In China, I have argued many times, high growth is no longer compatible with a strengthening balance sheet. If China is growing at a rate that approaches or exceeds five or six percent, it is probably a safe bet that debt is rising faster than debt servicing capacity.
The good news is that the current leadership seems very clear about the need to implement reforms, and also understands that this is going to be politically a difficult process. Last week Xinhua had this article:
China must maintain economic growth and persevere with market-oriented reforms in the face of multiple risks in the economy, the new helmsman of China’s ruling party has said. The government should continue its proactive fiscal and prudent monetary policies next year and improve the economy’s internal vigor and dynamic, said Xi Jinping, general secretary of the Communist Party of China (CPC) Central Committee, at a symposium held with non-Party figures here last week.
“The growth that we achieve must be tangible, not exaggerated growth, and should be efficient, of good quality and sustainable,” Xi said. He urged adherence to market-oriented reforms and well-conceived top-level reform designs.
Two weeks earlier the South China Morning Post had a similar, if less politically worded, message:
The man who will become premier next year has made a strong case for reform just days after the unveiling of the Communist Party’s new leadership, saying reform is the biggest dividend. Li Keqiang, speaking at a seminar with selected local officials on Wednesday, organised by the State Council, said China would still be able to see the completion of a “moderately prosperous society” by 2020 even with a lower economic growth rate of about 7 per cent a year, China News Service reported.
“We do not blindly pursue gross domestic product growth and it is very likely that our future development will go through a period of moderate growth rate that can hardly stay in double digits,” he said. “To achieve the goal [of building a moderately prosperous society], we’ll have to rely on reform, which still has enormous scope and potential to be explored.” Analysts said the remarks by Li, 57, who was elevated to No 2 in the party hierarchy last week and will succeed Premier Wen Jiabao in March, could be viewed as a strong political message calling for bolder reform.
Last week Xi Jinping, the newly elected general secretary of the CPC Central Committee, toured Guangdong Province in a self-conscious reference to Deng Xiaoping’s famous 1992 tour supporting reform. Xi’s tour was widely interpreted as a similar signal about Beijing’s intentions. As an article in the People’s Daily put it:
During his recent tour of Guangdong Province, Xi Jinping, general secretary of the CPC Central Committee, stressed the need to accelerate economic restructuring, describing the task as imperative. Xi’s latest southern tour is widely seen as a signal of the new leadership’s determination to firmly deepen reform. Xi met with business leaders in Guangdong on Sunday. This is in accordance with widespread concerns and anxiety over the nation’s economic future.
Economic reform directly decides the growth and distribution of wealth, people’s living standards and social confidence. It is in line with the trend of placing emphasis on adjusting the nation’s economic development model. After three decades of speedy development, the nation should take another look at the advantages it once relied upon. The era in which prosperity can be realized through labor-intensive industries and extensive production is becoming a thing of the past.
Restructuring the economy is a real challenge in the context of China’s rise. It is during this process that China will begin a decisive competition with developed countries.
More interestingly to me, in what is probably the most authoritative newspaper in the country, was that the article pointed very specifically to the kinds of problems Beijing expects to encounter and seemed to be warning everyone that reform is going to be tough and divisive:
In recent years, it’s been shown that the rhetoric of reform is widely welcomed, but practically carrying it out can meet with unexpected setbacks. This is natural. Only very few fortunate reformers implement reform measures with the public applauding all the way.
The Chinese have various demands, and some conflict with each other. For instance, public awareness of environmental protection is rising, and the worship of GDP is being opposed. However, public panic arises as soon as economic growth begins to slow down.
…Reform is exciting, but it is also full of difficulties and challenges. Xi said in Guangdong that China must squarely face difficulties and challenges, strive for the best results and firmly seize the initiative. This deserves consideration by the entire Party and society.
These expected, and exciting, “difficulties and challenges” are, I suspect, the things we should be most concerned about in our attempts to understand the pace of reform. The history of developing countries suggests that most countries fail in the reform and adjustment process precisely because the sectors of the economy that have benefitted from the distortions are powerful enough to block any attempt to eliminate those distortions.
I have written several times that this reform process may have already begun in earnest, and that in 2012 we have seen, for the first time, some real economic rebalancing, but not everyone agrees. The current issue of Caixin has an article that argues that the imbalances may have gotten worse, not better:
One of China’s top government think tanks warns that the nation’s economic imbalance has worsened alarmingly with investment growth overshadowing consumption. In a report published on December 12, the China Academy of Social Sciences (CASS) said the structural imbalance in the country’s growth model, measured by its self-devised index, has significantly worsened over the past decade and more.
CASS is a ministry-level research institute that advises the State Council. Its index gauges economic imbalance on a scale of 0 to 1. The higher the index, the worse the imbalance. China managed to bring the index down from 0.5644 in 1991 to 0.4513 in 2000, the report said. But the figured climbed to 0.6173 in 2012, as investment surged relative to consumption.
From 2000 to 2009, investment as a share of GDP rose from 35.3 percent to 47.2 percent, while private consumption declined from 62.3 percent to 48.2 percent, the report said. Income distribution inequality and an imbalance in the international payment account, which resulted mainly because of a long-running trade surplus, were also factored in when calculating the economic imbalance, the report said.
