The China Decoupling Myth? « naked capitalism

Friday, December 4, 2009

The China Decoupling Myth?

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.

43 Comments:

Trainwreck says:

December 4, 2009 at 4:25 am

Decoupling! LOL China is still hoovering jobs away from us….actually that is kinda funny if you think about it. Get it…vacuum cleaner called a hoover, Hoover president….bleh.

paper mac says:

December 4, 2009 at 4:39 am

“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.”

Yves, please read the Ho Fung Hung article on NLR:
http://www.newleftreview.org/?page=article&view=2809

It specifically addresses this, and shows that China has been pursuing a set of policies that enriches the coastal areas at the expense of wealth and labour from the rural centre and West. This has empowered the coastal elites in the CCP, and built a number of very nice-looking and affluent cities, but has left the majority of the working class in China relatively poor and with little purchasing power.

paper mac says:

December 4, 2009 at 4:46 am

Incidentally, if the people you are speaking to who have spent time in China haven’t been out of the Beijing/Shanghai/Xian/HK/Macau business circuit they probably don’t really know what they’re talking about as far as how the average worker lives, or what the “real economy” looks like for the average person in a second or third tier city. Things look a lot different in Lanzhou or Taiyuan than they do in Shanghai.
- Yves Smith says:
  
  December 4, 2009 at 5:14 am
  
  I have raised that very issue with some of the people giving those reports. I am inevitably told (without anyone being quite so blunt) that I am an idiot who has never been to China (save Hong Kong), that the people in question have Chinese in-laws or very good contacts and of course know the real deal.
  
  Having been the only Westerner hired in the Japanese hierarchy at a top Japanese bank in the 1980s (when they had a lot of gaijin employees, but a “local staff,” a sort of ghetto) and therefore working on the Japanese side of the table, I could see how very different things looked from that vantage than from the normal gaijin perspective. And that was in an advanced economy with very narrow class differences. It isn’t hard for me to imagine how the foreign perspective could be even more edited in China.
- MyLessThanPrimeBeef says:
  
  December 4, 2009 at 1:05 pm
  
  It’s not about the purchasing power of the working poor, but he purchasing power of the People’s Liberartion Army. The concentration of wealth in China has to remind their leadership of Chiang Kai-Shek’s Nationalist China and wary of another Mao revolting from the hinterland.
  
  The Communists have to be careful not to look like wannabee rich Nationalists with close ties to the West.
  
  I think Henri Cartier-Bresson had photos of people in Shanghai pushing wheelbarrows of paper Nationalist money to buy rice just before its fall to the Communists. The central bankers in Beijing would do well to nip any inflation or asset bubble in the bud.
Yves Smith says:

December 4, 2009 at 5:08 am

paper mac,

I should have been more detailed in my throwaway remark, and I may tweak it a tad. If one assumes Ho Fung Hung is correct as far as his data is concerned, but his explanation is not sufficient:

The concomitant to rising peasant income and industrial wages was unprecedented, soaring retail sales, even controlled for inflation (see Figure 9). But no sooner had the government taken its first step toward domestic consumption-driven growth than vested interests in the coastal export sector complained loudly about their worsening prospects. They asked for compensating policies to safeguard their competitiveness, and attempted to sabotage further initiatives to raise the living standards of the working classes, such as the New Labour Contract Law—which would increase workers’ remuneration and make firing them more difficult—and the managed appreciation of the yuan.

First, Roubini remarked before the global financial crisis hit that inflation in China was going to have the effect over time of a RMB revaluation, that prices would increase in nominal terms, so if you have a fixed rate, they increase to your trade partners as well. Wages would have to inflate to at least somewhat keep pace with inflation; you’d seen tremendous pressure from workers if not.

Second, Hu says wages DID rise for a time. So that means for them to have been stagnant, wages must have gone into reverse at some point. Yes, the coast has clout, but that much clout?

