities” of our theoretical differences as real challenges await the meeting of our necessary wills.
Liangpi:
Your discussion comes from the “end of the world, end of the world community forum”…..
this, for me, goes to the:
“Unrequited angst
Unrequited Love, oh no she left me
External Actor of Nefarious Intent
If it had only been for, hadn’t been for
Well, you know, do I have to say more, of course i don’t
Yeah, enough said, that’s just the way it is,
those people will never get it” camp.
More toward the “these things are hard to reconcile, sometimes they are even harder to understand” line of discussion.
Great post,
May I ask why a nation which is sovereign in it’s own currency and has no need to borrow to spend, will have a debt crisis? Isn’t the accounting actuality of this such that as long as there are goods and services available for sale in the country, the Chinese government, as the monopoly issuer of currency, can afford to purchase those goods or services?
Re-balance? Reuters has a clue. It seems more investment will be the solution. Growth is paramount.
“China has to rely on infrastructure investment to manage economic slowdown,…”
http://www.reuters.com/article/2012/04/23/us-china-economy-investment-idUSBRE83M00W20120423
Seems the Chinese are not listening to Prof P’s music.
Not really,They do recognise the overcapacity but see a way out thro’ roads,bridges,subwayaand airports.
csteven
if you have difficult to understand it, it is your problem, not mine. Go take some econ classes or read some books first.
China’s GDP easily under-report consumptions and service by 10 GDP points. The author clearly does not pay attention to how china’s GDP is calculated/reported. The imbalance in China’s GDP is certainly there, but not as bad as the official numbers would suggest. The conclusions that the author draw from the superficial imbalance number are thus off the road, and his bet that China’s GDP growth will average below 3% for this entire decade will be wrong.
august92618
Totally agree with you.
BTW, 2012 1Q, GDP growth 8.1% and 6.1% of the growth comes from comsumption. Rebalancing is happening, and 8.1% is still a very decent number.
Prof,
what do you think the growth number would be, given we mentioned that the comsumption number is actually at least 10% or 15% higher than your previous thought?
Probably with the same reasoning, the prediction will go from 3% to maybe 5%?
or do you maintain the 3% prediction?
Thank you.
Liangpi,
That website is nice and all, but the author doesn’t even disclose his name. How do you know he’s speaking as a qualified expert? I also think it’s odd that China feels it should use it’s own accounting system instead of the internationally recognized standard, and their reasons for doing so are not very compelling. I would need to see more about the source of the information before I believe it. Still, thank you for sharing. It’s very good to get both perspectives.
I think it is telling that consumption is still very low, as #74 pointed out, China is resorting not to maintaining current levels of investment, but INCREASING investment to sustain growth. That cannot be good for the long game.
@ Adam
China’s accounting system pretty much follows IFRS. Where there is deviation from IFRS China seems to follow US GAAP. China officially adopted a Western style accounting system in 1992 and announced a move to IFRS like standards in 2006. The Chinese Accounting System for Business Enterprises 2006 (ASBE2006) was modified somewhat in 2008. You can rest assured China does have world class accounting standards, the only question is do they bother to follow them. I taught US GAAP, UK GAAP, ASBE and IFRS in China for eight years at the university level. There is one word that describes Chinese adherence to, and compliance with, Chinese accounting stands: “sucks.”
China changed from Material Product System (MPS) to the System of National Accounts(SNA) in 1993.
MPS based on Net Material Product (NMP) is the conceptual equivalent of Gross Domestic Product (GDP) in SNA,it calculates for the material production sectors only, and excludes most of the service sectors, which are part of GDP. It is calculated by subtracting the value of all production costs (including the cost of material inputs, depreciation, and labor in production) from the value of output produced in the material production sectors.
For comparison with GDP, it is necessary to add back to NMP the value of fixed asset depreciation (which is not subtracted in GDP calculations) and the total value of all services classified as “non-productive” in the socialist system of national accounts (which are part GDP). The tax components subtracted in the calculation of GDP should also be added back to obtain NMP.
Experience of former USSR indicated that NMP was about 70-75% compared to GDP method of calculation.
en.wikipedia.org/wiki/Net_material_product
Hi Michael, I was wondering if you could comment on how large the Chinese banks are – in absolute terms and also, relative to the size of the economy. The largest American banks are USD 2.1 Tn odd (BAC and JPM) in asset size whereas the 4 largest Chinese banks are between USD 1.7 Tn and USD 2.4 Tn odd each. Relative to that, the largest Indian bank is USD 0.35 Tn odd.