CASS’ recommendation to encourage domestic consumption echoes that of many other academic and business researches, and the new central leadership has vowed to address imbalances by exploring domestic consumer market.
I have no idea how the index is constructed, but it seems that CASS believes that even in 2012 we have not seen a reversal of the growing imbalances in the Chinese economy. This puts all the more pressure on Beijing to change the growth model quickly.
But will everyone cooperate?
But certainly not every one in China is confident that Beijing will be able to force through the reforms that are widely accepted as necessary without a serious fight. There were two interesting and related articles in this week’s South China Morning Post that may indicate the degree of worry. They also show that it is not just the economic policymaking elite in beijing that recognizes the urgent need for economic adjustment and reform.
The first article tells you much of what you need to know in the title (“China’s rich and skilled leave in record numbers”). It goes on to say:
More than 150,000 Chinese became permanent citizens in major immigrant countries including the United States, Canada, Australia and New Zealand last year, topping the world’s list of overseas migration in absolute numbers, a recent report revealed. The Centre for China and Globalisation (CCD) and Beijing Institute of Technology (BIT) School of Law jointly released their findings in the Chinese International Talents Annual Blue Book’s International Migration Report (2012) on Monday, according to media reports.
…Another report by Hurun Research Institute and Bank of China in 2011 found that 14 per cent of China’s high-net-worth individuals had either emigrated or were in the process of doing so. In addition, 46 per cent were considering permanently moving overseas through various immigrant investor programmes with real estate, foreign currency deposits and stocks being the primary areas of investment.
US Citizenship and Immigration Services (USCIS) declared that 41 per cent of total EB-5 Immigration Investor Programme applicants were Chinese while the Australian Department of Immigration and Citizenship reported that 61.5 per cent of applicants for the Business Skilled Migration Programme were Chinese.
We have known for a while that Chinese with the means to do so are increasingly opting to move abroad. There are many reason for this, of course, but China is still growing much faster than the rest of the world, even if some of us don’t fully accept the official numbers, and so for people to look for opportunities abroad suggests at the very least that either some of these people seriously doubt the sustainability of China’s current growth and expect it to come crashing down, or that they are worried about political uncertainty and the possibility of difficulty ahead. Or both.
The second article, also by the South China Morning Post, involves data from a completely different source and for completely different purposes, but it may broadly be telling the same story. The article is based on a very interesting study conducted by Global Financial Integrity on illicit capital flows around the world. The article summarizes their study as:
Some 150 developing countries, led by China, have been the source of flows of tainted money totalling US$5.9 trillion over 10 years through 2010, Global Financial Integrity, a research and advocacy group in Washington, DC, said.
Flows of illicit money from tax evasion, crime and corruption in the developing world have roared back to pre-financial crisis levels, topping nearly US$859 billion in 2010, near the all-time high of US$871 billion in 2008, it said. In 2009, following the global financial crisis, the figure dropped to US$776 billion.
China tops the list of developing countries sending illicit money abroad, either to offshore havens or to financial institutions in developed countries, GFI said in a study. In 2010, illicit money out of China totalled US$420 billion, the report said, and exceeded US$2.7 trillion for the decade ending in 2010 – nearly half that period’s total for all developing countries.
For comparison’s sake, Malaysia came second, with over $64 billion in 2010 and $285 billion for the decade. Mexico was in 2010, with over $51 billion in illicit flows, and $476 billion for the decade. The study acknowledges that it does not include cash transactions, so actual illicit flows are probably higher, maybe even significantly higher.
You can find the full ranking of 71 countries here, and it shows, among other things, that illicit capital flows from China are roughly equal to the sum of illicit capital flows from the next fifty countries. I haven’t been able to adjust the numbers for GDP size (larger economies should on average have larger illicit outflows), but when you consider that the next fifty countries include Mexico, Malaysia, Russia, India, Indonesia, Poland, Brazil, Turkey, Argentina, Hungary and forty others, I think it is pretty safe to say that China’s ranking as number 1 is not just a function of its being the largest developing economy in the world.
As a share of GDP, in other words, Chinese illicit outflows seem easily to exceed the average for all developing countries. Mexico’s GDP, for example, is roughly one-seventh the size of China’s, and yet for all its drug money, its illicit flows were only one-eight those of China. This means that the Chinese business and political elite export illicitly a larger share of the Chinese economy than the combination of the Mexican business and political elite and their drug cartels.
One of the most interesting paragraphs in the study, for me, concerned trade invoicing:
Trade misinvoicing is the preferred method of transferring illicit capital from all regions except the MENA region where it accounts for only 37 percent of total outflows for the decade ending 2010 (Chart 6). In declining order of dominance, the share of trade misinvoicing in total outflows by region is Asia (94.0 percent), Western Hemisphere (84.0 percent), Africa (65.0 percent), and developing Europe (53.0 percent). Large current account surpluses of countries in the MENA region driven by crude oil exports entail larger outflows through the balance of payments. In the case of Europe, the relatively large unrecorded outflows from the Russia’s balance of payments dominate regional outflows.