This does not really add up. There seem to be some explanatory variables missing here.
- paper mac says:
  
  December 4, 2009 at 5:19 am
  
  Yves,
  
  I could be mistaken but the “stagnant worker wages” comment refers specifically to Figure 5, which shows (relatively) stagnant manufacturing wages as a percentage of the equivalent US manufacturing wage. This does not imply, as far as I can see, that the average wage as a whole was stagnant. I interpret Prof. Hung’s comment to refer to the initial increase in peasant wages as rural agricultural workers shifted to better paid-manufacturing, followed by a stagnant manufacturing wage as a fraction of US manufacturing wage in the post-1980s era (he seems to lack data for manufacturing wages predating this). As far as I can see, this is not inconsistent with the slow revaluation of the yuan eventually causing worker’s wages to go up to track that- if I recall correctly during the worst of our last crisis there were serious problems with food prices in major parts of China, suggesting that wages are still too low to deal with major disruptions in trade, possibly? I can’t see from the data he has presented whether he is including the last year or two- it’s possible there may have been some wage inflation since the last China Statistical Year book has been released.
  - paper mac says:
    
    December 4, 2009 at 6:30 am
    
    This came out pretty mealy mouthed. What I meant to say was that I think the claim Hung is making is rather more restricted than the one you ascribed to him. As I see it he is describing the following phenomena:
    
    1) pre 1980s: No data on manufacturing wages, but less %ge of population involved in manufacturing work, more involved in relatively less lucrative agricultural work
    
    2) 1980s – 2000s: Average wage increases as more of the rural population moves to manufacturing centers. Manufacturing wages relatively stagnant as a percentage of US manufacturing wage, which makes sense given (a) the declining value of the yuan during the early part of this period and its peg during the latter part and (b) the relatively large supply of rural labour, provided in part by policies encouraging the flow of capital and jobs to urban centres
    
    As far as Roubini’s comments go, I don’t think the value of the yuan has appreciated significantly although obviously it will need to in the future. I don’t claim to know anything about price inflation in China but if you accept the premise that the government is engaged in currency manipulation I’m not sure why we would expect to see price inflation as a result of a RMB revaluation, given that the revaluation of the yuan to date has been modest- still around 7 yuan on the dollar.
    - Yves Smith says:
      
      December 4, 2009 at 6:48 am
      
      Paper Mac,
      
      You are completely missing Roubini’s point. Prior to the crisis, China’s inflation was running at twice its target level, in the 6-7% range. From our experience in the 1970s, that’s a level at which it starts to affect behavior, and also compounds at a meaningful rate.
      
      The inflation resulted from China’s inability to fully sterilize its purchases of dollars, which were necessary to keep the RMB from rising.
      
      Roubini’s point was no matter how China played it, its goods were going to become more costly to its trading partners. Either it would revalue, or inflation would raise NOMINAL prices which with a fixed rate currency, translates into REAL increases. That in turn will translate back into higher real wages (in global terms, as in workers presumably will share in the appreciation in goods prices).
    - paper mac says:
      
      December 4, 2009 at 7:11 am
      
      I see what you are saying now (this is what I get for posting with no sleep, sorry). I think this point is partially addressed by the observation that wages dropped as a fraction of GDP over the years preceding the crisis while profits increased (workers may not have been sharing in profits), but I don’t know whether or not the purchasing power of the average Chinese factory worker has been decreasing, which this suggests- I suppose you are right to say that one would expect pressure from workers if this were the case. Certainly we have been seeing a lot of unrest from the working class in China, but I don’t know to what extent this is related to inflation. If you don’t mind I will pose your question to Hung on the discussion I referenced below.
    - OGT says:
      
      December 4, 2009 at 11:10 am
      
      I think sterilization is actually the key here. The price of sterilization disproportionately falls on the household sector, and not at all on the corporate sector, which is given practically free financing. One could argue that the restrictive labor policies are also a part of sterilization.
      