Does the sheer size of the Chinese banks have something to do with how they act as conduits from the central bank to corporations which in turn invest in the building of fixed capital capacity? this is similar to what Chanos is insinuating… The trove of NPAs is yet to be declared? All said, I can’t understand how the 4 largest Chinese banks can have such large B/S sizes. Thanks.
@ Liangpi, my comment @ 52 is actually a real invitation for further discussion and my real email address. i assume you took that as a spam. the link you provided is very interesting though.
@ 80 Adam, the problem with China’s GDP reporting is well recognized. there are books in Chinese that clearly state the statistics standard and practices in China. you can read “中国年度国民生产总值计算方法” by China’s statistics press if you really want to know; 许宪春,deputy chief of NBS, has written some books and articles on this issue as well. if you prefer English, OECD in 2000 published “China in the Global Economy National Accounts for China SOURCES AND METHODS”, and there is an update in 2007 on this issue.
@ Crispus, whether China’s accounting practic sucks or not is not relevant to the statistical problem discussed. to me it is technically impossible for China to report the GDP numbers by SNA standard, simply there is no such infrastructure. they are still using 1996 industry survey to calculate the value-added component of industry GDP. when people use power generation as a proxy for China’s GDP growth, it is viewed as deep insight. this is funny because it is actually how the old Chinese MPS system worked before 1993. all activity was measured by output. maybe GDP does not much sense at all.
I agree with Liangpi and august China’s statistical bias greatly exaggreates the apparent imbalance of the Chinese economy. if the Chinese economy is so “imbalanced”, the Chinese economy would have crashed multiple times in the past two decades when so many global crises hit. In short, we took chinese GDP numbers too seriously. this unfortunately greatly undermined the issue being seriously addressed here.
@79 Liangpi,
I am glad that you are trying to dissect the GDP numbers from China. The claim that consumption is low, and actually lower from a decade ago, just does not jibe with what you see with your own eyes if you have been frequently visiting or living in China over this period. I just can’t fathom why traditionally-trained economist refuse to examine the way GDP is measured in China. I wish someone could give a deep dive on GDP somewhere on the web. For example, as a result of what the CCP was able to achieve, most rural population in China do not pay rent or pay down a mortgage. Is housing expense for the rural population a significant item in America’s GDP? How does China’s GDP take that different situation into account?
When I was reading the business news in China in January, all the luxury car brands were reporting 40 to 78% growth in 2011, and projecting that in 2012 or 2013 China will pass the U.S. to become their no. 1 market. Now most luxury brands are sold at double the U.S. price in China, so if the number of vehicles sold surpasses that in the U.S., that means the absolute consumption dollars are way higher. Yes China has more people, but the GDP of China, at $7T, is less than half that of the U.S. at $15T.
When you walk into a high-end department store in Beijing, the clothes and shoes are priced higher than those in the U.S., and yet there are lots of people buying. And anyone who has walked into a low-end retail building where the migrant workers shop always come out amazed at the rows and rows of stalls on each floor. For sure the top quintile and the bottom quintile shop and shop till they drop.
And to top it off, I would like someone to reconcile Apple’s latest results with the size of China’s economy. $7.9B of revenues were from greater China, about 20% of Apple’s Q2 $39.2B revenues. Does it not strongly suggest that China’s middle class is now spending at a comparable clip to the world’s middle class?
GDP People:
Were GDP to be understated, at the individual level, this would neither be unusual globally, nor specifically within a developing country, China, or for that matter, Austria, Australia, the US, or Brazil, but anyway…. This line of discussion reminds me of a title of some book you should read, were it to have been written under such a title, “Desperately Seeking a Universal; Satisfycing for a Delusion” anyway,
Here are some links to further the discussion, is your point of GDP in China, or an attempt to undermine an imperfect, but rather useful notion, that of GDP, in support of sustainable global development (see previous assumptions, in argumentation, stated), anyway, thus a further extrapolation to some preferred current end state of your desired ignis fatuus where we arrive at your preference, where the spirit of argumentation is lost in a sea of individual need, anyway:
Growth Performance of China since 1978 http://www.econ.hku.hk/~zli/e6031_3.ppt
Here is another link:
http://forums.philosophyforums.com/threads/gross-domestic-product-42143.html
Regardless, it is what is had, there is not, could not quickly be created, a meaningful replacement. And, in the case of China, it’s composition, is considerably skewed relative to historical example, current experience, and future benefit to global development; even toward notions of equality a fairer distribution of global capital, yet, notions of equality are essentially bound within liberty, and as liberty may be taken, so might it otherwise more broadly in response to circumstances.