This creates, for me, a real and very obvious problem with understanding China’s trade figures. According to the study, illicit money out of China totaled US$420 billion in 2010. The study also claims that in Asia nearly all of the illicit money flows (94%) occur through mis-invoiced trade, which suggests, of course, that the trade numbers can be seriously distorted. If capital is being secretly taken out of the country through trade, exports are likely to be under-reported, imports are likely to be over-reported, and the real trade surplus is almost certainly larger than the reported trade surplus.
How much does this illicit capital flow impact China’s real trade account? Here is a January 2011 Xinhua article on China’s 2010 trade account:
China’s foreign trade last year jumped 34.7percent year on year to more than 2.97 trillion U.S. dollars while its trade surplus fell 6.4 percent to 183.1 billion U.S. dollars, the General Administration of Customs (GAC) said Monday.
The country’s exports grew 31.3 percent year on year last year to 1.58 trillion U.S. dollars while imports surged 38.7 percent to 1.39 trillion U.S. dollars, said the GAC. “China’s foreign trade is, in general, heading towards a balanced structure,” said the GAC in a statement on its website. The trade surplus accounted for 6.2 percent of all foreign trade last year, down from 8.9 percent in 2009 and 11.6 percent in 2008.
It is clear that these illicit capital flow numbers are pretty significant in relation to the trade numbers. China’s trade surplus in 2010 was reported to be $183 billion, but GFI claims that Chinese illicit capital flows (I assume that most if not all represents outflows, or even net outflows) for the year were $420 billion, most of which may have been recorded as higher exports or lower imports.
Even if these numbers are way off, they still suggest that China’s real trade surplus may have been substantially higher than reported, with much if not most of the money parked offshore for safekeeping. Among other things these numbers also suggest that the sluggish import growth of the past year, which smart people like Andy Xie insist are among the many numbers that are not compatible with the high official growth rates claimed by the government, may be even lower than reported.
Obviously I am not the first person to complain about the opacity of Chinese economic data and the difficulties we often have in reconciling one set of numbers with another, but I think it is important to note that while opacity may not be a terrible problem during the optimistic up-cycle (in fact hazy data give us more leeway to daydream pleasant things), it can suddenly become a huge problem during the pessimistic down-cycle, when they don’t even constrain our nightmares. What is worse, an increase in opacity, which we are clearly seeing in the financial system, is usually a herald of bad tidings. When the economy starts to get bad, often the first impulse for many is to massage or hide the data.
M.Pettis: “For people to look for opportunities abroad suggests at the very least that either some of these people seriously doubt the sustainability of China’s current growth and expect it to come crashing down, or that they are worried about political uncertainty and the possibility of difficulty ahead. Or both.”
Perhaps it’s just the pollution.
In that case most of the escapees would be Beijingers and dongbeiren. which I am not sure is supported by the numbers. Perhaps it is the infant formula.
My family think that way. I’m British, married into a Chinese family. My brother-in-law is very keen to send his child overseas, because he firmly believes that anything you make or create here can be taken away just like that, by the government or by bad policy.
That’s the same reason that Russians give for coming to London- there are no true property rights under an authoritarian regime. Interesting as a factor tending to undermine the stability of such nations: those blessed with talent or money cash in their chips and leave.
Anecdotal: Hired a Chinese Scientist. She and her husband did post-docs in Canada. Had good jobs in China, and a 2-year old. She said she wanted to come back to Canada because of the pollution.
My understanding is that Michael was pointing out that people with significant capital (to invest) are escaping. So pollution would not be a consideration, since they can afford to live any where in China or a neighboring country where there isn’t pollution. I thought the point is they are safeguarding their capital and property rights. Scientists aren’t (usually) capitalists, and might place property rights at a lower priority than being trapped in a bad environment due to proximity to work location. And are you sure that property rights were not also a consideration for them?
Insert comment here about Chinese Snakeheads… Great Rebalancing = uptick in human smuggling?
Previous comment may be a bit rhetorical and inappropriate given the subject matter of your blog. Feel free to remove. Devoured the great rebalancing over a weekend last month. Brilliant stuff, have been recommending to former professors and colleagues at Deloitte and Bain… They love it. All best – A
To mix Warren Buffett with Hans Christian Andersen, it’s when the tide begins to go out that you can see who has been swimming naked. Of course Chinese banks can swim naked for a long time as long as the emperor tells all his subjects that the banks have a fine set of silken spun (swimming) clothes.
I’m not sure that the interpretation of the misinvoicing issue is as straightforward as you suggest – although it may be a subjective question and depend on the specifics of the scheme. For example, one way to move capital by misinvoicing would be to underprice your company’s exports (in order to resell them in the destination country and keep the profits there). On the one hand, this may understate the _value_ of the exports, but on the other, the exports might not have taken place at the ‘full’ price.
It would take working through some examples, I think, to make conclusions – and those conclusions would likely not match very well with company-specific figures and accounts (very easy to fudge to hide this).
Most Chinese exporters use Hong Kong to reinvoice to their final customer and leave the difference (5 to 10%) in some of the largest banks in Hong Kong. The Taiwanese do exactly the same.
On the import side, Singapour is very commonly used (commodities purchased by subsidiaries in Singapour and reinvoiced at a higher price to their own Chinese factory).
GA, you’ve restated what Michael wrote, you are not disagreeing with his point. The point is that exports may be understated and imports overstated, thus the true surplus (and nominal GDP level) is much higher and the consumption level percentage of the economy may be much lower than stated.