      So even if sterilzation is only partially successful it would still have the effect of slowing wage growth, especially in relation to production. The effect on real wages is interesting to consider, how much compensation is the availability of previously unattainable tradable goods like home appliances? Reverse fordism, make the stuff so cheap even your low paid employees can buy them?
    - john c. halasz says:
      
      December 4, 2009 at 10:24 pm
      
      I already reposted this at the end of another thread, but it’s a simple explanation of why higher inflation with a fixed FX rate amounts to a defacto appreciation:
      
      “Oops! paine, I think you’ve got this backwards. With a fixed exchange rate, higher domestic inflation than RoW is a de facto real appreciation of the domestic currency. Say 1$ = 7RMB = 1 bag of rice. After 2 years, 1$ is still worth a bag of rice, but a bag of rice goes for 9RMB. So one can buy 1$ for 7RMB, buy a bag of rice with it, and still have 2RMB to buy some soy sauce. So the apparent domestic depreciation in the buying-power of the RMB through inflation is de facto an increase in its buying-power expressed in $ terms. Of course, this all is complicated by the fact that the US$ floats against other major currencies, so the RMB might de facto appreciate against the $, while depreciating still against the Euro.
      
      But then what has been remarkable is the extent to which the Chinese authorities have managed to contain their domestic inflation, at least of the CPI sort, through massive sterilization. But then that has resulted in a massive accumulation of $ reserves by PBoC and SAFE, which amounts to a policy of forced savings on households, and only contains inflation at the cost of large future capital losses on those excess reserves. China too is in a pickle, because their hoarding of excess reserves reduces the global demand upon which their development, export-led or not, depends. When they move away from the $ peg depends on how soon the growing costs of the policy outweigh the benefits, and when they actually come to feel/perceive those costs. But maybe it’s something like a paradigm shift. The old policy will be abandoned only when they’ve figured out a new policy to replace it.”
      
      I don’t have any real clue about what the actual Chinese inflation rate currently is, but I’ve been catching glints from the press that it’s high and rising. I’d think that would be worrisome to the CCP, since high inflation was a factor in the popular discontent leading to Tiananmen Square.

Richard Kline says:

December 4, 2009 at 5:21 am

Without a detailed reading of the evidence and statistical analysis, I’m not quite prepared to completely dismiss this study by Ho, but just on the surface there are massive concerns with the credibility of his conclusions.

Start with something basic, the argument that as a percentage Chinese factory workers take home the same share of GDP as they did forty years ago. Of course Chinese GDP has soared over that time, so in fact the spending power of that share is more now than it was.

Then there is this ‘all Chinese factory workers’ as a basis of comparison. What a ludicrous concept. The state still employs literally millions there at dead end, low-productivity Iron Rice Bowl industrial rust buckets. Less now than every but still many. And yes, we can bet that they make pennies on the scale of world wages (though the additional guarantees of support, housing, etc. to the extent to which they are maintained don’t seem to make it into these salary-based comparisons, what?) And too, some of the least value-added export grunt work is surely poorly paid by world standard. Those sources of course drag down average wages and visions of spending power, but that conceals the real point. There are higher value-added portions of the Chinese industrial economy; these amount to millions of jobs, with real impact on spending, especially on a regional basis.

Restricting comparisons in this study to ‘factory wage jobs’ is not a correct basis; so much so that I wonder aloud at the motives of its author. So much of the boost of income _and spending_ in China in the last twenty years has come from the decontrol of prices on agricultural products. Yes, many rural folks are still very poor, not only by world standards but even by Chinese standards. Many are other than poor though, and even those on the bottom have more money than at any time. Hence, more money in motion in China’s domestic economy. This doesn’t seem to make it into the analysis as related.

Construction workers are badly paid as a group. Despite that, the sheer volume of construction work has spread buying power out in to China’s domestic economy, at the small scale, but that is exactly how ‘stimulus’ works, both in the short term and overall. Yes, the state may be intitiating that push, but the aggregate result is a residual boost in domestic demand: those wages get spent, and not just returned as taxes to their source.

One could make the argument of the last two paragraphs writ far larger regarding the FIRE sectors of China’s _urban coastal economy_. Profits from real estate construction and speculation, from equity investment and speculation, and other aspects of higher finance are real as far as the domestic economy is concerned. These are private profits, not just money magiced up by the state or siphoned off by foreign capitalists. Let us just allow that the domestic demand component of this activity is positive. Again, this seems omitted from this study.

