One of the motherhood and apple pie items in econ-land is that the world needs global rebalancing, which is code for China has to stop being a mercantilist and currency manipulator, and the US has to quit borrowing a ton and overconsuming (or underproducing, which is another way to frame the same problem). But once everyone agrees that that’s a swell idea, no one seems particularly inclined to do anything about it, except complain about the consequences.One of the things that has led to somewhat less attention to this elephant in the room is the perception that China has “decoupled.” If it has managed to fare reasonably well in this global upheaval, then surely it is becoming more self sufficient and therefore less dependent on US demand, so the situation is already righting itself, correct?
Wrong, says Dror Poleg (hat tip reader Michael). He argues that many of the beliefs about China’s economy are off base:
Back in the middle of 2008, many publications, most prominently The Economist magazine, suggested that a downturn in developed countries might not have any significant effect on developing economies, since the latter have already “decoupled” …
Within a few months, the “decoupling” theory proved to be false: The downturn in the developed world had a significant impact on China’s economic well-being, causing a dramatic rise in unemployment and a sharp slowdown in economic growth…
And so, in the second half of 2009, China’s (and America’s) stock exchange(s) started to go up again, and the decline in economic growth was reversed, albeit not yet reaching the levels of 2007-2008. And together with traces of growth, again came the “decoupling” theory: The Economist attributed China’s relative success in averting a major crisis to its ‘strong domestic markets’ and implied that it was due to China’s economy shifting ‘further from state-sponsored investment to private consumption’.
As I noted back then, the assumptions made by The Economist and other leading publications concerning China’s growth are false. A new study published by Professor Hung Ho-feng at the New Left Review (of all places!) provides some interesting information that helps put things in perspective. The article compares China’s development path to that of other Asian economies, including Japan, Korea, Taiwan, Singapore, and Hong Kong. It provides a concise summary of political and economic events in East-Asia since World War II as well as some colorful predictions and recommendations, but for the purpose of this post, I will only mention some of Prof. Hung’s key observations:
1. Private consumption as a share of China’s GDP has been going down consistently since the early 1960s, including a dramatic drop following China’s “Reform and Opening Up” policy at the end of the 1970s.
2. The average wage of a Chinese manufacturing worker in comparison to his American counterpart remained constant over the past 30 years, hovering around 2%. This means that despite the massive increase in Chinese exports to the US, a Chinese factory worker still earns a 50th of his American counterpart, just like in 1980. In comparison, the average wage of Japanese manufacturing workers in comparison to their American counterparts went from 7% in 1950 to nearly 60% in 1980. Korean manufacturing workers enjoyed a similar relative increase in their buying power between 1975 and 2000, as did their counterparts in Taiwan.
Yves here. I don’t have the foggiest idea of how to reconcile this factoid with what I hear from people who have spent time in China, namely, the affluence of the coastal cities, and how, for instance, university faculty enjoy a much better lifestyle than their US counterparts. Of course, the people I know probably do not spend much time with factory workers,but still…. Hung Ho-Feng offers an explanation, which relies on the power of the rising coastal elites, but I don’t find it sufficient (as in more has to be at work for his theory to be valid). Back to the article:
3. Over the last 30 years, China saw a 40 fold increase in private consumption. In the same time, however, there was also a 180 fold increase in fixed-asset investment.
So, in the real world, China’s economy is becoming increasingly dependent on investment in fixed-assets (by government, or via government-induced loans), and depends less, not more, on local consumption. China’s development trend and growth in real manufacturing income is very different from that of other “Asian Tigers” and seems to offer a very limited benefit to those working at the lowest paying jobs – which means they are not going to become the world’s new consumers any time soon.
It looks like the only decoupling we have been experiencing over the past 12 months is a decoupling from reality – a growing gap between what we read in the papers and what really happens in the global economy. There is a lot of growth in China, and while some people are making more money, there are even more people who don’t, and a few people who make more than everyone else combined. And while there is an increase in retail spending, local consumption is not likely to become China’s main growth engine any time soon.