In short, the economy may be even more unbalanced than calculated.
The other interesting aspect is that exporters may not be as unprofitable as reported, except the profits are accruing to the illicit economy and to a fewer number of insiders, so thus is likely misallocated (even the highest IQ people in the world could not allocated capital more efficiently than millions of monkeys making individual opportunity cost decisions).
Michael,
What are the implications of these illicit capital flows on exchange rates? Does it imply that the RMB is not as overvalued as might be previously expected?
Thanks.
There are broadly speaking two reason why money flows abroad. The first is that including foreign assets in your portfolio improves your overall portfolio, perhaps because of diversification, or because assets abroad seem cheaper than at home, or because growth abroad is greater, or because foreign currencies are undervalued, etc. The second has to do with rising uncertainty at home, perhaps economic, perhaps political, etc. If you believe the surge in capital outflow represents portfolio decisions, then it might imply that the RMB is no longer seriously undervalued. If you believe it represents rising uncertainty at home, then it shouldn’t have much implication for the value of the RMB.
Hi Michael,
I’m a bit confused. If capital is illicitly flowing out of the country through trade misinvoicing, why might this suggest that the RMB is not as undervalued as we thought? Isn’t the outflow simply reflected in the current account rather than the capital account, leaving the overall balance of payments position intact?
Good article. It is always important to step back, and think about what is reasonable. China has grown tremendously over the past few decades. But the numbers are clearly exaggerated. However, in the comments section in your previous post, and contained in this post, are clear indications that the Chinese government is working towards mitigating and/or correcting imbalances. I believe this.
One thing that jumps to mind though is history. Command economies do not have good ones. From Stalin to MITI’s Japan, control from the top can show flashes of brilliance, but fall in the end. I do hope the plans include a way for the government to step back.
Where are they going with all that money? Sure here in Vancouver there are more and more Mandarin speaking kids with 200k cars and 800k apartments but not more than a couple billion dollars worth and we are probably a prime destination for Mainlanders, along with Toronto because prior to 2012 you could buy a Canadian greencard for 500k (so one apartment in downtown Vancouver!).
Assuming that even if the majority just goes to Hong Kong and Singapore to give libertarians their mirage of ‘economic liberty = success’ that still leaves a couple hundred billion dollars to be laundered somewhere else!
California:
http://www.dailymail.co.uk/news/article-2261460/California-maternity-hotel-Chinese-women-pay-thousands-birth-make-babies-American-citizens-closes.html?ito=feeds-newsxml
Although this one closed, I guess there are many others just like it that are filling the gap.
I think Australia said over 60% of their “green card” applications this year were awarded to Chinese citizens, so that might be another destination.
Caixin article discussing the slow down in subway building…essentially asserting over/mal investment for many cities. The outcome? Slower growth as Michael has predicted. Note the relationship between slowdown of real estate to the funding base for city governments.
This is Caixin, not some foreign publication seeking to keep China down or hurt the feelings of the Chinese people.
http://english.caixin.com/2012-01-06/100346469.html
That is extremely bizarre. What about all the huge subway projects they were authorizing just a month or two ago? That all fell through already?
My favorite line in that article is the very last one: “How does each subway system turn a profit? Not necessarily through passenger ticket sales. Key sources of subway system cash in Beijing, said the Line 4 financing official, are government subsidies and real estate.”
If government subsidies are how you turn a profit, it’s not a profit!
and don’t forget unlimited access to cheap capital
The essiential is rather: Less investment – less jobs – less growth.
Is it just me, or is there something wrong with the numbers cited in the Caixin article?
As far as I know, China’s GDP is about RMB 45 to 50 trillion.
In the article, it said a light rail system required: RMB 6 billion in revenues, a city with RMB 6 trillion GDP, and a population of 1.5 million.
So is it reasonable to expect each person to spend RMB 4000 per year riding the thing? (RMB 6 billion / 1.5 million)
And that city, whichever one it is….is to make up for 12% of the country’s GDP? (RMB 6 trillion / 50 trillion)
But in any case, Hua Qiao, I appreciate your digging up and attaching these enlightening articles, just like you did in Michael’s last post with the WMP article.
I can’t take this Caixin article seriously because the numbers seem to give it an aura of shoddyness.
Andy
The Per Capita GDP in that city is RMB 4 million (or US$640,000). So I guess they can afford to ride.
http://www.youtube.com/watch?v=fK8mneO8yvU
“….a trillion is more than a billion numbnuts”
Andy,
Thanks. I think the revenue referred to is the total tax and fee revenue taken in by the city, not the pro forma revenue from the train system. But you are right that 6 trillion in city gdp sounds a bit high as a precondition for light rail. But then again, we know that if you added up all the gdp reported by the provinces, it would be much higher than the country’s gdp because provincial cadres are evaluated on this number (so provincial numbers are inflated). The same thing probably happens at the city level. caixin is one of the most respected periodicals on the mainland.
Good article. You are not the only one who complain about Chinese data… me too.
Chinese economic figures are wrong or so difficult to obtain.
5% of unemployement everyyear, never change. Strange no?
I don’t have any particular comments about the article itself other than to say that it’s another very helpful perspective from an author who knows China better than most.