Reminds me of the double-speak in this, in the run-up to the Brazilian elections, Lulu’s party said that Brazil would attract 800 Billion USD for massive infrastructure, than under realms of significantly less investment they decried inflows of capital which were embodied in the concept of “currency wars” while Brazil strength was defined in terms of commodity exports, as its manufactures cried (due to strength in currency, and need for domestic reforms) as is the case more broadly. Neither within the frame of BRICs are there common interest, but superficially, and more broadly, whether it be 40 to 50% youth unemployment across the Middle East, in broad swathes of Africa, Latin America, perhaps a depressed American city like Detroit, and elsewhere in these matters.
People argue, isolated points, able to be retained, often emotionally supported within illusory realms of their cognition on these matters, while the real work remains undone. Ideas, are useful insofar as they can become actualized, after potentiation is acknowledged, those driven to narrow in their framing, whiling useful for testing in a vacuum are rarely useful in the more complex environments that we find around us. Argumentation is for delving deeply into topics, not for the winning of an argument, perhaps, even, for traditionally trained economists, or those who understand the purpose of dialogue.
@liudechan 85
You wrote “The claim that consumption is low, and actually lower from a decade ago, just does not jibe with what you see with your own eyes if you have been frequently visiting or living in China over this period.”
I do not interpret that Mr. Pettis is claiming that “consumption is low” neither that consumptiom is “lower from a decade ago”. What he claims is that the weigth of consumption, as a share of China’s GDP, has declined. That is perfectly compatible with consumptiom growth as long as investment grows much faster.
liudechuan, i am not surprised pettis hasn’t responded to the latest batch of comments because we seem to go over these same discussions over and over again on this site, but aside from what ignacio says above, it should be noted that pettis has pointed out many times that rapid growth in high end luxury goods has historically been a sign not of rising household consumption but rather of rising income inequality. no one doubts that income inequality in china is very high and rising, and this is what has driven the consumption of luxury goods. didn’t the same thing happen in japan in the 1980s?
as for apple, it implies that aggregate consumption in china is a big number, which everyone knows, but this is simply because china is a big economy. this does not even begin to address the question of whether or not consumption is a high or low share of GDP.
I haven’t commented in some years, but I will do so now because I am a little surprised by all of this discussion about whether or not consumption is a little higher as a share of GDP than the official numbers suggest. Even if consumption were 20% higher and if income is understated to the point that GDP is 10% higher, which is the highest estimate of the misstatement that I have seen among credible analysts, this implies that consumption is indeed higher than 34% of GDP but how much higher? If my arithmetic skills learned many, many years ago still serve me, this adjustment takes consumption from 34/100 to 41/110, which is still only 37% of GDP.
To suggest that the whole argument Pettis makes about the impact of consumption is undermined by this possible adjustment in the number is, I think, a little bit absurd, isn’t it? For an economy to have consumption under 50% of GDP is very bad. To have it under 45% of GDP is terrible and suggests horrible imbalances. But whether the actual number is 34% or 37% is trivial. It is either way a disastrously low number, isn’t it, and the implications for rebalancing are frightful.
As a non economist I might be on thin ice. But isn’t the experience in the western world that the shadow economy is rising especially in times of crisis ( and of course in situations where there is about full employment).
And that there also is a strong shadow economy in the western world, which isn’t part of the GDP.
The last time it was it was invoked was during Craxi’s reign as Prime Minister in Italy, as far as I remember he strongly argued that Italy deserved to be a part of G6 (–>G7) because the italian GDP was strongly underrated because the shadow economy was stronger than in other countries ( and Craxi was if anything a specialist in these dark matters).
@88 JXu I had no expectation that Prof Pettis would respond to my stupid bewilderment. I was speaking to the students in the professor’s class, hoping that some of them will feel intrigued enough to research into the economic data to explain my bewilderment. We are fans of the professor’s blog as we are stimulated by the intellectual debate on China’s economy as outsiders. For the professor’s students, it is their country and in 10 years they will probably be the ones making the economic decisions that will influence its future. They have a compelling need to have a deep understanding of the data.
I was brought up under Chinese schooling myself, so I know it is going against the student’s nature to even feel that the professor’s claims need more substantiation, to explain why what you see is not what you get. I never said that the GDP data must be wrong, because I did not know how we could break down the data to smaller pieces to arrive at an insight on what is going on.