Then there is the completely lame comparison of China’s growth trajectory with Korea and Japan. Oh puh-leeeze. Did anyone bother to do a headcount here? The rural subsistence agricultural component of the economy in China is vastly greater, and also larger as a share of the overall economy. _Of course_ the growth path won’t look like that of Korea: it can’t, and no one should expect for a second that it would. The probable growth path for China is EXACTLY WHAT WE ARE NOW SEEING: a developing coast and megalopolitan sector with rising wages, assets, spending power, and hence demand pull with a huge an permanently depressed rural hinterland which drags down aggregate numbers, concealing the real impact of growth.

To me, this study appears to be carefully constructed so as to omit anything which could support either the observation that growth and demand are increasing in China or that decoupling might (or might not) be occurring or incipient. So yes, if one wants to omit most of the potential evidence for the possibility of decoupling by focusing on a skewed set of data least likely to show decoupling, than one might support a ‘conclusion’ that the resultant study shows no decoupling. That’s called seeing what one wants to see, to me.

I’m not going to argue directly that decoupling is presently occuring in China. I don’t feel that I have sufficient information to forcefully support such an observation. Do I think it is happening? Yes. Do I believe that it will be the norm? Yes, and before very long at all, although the country will remain permanently two-tiered (at least two), and that the tier of ‘haves’ will most certainly support the government and its system which has enabled them to become that way. The most that I could say now with certainty, though, is that those who have argued China would crumble in this crisis have cracked their rhetorical teeth on that particular unrealized contention.

paper mac says:

December 4, 2009 at 6:40 am

A bizarre reaction to Hung’s paper. I will just address this point, as you are mostly arguing against claims Hung does not make:

“The most that I could say now with certainty, though, is that those who have argued China would crumble in this crisis have cracked their rhetorical teeth on that particular unrealized contention.”

I really suggest that you read the paper in full, since it is not at all arguing for the likelyhood of a Chinese collapse. Rather, Hung provides evidence of obstacles to the decoupling that you assume (apparently without evidence) is occurring, and suggests which specific policies and political actors have impeded the growth of domestic demand in China at the expense of their export-oriented economy. The need for the rebalancing of the economy in China away from exports and toward domestic growth is relatively uncontroversial.

If you have evidence that Hung is incorrect in his analysis of his figures, I would suggest that you present that evidence to him at the active discussion currently going on at the china study group blog:

http://chinastudygroup.net/2009/11/ho-fung-hung-america’s-head-servant-the-prc’s-dilemma-in-the-global-crisis/

It is interesting to note that Hung’s ultimate prescription for this rebalancing to occur is the breaking of the stranglehold that the Chinese coastal manufacturing elites have over economic and Party policy. This situation is not dissimilar to the one America finds itself in at the moment, and this is not coincidental- the interests of the elites on Wall Street are intimately tied up with those in Shanghai.
- Richard Kline says:
  
  December 4, 2009 at 7:07 am
  
  So paper mac, you misread me, but I didn’t detail all my remarks so that’s easy enough. Something that it is evident that you don’t follow is that this is not a new issue in Yves’ posts nor in comments thereto. I have a long history of a particular point of view on this. It is one of the very few points regarding which Yves and I have any substantive disagreement, though I think this is more one of divergent conclusions than conflicting ones. You don’t have that history to know.
  
  Regarding my closing comment, that isn’t directed at Hung. There was nothing of that in his statements. It has been a frequent contention—here in comments and elsewhere—and is tangentially relevant to the ‘Decoupling yes/no?’ evaluation. The conclusion of decoupling, or better _a_ conclusion, is that China will suffer less from the present economic losses of the financial crisis, and thus be in a better position to make global economic gains coming out of it. By contrast a frequently advanced counter-position is, ‘No they won’t, either; they will fall/are falling on their face big time.’ This needn’t be Hung’s thesis for his conclusions to be readily picked up by those who take that view. [That is not Yves' view either as I understand it, or at least not in all-caps.]
  
  That said, I’m not entirely comfortable, well not comfortable at all, with the ‘selfish coastal elites are hogging all the gains’ position which has just recently popped up in commentary on China’s economy, at least in that specific formulation. Lord, does anyone really follow _why_ development has happened on the coast? There are fundamental logistical and historical issues in play here, not simply the ‘world-striding decisions of a privileged few.’ Not that a privileged few haven’t may inordinate gains, but is isn’t, first and formemost, a factional process: the factions accrue to underlying processes.
  