Michael, you’re just flat out one of my favorite writers… period. Thanks for another outstanding piece of work.
Hi, Michael, It looks like China has escaped the hard landing and the GDP growth of 2012 is 7.8%. How do you explain this result? Should we call it a miracle or simply a China Model?
I am not sure we should call it either. I very much doubt China will have a hard landing unless they postpone the adjustment for another three or four years, in which case they will be forced into a hard landing because of the collapse of debt capacity. What I have always expected is a long, slow process in which slowing growth causes them to panic and step on the accelerator while rising growth causes them to panic and step on the brake. My guess is that growth will continue grinding down for many, many years.
When there are no viable options, oscillation between unacceptable outcomes at each extreme is likely. China is trapped by unbearable inflation on the growth side, and unbearable unemployment on the contraction side.
Free money (debt and money creation) misallocates money away from producing things people need and to activities that concentrate capital. The debt (free money) capacity is reached when the people can’t afford their daily living expenses. Remember the free money spiral is exponential, so it accelerates near the limit, and needs more and more free money to sustain itself.
The real growth is grinding down because the free money vortex is sucking an exponentially larger amount of money away from necessary activities.
I will stick my neck out and claim these things always end in a hard landing, because of the exponential nature of the end of the free money capacity. Right now the numbers are being massaged at an exponentially more outrageous level in order to hide this exponential tailspin into devastation. I will bet there is no way a centrally managed economy can avoid a hard landing.
And we have a hard collapse of Europe ahead too, even Soros is saying it could be similar to the fall of the Soviet Union.
Right now I see this free money machine accelerating into the formerly sleepy Mindanao (Philippines). We are headed into the “crackup boom” of the Austrian economics.
We will end up with a catastrophic collapse of globalism and global trade as this vortex peaks and sucks the entire world into misallocation of capital.
Monetary scientist Dr. Fekete explains this concept of free money and the collapse of globalism (global trade) from the perspective of the gold basis.
It is an interesting theory, although I’ve explained that gold standards are not a permanent solution either.
You can make the GDP number anything you want if you keep giving free money to infrastructure projects
Until, of course, you are no longer able to fund the free money giveaway. This, as you know, Andao, has always been why these kinds of growth miracles never go on forever. Economic policy would be so much easier, I guess, if there were no debt capacity limits.
@Andao
Exactly. Well said. The great rebalancing is on the back burner again.
Michael:
I have been living in China for 5+ years and have become increasingly concerned about the economy here in the last couple of years. You mentioned above that you think a hard landing is unlikely in the short term. What do you think a “hard landing” would look like if it occurred? What do you think about the possibility that the RMB is now overvalued (not undervalued) and that substantial capital flight could ultimately create a financial crisis simular to what happened in Thailand in the 90s? I believe Andy Xie floated this possibility. From my perspective, prices for more and more things seem to be higher in China than in the U.S. If real estate prices start falling to any extent, does that drive out hot money, while at the same time bankrupting developers and banks? Do you see potential for a perfect storm in this regard?
Interesting you see the inflation trap I wrote about in my comments above. The hard landing will coincide with a collapse of global trade and a contraction of globalism. I wrote about this in comments above.
All the currencies are in a competitive devaluation relative to gold, even Japan is to join the fray now that it has entered the terminal velocity of a deficit account.
It will look like a collapse in global demand when the free money capacity limit is reached globally. It will appear to oscillate between pro-growth and pullbacks for decades just like the prior period from 1929 to WW2.
We are in the crackup boom phase of the late 1920s, with most countries already in real inflation adjusted contraction (using non-liar stats) and the developing world racing to its debt capacity limit.
Michael,
Is there a reason why MENA (Middle-East/North Africa) is a lesser destination of illicit capital flow? And what is all this illicit capital purchasing, real estate?
Just a quick note to say that I am really enjoying your book. Your framework for understanding the mechanisms behind trade imbalances is, like the best insights, a real surprise, but then so blindingly obvious that it’s hard to see why it wouldn’t be as basically understood as a supply and demand curve. I’d guess that you’re going to get a lot of reviews that say how well known it all is, while they quietly rework their models behind the scenes.
It also hammers home just how poorly the economics profession as a whole understands both accounting and, perhaps more importantly, the banking system. It’s been sad to watch so many prominent economists sound hopelessly confused after the crisis (Chicago may have to give up a Nobel or two!) and to see the arguments about China’s economy proceed as though there aren’t any tools to really understand what has happened and what can happen in China.
Michael, congratulations on the publication of “The Great Rebalancing”. I look forward to your insights on the World economy and the inevitable adjustments across the globe.
I agree with your comment that the subway lines are not making money due t passenger receipts but due to subsidy, then how do you explain that the MTA of ny/nj is still not making money after 125 years of existence and if I remember congress gave them billions recently to keep them afloat, this is after increasing the fares multiple times over the past few years. Now we are out complaining about Chinese subsidies. Hypocrisy and jealousy if you ask.
@vish
As the guy who brought up subways to begin with, i will admit i agree with you. In fact, i think most of the subway projects in china do make sense over the long term from a social investment standpoint. We know these assets will be used. No subway in the world is profitable sans subsidies except maybe the mtr in hong kong. So while i am a big critic of china’s misallocation of capital, i am not a big critic of subways. Xian is a city of 6 million with choking pollution and deserves a subway.