I am an engineer not an economist, but I expect that like engineers, economists would also check one’s modelling against the observed phenomenons. I had gone through life believing the rudimentary macroeconomics I was taught in college. Only after I had lived through the last 12 years, first the Y2K bubble then the sub-prime derivatives bubble, did I come to the realization that traditional economists like Greenspan and his followers were quite clueless.
Your dismissal of the Apple data point is typical of someone who feels that the model is totally correct. 38% of Apple’s revenues are from the Americas vs 20% from Greater China. The U.S.’s GDP is $15T in 2011, vs $7T for China. Thus the Apple consumption percentages are very comparable, could we project from it that the electronic gadget consumption percentage is also comparable? Could we figure out in what areas are Chinese of the five income quintiles consuming less? If the government can figure it out, maybe they can devise more effective stimulation measures to target that category of consumption, or that income quintile?
Liangpi:
What have I misunderstood?
Services underestimated, look at the DYI market in western countries, would a person who does whatever of their own, or buys their own materials and has another do something, or in barter, not balance out the differential, even under PP circumstances. Point is the model, for such a large actor, has to alter, and is altering slowly, will alter nonetheless, as there are many more sectors in an economy than commodity exports, even Russia, long mired in the natural resources equate to national power focus that has muddled most post-colonial post-imperialist literature over the last several decades realizes that. Even there are pockets of confused thinkers on these issues. Where the system, or set of sub-systems are seeking to gain a new homeostasis at present, the future will certainly see adverse consequences, to choices left unmade. Michael’s focus is that growth will slow, and time is passing for China to make necessary adjustments, that he has thought necessary, i think he states from 2006, I remember thinking toward this fact at least as early as 2004 (and not for the very well reasoned arguments that michale mentions, mind you, not seeking to steal his prescience on these matters), but regardless….. where this is posited as a developed-developing dichotomy, this is short-sighted, as there are a plethora of development partners, and in this it need be a partnership, zero-sum thinking, is only for insular morons, anyway,…see the following to see the nature of development need globally (and I will take a minute gather them from google news)
Botswana: Before the downturn 6000 jobs, now 1500, to lose 500, 1/3 of the jobs, for export, no financial repression mechanism possible
http://www.mmegi.bw/index.php?sid=4&aid=577&dir=2012/April/Friday27
South Africa
http://www.steelguru.com/stainless_steel_news/South_Africa_to_impose_tax_on_ferrochrome_imports_from_China/258582.html
“chrome ore exported to China has since increased from 200,000 tonnes per year in 2002 to 4.7 million tonnes in 2011. This has enabled China to build up its own ferrochrome production from 532,000 tonnes a year to the current 2.5 million tonnes. Because of this, South Africa’s share of the global ferrochrome market has now fallen from 51% in 2001 to 37% in 2011″
Brazil
http://www.4-traders.com/news/Brazil-Faces-Multiple-Hurdles-To-Become-More-Competitive–14301999/
Australia
http://www.smh.com.au/business/support-manufacturing-investment-ai-group-20120411-1wpgf.html
http://www.theage.com.au/opinion/politics/manufactured-crisis-20120428-1xro9.html
US
http://www.bizjournals.com/sacramento/news/2012/04/26/sacramento-region-manufacturing-jobs.html
http://www.uticaod.com/features/x1018069987/Enticements-keep-Indium-Corp-from-bolting
http://www.democratandchronicle.com/article/20120427/BUSINESS/304270080/Manufacturing-promoted?odyssey=tab|topnews|text|Business
China
Chinese Output
Chinese manufacturing also shrank for a sixth month in April, according to a survey of companies. The 49.1 preliminary reading of the purchasing managers’ index from HSBC Holdings Plc and Markit today compared with a final 48.3 the previous month.
India
http://timesofindia.indiatimes.com/business/india-business/Govt-for-domestic-electronics-manufacturing-industry-may-be-unwilling-and-unable-to-comply/articleshow/12919211.cms
Russia
http://english.ruvr.ru/2012_04_29/73329806/
Sri Lanka
http://www.sundayobserver.lk/2012/04/29/fin02.asp
Jamaica
http://jamaica-gleaner.com/gleaner/20120427/business/business6.html
Japan
http://www.reuters.com/article/2012/04/26/japan-economy-pmi-idUST9E8EM02K20120426
So these other countries, some of whom may have used a similar mechanism previously, as those employed by China, all are interested in Manufacturing. Where, GDP, had never in any of these, even when systems might not have existed to capture more of the street level services, had a situation where FAI was as high. Nor, would many have continued to grow as fast after hitting a level, S-Curve for your economics class, where attempts to do so might only lessen their eventual destination. Point is, globally, and from much recent strife it should be seen that there are vast amounts of the global people, rightly or wrongly, rightly or wrongly for the right or wrong reasons, desirous that opportunities be spread more widely. That is Egyptians are not as interested in cheap Chinese products, as much as a luxury as that might seem to some, as they are in having jobs to buy the cheap goods with. This is an occasion globally, whether this be Brazil, Russia, SEA, Italy, Spain, Portugal, Greece, Botswana, South Africa, Nigeria, Tunisia, Morocco, Argentina, Georgia, or Mexico, Etc….