  Then there is the, ‘China REALLY needes to do X (if they’re smart)’ kind of tenor to quite a few analyses, and this is evident in the conclusions if not the tenor of this study. There are lots of things that one could very relevantly argue that China would benefit from doing. What China ‘needs’ to do is, really, a policy choice of those who make policy. Finger-wagging from those out of the loop strikes me as, well, elitist, and not in a constructive way. Whether China ‘needs’ to either move growth away from the coast or develop domestic demand are eminently debatable propositions. Your relegating those debates to a conclusion you prefer with a sweep of your hand doesn’t settle them or make them less relevant, paper mac. For the record, I personally think it would be desirable to spread growth around—something far more difficult than is granted—and support somewhat stronger domestic demand. These things would, of course, be desirable for Americans hoping to bolster their competivite position against the challenges which an globally engaged Chinese economy presents, something always slighted as a point of disclosure, it seems to me, by those non-Mainland, frequently US based, often US funded, and who knows by what policies influenced commentators who want to shape the discussion on ‘what China should do/is.’
  
  I’m far more interested personally in hearing what mainland Chinese think about this issue and what they’re prepared to push for. These are their issues, their economy, their government, and their future. It creeps me out, I’ll say it, to hear others continue to argue ‘what’s best’ for the Chinese. I want to hear what they see important here—because that is what will decide this issue, not rather to self-interested remarks by those living elsewhere, as I often take them.
  - paper mac says:
    
    December 4, 2009 at 7:26 am
    
    Fair enough, and points well taken. For what it’s worth, I’m not entirely sure I agree with all the implications of the “coastal elites” formulation either and Hung has an interesting comment on that blog discussion:
    
    “one very well known economist in China (generally regarded as on the left) once told me in private that in China there was no genuine left among officials — there are those siding with private capital, and those siding with state capital, so what appears to be left-right dispute is in fact inter-capitalist rivalry — it has some truth in it, as what western media recently characterizes as leftward turn of China under the crisis is in fact referring to the expansion of state capital at the expense of private one under the stimulus.”
    
    I suppose my comments could be taken as an outsider hectoring the Chinese on what they need to do, but part of why I like Hung’s analysis is that it squares well with my experience of the country, particularly parts west of Xi’an, and those that I knew living there, who have frankly seen little benefit from the coastal boom- my views are probably coloured by some of their resentment. Ultimately I would like to see Chinese prosperity benefit the everyone, and I think that goal has been impeded to a large extent by the interests of the capital classes in China and abroad. That said, this would probably mean more overall growth, faster, with all of the additional strain that adds to the environment there and globally.
    - Richard Kline says:
      
      December 4, 2009 at 7:44 am
      
      So paper mac, I agree completely with the contention of Hung’s informant, that there is no real left active among the policy makers in China. We have center right disputing spoils with statist hard right, not that those terms translate well to a Chinese context. In that respect, China is _very much_ engaged in the trajectory of Japan, and just a little less so Korea and Taiwan. Andy genuine social left is excluded from policy influence. Of course the radical left in China so profoundly discredited itself for its role in the Cultural Revolution it won’t get a sniff of power for a decades to come, and I doubt then.
      
      I agree completely that I personally would like to see development and some measure of prosperity come to far inland and ethnically non-Han areas in China. This is not a simple issue, though, at all. It’s by no means clear that policy decisions by ‘the center’ could even effect this on a broad scale even if such was chosen for. Showcase projects, yes, but widespread gains, no. Take a look at France, Italy, and even the UK in the nineteenth century; rural backwaters with little investment and population drain were endemic: these are intrinsic to capitalism. The more China becomes ‘capitalist friendly,’ the more certain it is that the relative poverty of ‘out of the money areas’ will increase even if their absolute prosperity marginally increases.
      