However, i think the issue to point out is that many of these projects are financed with short term loans that create maturity/liquidity risks. Inappropriate structures that rely on local government support in excess of stated subsidies. I find it interesting is that high level officials are critical of projects that might suck taxpayer money yet would truly be beneficial to local society….meanwhile taxpayer funds are used to sustain stupid projects such as the solar company whose bond default was averted by the local government stepping in.
I wish I knew more about the history of the MTA and how the stations and lines were designed. I don’t get the impression that there’s a lot of public input on where stations are built on Chinese lines, and often times they truly are in the middle of nowhere, even in a city like Shenzhen. The subway in Shenzhen is also significantly slower than taking a bus from most points in town. MTA at least has express lines that speed things up a bit.
Vish, I think the point is that subsidies and any other government incentives to support investments and economic activity are not necessarily healthy economic growth whether it be in China, the U.S. or Europe.
Now we could have the debate that in NY/NJ the government subsidizes roads and the true costs of vehicles are not borne by users (vehicle drivers) so you need to equalize transportation options, but that just clouds the basic argument that government sponsored activity is not necessarily and many times is not productive. And yes, one should also consider carbon emissions of vehicles as a soclal cost.
I would argue a part of the subsidy for public transportation in any country is a subsidy for lower income individuals/families that benefits everyone who uses the system regardless of their income. I am actually empathetic to the value of public transportation, but I think that like many government activities the incremental value is destroyed by inefficiencies that are inherent in government activities. Inefficient workforces and politically-motivated decisions are the main culprits. (As a side note, I think this is where Obama’s enthusiasm for government activity falls flat and is not realistic.)
Professor,appreciate your view on the following warning of pending currency war between US and China,Russia,Iran:
Financial Pearl Harbor’ is a Real Threat Warns a Pentagon Adviser
http://www.eturama.com/videos/financial-pearl-harbor-is-a-real-threat-warns-a-pentagon-adviser-fW3fZzfHEX4
Many commenters over time have made the point that social investments such as health services, elderly care, education and perhaps public transportation will contribute to increasing consumption in the Chinese economy.
If one assumes that these social investments do not directly increase consumption in a healthy and sustainable manner, isn’t possible that these investments could give Chinese more confidence and security in their futures that they will consume more as opposed to save at their current high rates. Let’s call it the “We got your back” theory. I am sure every neo-conservative econ advocate on this board just cringed. For sure this is a monumental and perhaps impossible objective in a developing country with this many people. From what I also know, the Chinese have generally been suspicious of their society and government’s aim to work for the common good.
I believe liberal economists in the West think that the various safety nets including social security have contributed to promoting consumption in their economies. Beyond providing people security, redistribution from higher incomes to lower incomes also contributes to consumption as higher-income earners have a propensity to save/invest. Supply-siders would argue that investment shoud drive consumption, but I do think there are times when promoting consumption makes sense. Now whether the West has gone too far with its healthcare and retirement schemes is altogether another point. The U.S. and Europe will soon be forced to adjust these programs mostly due to the increased costs attributed to greater life expectancy.
I think everyone would agree that social safety nets improve consumption for the reasons you just stated, but I think the contention is whether or not these nets should be provided by the government or by the private sector. It seems kinda obvious that people would spend more when they don’t need to pay for health care directly. Which part about this argument do you think is so contentious?
Andao, actually I am just curious what people think about social investments and their impact on consumption directly or perhaos indirectly. Your comment about health care is a perfect example of how government spending even with the best intent can be inefficient. Here in the U.S. we will be having this debate for many years as Americans come to grips with the fact that we can’t have everything.
Another example is higher education and the American mindset that everyone should be able to attend college. We now have a expensive quiltwork system with loans, grants, subsidized public colleges encouraging younger people that lack the skills and motivation to complete their education or to complete a degree that will not further employment or productivity.
Andao, actually I am just curious what people think about social investments and their impact on consumption indirectly as in described in my previous comment. I tend to agree with you. Your comment about health care is a perfect example of how government spending even with the best intent can be inefficient. Here in the U.S. we will be having this debate for many years as Americans come to grips with the fact that we can’t have everything.
Another example is higher education and the American mindset that everyone should be able to attend college. We now have a expensive quiltwork system with loans, grants, subsidized public colleges encouraging younger people that lack the skills and motivation to complete their education or to complete a degree that will not further employment or productivity.
If social services are increased with free money, then it will shrink the real GDP even while percentage share of consumption may grow, so it doesn’t accomplish the goal.
The only way it will accomplish a useful goal is if it is a transfer from the 200 families that control and steal most of the capital of China. Not likely.
Phil, If you can, you should read latest Prof Book. In it he clearly explains that consumption ,investment and savings are determined mainly by government policies not decision of individuals. Social security and health care programs are social choices that individuals make and pay percentage earnings through out their earning years. So these programs are paid except for some adjustments such as longevity increases or say heart transplants.
There is a big misconception that West slows downs because of these programs. The West slows down because of policies which promote to run their models to extreme either with export deficit or surplus. These extreme positions as Prof states create imbalances which slow economies.