Where stories, might happily point back to a kindler, simpler, post colonial, anti-imperialist dialogue, the rubber is no longer meeting that road, where leaders in government and business and industry in China and elsewhere do not realize that fact, they are only deluding themselves.
GDP Service Under Reported People
Z is a problem
Z, by definition, is composed of V, W and X
X is too low, of a weight historically relative to V and W.
Thus, if Problem is X is to low, correspondingly, Va and W, historically too low,
So, if felt that, consensus is moving toward X is too low, what should one do correspondigly, state that, X is not too low, ignoring that V and W are equally too high. More importantly they are too high, relative to all other similar cases in history. So, if want not to think of Va and W being too high, simply focus, on X, as if X is the only issue, and more importantly focus the conversation within a bounded range within conceptions of X, forgetting that X being too low, is simply a corresponding statement that, and more important statement that V and W are too high. Especially considering what was stated in the last section. Thus the entire thread, becomes a discussion of X and if X should be marginally higher or not, undermining the relevance of V and W, the more important factors in the general line of discussion. As if the important issue is growth at 3%, 2%, or 5%, rather than the systemic structure that undermines stability more globally in these matters.
A lonely view? http://www.todayonline.com/Business/EDC120430-0000003/America-must-end-yuan-fixation
Another data point to re-construct the $2.4T+ Chinese consumption total: “Last year the Chinese spent a whopping 14% of GDP on groceries, it is no big surprise that rapidly growing China became the world’s biggest grocery market, overtaking America in yet another category, according to IGD, a food and grocery research firm.”
http://www.economist.com/blogs/graphicdetail/2012/04/daily-chart-3
The Apple consumption rate is comparable but tiny – 0.5%. Groceries consumption is huge – almost $1T. The $983B figure for 2011 just surpassed that of the U.S., so the groceries consumption rate is roughly doubled that of the U.S.
Well, I don’t see any reason why the central government can’t simply ‘print money’ and recapitalize the state owned banks as needed to allow the banks write down their bad debts. There are obviously problems with how the banks allocate capital, but I don’t see any immediate reasons for a crash if China doesn’t change course. They could keep going on the way they are for decades. As long as the government keeps propping up the banks the game can continue. And I don’t see any reason that will make the government not want to. They can keep a lid on inflation without improving their capital allocation process. They can keep a lid on unemployment without improving their capital allocation process. They will still have growth, even if they don’t improve their capital allocation process, just not as much. The average investment may not break even, but they will probably still return 50 or 80 cents on the dollar. The process is wasteful, but where is the brick wall?
I think the thing to remember about China is that their growth numbers are mostly fictitious, the result of counting all sorts of investments as if they are going to pay out at 100 cents on the dollar. They obviously won’t get that sort of payout, so their real growth rate is much slower. But, even if we assume they are only getting 50 cents on the dollar payback on investments by state owned banks the model still works, just inefficiently. Just like public sector investment in all countries. Roads still get built, even if they cost twice as much as they should.
The party leadership may not care that much that capital is being wasted. A different process might be more efficient, but with this system they get stability, and they get political control over the economy. They are a bunch of communists after all. Their goal isn’t efficiency or to grow the private sector.
So, their growth is much slower than advertised, but they are still growing. Partly because the capital allocation process is inefficient, but not maximally inefficient, and partly because a great deal of the growth is occurring in the private sector. Let’s take a wild ass guess and say real growth is 4%. Still not too shabby, especially since unemployment is low, wages are rising, and inflation is under control.
China has lots of problems, but I don’t see why their present course is going to result in them hitting a brick wall. What is the mechanism?
Forget about my previous post, with China GDP per capita of 8K, that was at PPP. The actualfactual figure is 4K. As i said in that post, I dont believe for a moment China will overtake Mexico or even Russia on GDP per Capita, even in the long run. Good luck to them catching up with America on total GDP because that requires them to at least triple per capita GDP.