      From my perspective, the most effective way that ‘development’ could be spread in China is just the way it is everywhere else, by redistributive spending by the state. Private capital has no incentive to go to backwaters and manifest logistical incentives from doing so. Spending on education and certain targeted kinds of production in the interior would be great. I think all sections of the Chinese policy making circles understand that more uniform prosperity is highly desirable from the standpoint of social peace. But whether we’ll see more than pro forma gestures toward that end, that is a very live debate in China, and one that the winners and losers will determine, I suspect, not on the basis of the greater good but on the basis of which group are the better political infighters. And from that perspective, the more that policy formulations are pushed by non-Chinese toward one end or the other, the more those are likely to be _discredited_ by association, and thus the harder for the faction within China pushing such goals to succeed. I would ask those looking to shape Chinese policy from the outside to go home and give a long hard mental review toward that possibility.
- Richard Kline says:
  
  December 4, 2009 at 7:27 am
  
  On a further point, paper mac, yes, I should read the paper. Time is limited, and probably I won’t. I will reiterate that in my view an analysis which is restricted to a comparison of factory wages only in two not readily comparable economies strikes me as inadequate (however desireable) by itself to support a conclusion about demand changes in China, and hence inconclusive at best even if accurately done to argue for or against decoupling. Yes, it would be good to know exactly what Hung is talking about in detail. One reason I am reluctant to spare the time is that it is just maddeneing to continue to hear analysts discussing China’s economy first and primarily on the basis of their export industrial sector. I’m not saying that Hung is doing this—haven’t read him through as we’ve established. That said, property development and the shifts in agriculture are consistently underestimated for their role in development and demand, so when I see yet another study focusing on only part of the issue while presenting conclusions and advice about the whole I don’t engage with it with a great deal of confidence in its motives, regardless of its conclusions.
  - Dan Duncan says:
    
    December 4, 2009 at 10:50 am
    
    These debates on China’s internal demand and whether China has decoupled only make sense if you have reliable stats (oxymoron?) at your disposal. On whose stats do either Richard or Paper Mac rely?
    
    Sorry…but it’s hard for me to believe anybody really has reliable data on China’s economy. Hell, just re-read Yves’ underlying post…She’s asking a very legitimate question about decoupling, and she cannot help but to get metaphysical: Does she rely on Professor Hung [How this tenured academic must fare with the co-eds!] or does she rely on testimonials from “people” she knows in China?
    
    Think about that for a moment: There’s an crucial question being asked about this all-important economy from a respected financial author…and she must resort to an appeal… to “people” she knows who live there! And no, it’s not a criticism of Yves, as I don’t think she has many options.
    
    Does one rely on the Chinese gov’t stats? If not, how about Stephen Roach or some other IB economist? Do you really think there’s no vested interest in Morgan Stanley currying favor with China’s government?
    
    Until the data is trusted (or at least there’s some consensus), then the entire debate is quite meaningless.
    
    On NonFarm Payroll Day…when BLS tells us we are right on the cusp of job creation(!), it’s hard to take any of these debates seriously…because we’re all like the Ancient Mariner with chatter, chatter everywhere and not a thought to think.
    - Yves Smith says:
      
      December 4, 2009 at 4:24 pm
      
      Dan,
      
      You beat me to the punch. I was going to say in response to Richard that while I am skeptical of the decoupling thesis, there isn’t any reliable data either way. The reason I am skeptical that I am forced to rely on historical analogy, which is admittedly pretty shaky, but in past really bad financial/trade crises, the big creditor nations suffered worse than the big debtors, who in the end defaulted.
fresno dan says:

December 4, 2009 at 7:10 am

I think you bring up some good counter arguements.