Listened to an interesting Google+ session on China’s air pollution in which it discusses the difficulty in future economic growth based on the energy requirements to fuel that growth – https://www.youtube.com/watch?feature=player_embedded&v=r_kBE9eFRU8 (from about 20 minute mark – on youtube so VPN required for those in China) – would be interested to know if you have studied future growth levels from an energy requirement perspective and what you thoughts are on it Michael.
Phil, I wanted to say if the book is available?
STAN
OK Stan, I plan on ordering it from Amazon.
I bought the Kindle version. Quite good.
This article needs some statistical regression. Given that China is the most populous country in the world, logically this aspects impacts also the number of people studying, the number of people moving abroad etc..etc… sorry to remind some boring statistical realities.
Hi Michael-
I’m in the middle of your book (naturally, it’s fantastic) and I have silly question I was hoping you, or one your more enlightened readers could to clear up:
Starting with the macro identity C + S + T = C + I + G + (X-M), how do you get to
“(S-I) = (X-M)” ? What happened to the “(G-T)” ?
Thanks!
If you assume that government revenues (T) and expenditures (G) are in balance, then T = G and they cancel each other out.
In a sense illicit flows help a bit contain the rise of the Yuan. Crackdown on corruption should help make more illicit flows buffer the rise of the Yuan.
Just bought your new book “The Great Rebalancing” on Amazon and will read it next week !
Peter, I have no idea where did you get the left side of equation C+S+T. As you know GDP
can be defined in terms of product method,income or expenditure. Prof uses the product method to define the GDP. I am not sure if he lumps G(government spending) into consumption(C). Even if he does not you still get the following . GDP=C+I+G+(x-M) and
S=GDP-C so S-I= (x-M) + constant G which still does not alter the logic.
china as a sheer functionary memeber in the whole system, nothing more, we need look at bigger picture.
may we undervalue the yuan, but never unvervalue the patient and tolerant of chinese masses, whose accept the unacceptable, endure the unendurable, until the day they began to starving. until the day the chinese managing elites shall be easy to find ways to continue coverup, blowup bubbles, boost inflation, all these camoflages lead to single purpose: suck the silent majorities to their bones, however, this works, sadly.
Governmental Deception Point, the political correct definition of GDP in china.
If this article is accurate I would say the Chinese leadership are trying to do the right things. Lower inequality through taxes on state enterprises, raising interest rates for savers, etc.
http://www.guardian.co.uk/world/2013/feb/06/china-tax-reforms
How can you tax what is not reported? And even if they succeeded, this is renationalization (centralization), which is does nothing to put the money in the consumer’s pocket. The market interest rates sound like BS, because they will only allowed to float within a range. Heck the Yuan is allowed to float within a tiny range.
I bet this is just news to appears the masses and foreigner investors to keep them blind to the worsening contraction that is being hidden.
Michael:
1st Kindle purchase, your new book, well done, an easy read, you should approach a foundation and have them sponsor the delivery to several thousand of the top political leadership in the world, a must, easy and clear read.
Really goes a bit further than the blog, and more comprehensive, constructed.
In my mind it highlights to points that I come back to in my frame of these matters, which would be this is an issue of success of the matter, and that with so many new participants in the system, it has to evolve where much more cooperation and maturity need to eventuate globally on these matters.
On application of your considerations, so many of the surface level beliefs existent in so many of the niche groupings that hold beliefs on these matters are upside down and backwards; whether Bloomberg Financial or NGO Development or Int Institution to Workers Groups and the many Nationalistic memes that interfere with the advancement of peoples domestically and globally.
Because your considerations are so simple, I suspect they will be heartily included in much work globally. Importantly the stale and narrow empiricist models that prevail in proving life in vacuums, which are eerily accepted superficially by the educated and uneducated publics of the world, will find much new meat for the fire.
I still like books that I can hold in my hand but jumped to the kindle to read this. Am glad I did, but was left wanting for much more.
Hopefully you delve conceptually into some of these areas in greater depth and put it out there.
On another topic, in reading the Geneva report, it seems there is much more for you to delve into, and the report would support the narrow and incremental approaches that seem more politically approachable. But that, implies the worst of your predictions in the title, and frankly I am sure that was an editorial decision, yet, it seems that much greater maturity need eventuate.
@The guy, who believes that China won´t be a high-tech country:
The Chinese innovation market is beginning to develop.
http://lup.lub.lu.se/luur/download?func=downloadFile&recordOId=3158091&fileOId=3158105
Silicon China will be bigger than Silicon Valley.
http://prestowitz.foreignpolicy.com/posts/2013/02/07/silicon_china
@lelouch,
恭喜发财
While both gentlemen are right that there are Chinese innovators who are as best or even better than those from other countries,but without an open society,all these are just wistful thinking.see what a Chinese innovator Dr Morris Chang said about innovations.
2/2「台灣經濟發展新模式」講座-蔡英文與張忠謀主題對話
Morality in equals morality out…
Regarding this in your article;
“These expected, and exciting, “difficulties and challenges” are, I suspect, the things we should be most concerned about in our attempts to understand the pace of reform. The history of developing countries suggests that most countries fail in the reform and adjustment process precisely because the sectors of the economy that have benefitted from the distortions are powerful enough to block any attempt to eliminate those distortions.”
In the history of all developing countries one must first consider where the developing influences come from and the morality inherent within them; and second, who and why, within the countries being developed, allowed, aided, and abetted, the development to take place and the morality of their motives.
More prudent and slower developing China (some would mistakenly say backward), faced with ever growing distortions in the world in the past fifty plus years — excessive consumption by other nations and mismanagement and hoarding of global resources by the western elite aberrant sociopathic few — decided that it must take action in order to compete and survive. The external aberrant sociopathic forces, with their immoral products that were the result of immoral reform and adjustment processes in their own home nation states (read gross corruption of the rule of law in their own home nation states) were more than happy to set up shop in China. They were not only interested in profit through cheap labor but rather also gaining control of the population, through various financial and propaganda pump and dump schemes, to control and herd thin the Chinese population, much as they are presently doing in their own western nation states and other nation states. Think of it as a global forced diet where many of the dieters die off in the process. They have a cute little Orwellian double speak euphemism for it. They call it austerity. China is now included.
These external western developmental forces, schooled in secessionist self serving corporatism and the Noble Lie, were easily able to bypass the more well meaning Chinese leaders who just wanted to keep up with the rest of the world and gain a fair share of the planet’s resources, and instead, they appealed to the more greedy more corrupt leaders. Birds of a feather do flock together.
And so we now see these imported influences blossoming in China. The same disingenuous, deceptive, and intentionally divisive pace of reform, the same reform and adjustment process that creates ever larger distortions in the economy, and that causes more perceptive others in other countries, and now in China, to seek a safe haven elsewhere. Its all relative! Hot money flows are an integral part of the divisive perpetual conflict and break down of the ‘rule of law’ intentionally being created and taking taking place globally. This is not about seeking balance. Economics has been co-opted and is now an energy dissipating smoke screen. This is about the evolution of morality and your perceptive ability to see a ratchet when someone is telling you it is a pendulum…
http://www.boxthefox.com/deceptionology/10aggregategencorruption.html
Deception is the strongest political force on the planet.
Did you just use Mad Libs to write this? LOL.
warren
Lots of adjectives, loaded words, and such….what else, so what?
I think it to be more rather simple and disappointedly complex (to the likes of you) insofar as such an undertaking as the development of nations is fraught with difficulty.
Your, seemingly, Marxian critique, whether consciously, or otherwise, does little more than it had done in decades previously, to raise the, potential, ire of those who would find common cause, either partially or wholesale. So I said complex, the processes. Simple, the responses. It isn’t difficult to see why a China, any developing nation would want to develop. Compare South Korea and North Korea. Factor in post-colonial African states fed on the very same diet, of a dying cohort of thinkers in your vein. The nefarious other, the mid to late 19th century to late 20th century, regurgitations of nationalism. A crisis, and a deepening of such memes spreading unconsciously through some circles. Simple , insofar as it is difficult, that elites transitioning would seek to sure up their spheres of influence and future prosperity.
It is complex, because there need eventuate much higher levels of global cooperation and maturity to ensure a more optimal future for a people, on a planet, where the former is increasing toward exponentially, and the latter, if not shrinking, depleting on a per capita basis. Some might posit, vis a vis the Korea demonstration that the development of any nation under such a case is smart, if one is a long termed dispassionate thinker, realistic and pragmatic. But that is the converse of your perspective begging for equality and equanimity, in anger at the seeming injustices while lost in a neo-Orwellian mid 19th century Victorian Idealistic Romanticism. Rather the leaders, and prime beneficiaries in nations rarely have such delusions, if their underlings sometimes will voice such a mouthpiece; some nutmeg with my mace.
Anyway, you should review some of the tried and true trends coming down the line, then consider the innovation and cooperation needed to limit the influence of a still largely uncontrollable global population where Malawian and Indian women, especially of the lower socio-economic classes, consider it necessary to have 4 or 7 children.
The likes of you will cry afoul if in 2050 Africa has two billion people and extreme poverty, not remembering it had such at 300 million, 650 million (in 1990), 1 billion today, and perhaps 2 to 3 billion in 2100.
So, more substantiated facts, less Casanovan Idealism. All over the place with nothing to show ( in support of the argument) but loaded terminology and baseless assertions.
csteven,
You need to factor in gene drift and EMF (the electronic migration effect)…
http://www.boxthefox.com/deceptionology/6environmentasdna.html
It is the force that will negate and balance the inbred perceptions of the global elite.
Deception is the strongest political force on the planet.
There clearly needs to be an adjustment and most people agree with that. Why has the central government not started this? Short sightedness, short term economic pain and poor incentives. With party incentives towards growth are still in place so this could be a reason.
Could it also be there is a huge conflict between communism and consumerism?
With an investment lead economy, state companies drive economic decisions and can easily be controlled by the central government.
If we see a rise in domestic demand does the central state not have to relinquish power of the overall economy to the consumer as the consumer becomes the main decision makers.
Can there be institutions which allow this decentralized decision making and still allow communism to flourish? Does this decentralized decision making also not require a more educated population or a population which think about their actions more?
Although the move toward a consumer driven economy, it may not be good for the policy makers. As we see in the west, what is good for the majority of the population does not always come to fruition.