One point i would bring up, while not addressed directly in the article, is the implicit critisism that China is doing nothing for the living standard of the average Chinese.
http://www.huffingtonpost.com/elizabeth-warren/america-without-a-middle_b_377829.html

I don’t know if China is TRYING to keep wages low. I don’t think the US is TRYING to keep wages low. But if it is a world wide phenomenon, I see little utility in debating decoupling. Indeed, I wonder why there seems to be such a desire to say that China’s economic growth over the last few years is due solely to “coupling.” It seems as if there is simply an unwillingness to accept that China may be weathering the GFC better than we.
- Richard Kline says:
  
  December 4, 2009 at 8:11 am
  
  So fresno dan, this is the bone in my throat, too. Far, far too much, the discussion outside of China regarding both China’s internal economic changes and China’s changing place in global economic networks is framed in an entirely ‘West-centric,’ and typically an ‘American-centric perspective.’ And this is just so utterly backwards in actuality. China’s changes have not been export-driven: that’s the icing, not the cake.
  - run75441 says:
    
    December 4, 2009 at 11:18 am
    
    Richard:
    
    One hell of a large Labor Pool in China which keeps things in balance for manufacturing there until such time as it becomes an even smaller incremental need.

Hal R. says:

December 4, 2009 at 6:35 am

The same type of thing still goes on in the U.S. look at the take home pay of a factory worker in New York as opposed to a factory worker in S.C. there is a big deference there.

chindit13 says:

December 4, 2009 at 7:41 am

If expanding bank lending at the rate of 25% of yearly GDP can prevent a collapse, then I suppose China might be out of the woods. I think they have merely bought time, and have created an even larger problem down the road, as a good deal of that new bank lending will never be seen again.

As a resident in Asia for two and a half decades, I have seen a lot of comings and goings, both of economies, and of foreign analysts on one week fact-finding tours. I remember how impressed everyone was visiting Tokyo in 1990, seeing the city ringed by construction cranes, and deciding that the then-nascent collapse of the Nikkei was unjustified. They forgot that supply did not necessarily equate with demand, and that every crane they saw represented a bad debt waiting to happen. Appearances can be deceiving.

I understand all of what China is doing is aimed at biding time until one of two hoped for outcomes occurs: either the US consumer reassumes his position as the world’s buyer of last resort, or China somehow switches from an economy relying on exports (37% of GDP) to being domestic consumer driven. Can either happen? US consumers are still strapped for both cash and credit, while the Chinese demographic is such that 99% of the population earns less than 40K yuan, hardly enough to become superconsumers. Doesn’t look good, though it might appear so to a short term visitor.

China and the US are engaged in a Hopium War, where the US, hampered by debt, is trying to solve its crisis with more debt, and China, hampered with excess capacity, is trying to solve its crisis by building more capacity. The only thing which remains to be seen is who fails first.

MyLessThanPrimeBeef says:

December 4, 2009 at 2:06 pm

Chitdit, that’s a common trait among Homo Not-So-Sapiens Not-So-Sapiens to delay fessing up as long as possible.

The latest example is Dubai World.

Eventually, the irresistable force of math (plus is good, minus is bad) obliterates whatever little character defects we Homo Not-So-Sapiens Not-So-Sapiens have.

Mickey, Akron, Ohio says:

December 4, 2009 at 9:43 am

As is implied in some of the comments above, instead of suggesting that China “must” somehow follow the trajectory of its Asian counterparts or the Western “model” at which some point domestic consumption becomes “desirable” and therefore inevitable, decoupling itself from the export platform model witnessed up to this point, let me posit the follwoing:

What if the assumption of structural homogeneity presumably witnessed in industrialized countries up to this point is false? That “uneven development” and structural heterogeneity are the more likely outcome?

What if the decoupling between first-world urban enclaves/regions in China and the netherworld rural backwaters there is permanent? To the extent that urban areas are able to secure [import] foodstuffs from locations other than the traditional source – the surrounding countryside – could this rupture be managed/secured without a political convulsion? And to the extent that the disparity in living standards between urban and rural Chinese remains “constant”, surplus labor from rural areas will always be available pulled by the lure of the city. But after a generation or two, will the bottomless pit of rural labor even be required? The urbane elites in China have little interest in “democracy” if it portends a tranfer/redistribution of “their” wealth from urban areas to the hinterland. Indeed, anecdotal evidence suggests that these urbane elites have little interest in challenging the authoritarian nature of the regime. Why would they? Steeped in Confucian/Buddhist values that accept poverty/inequality as inherent to existence – bad karma – only when stability is threatened would they consider change. And there’s always the PLA! But as was suggested above, there is no “LEFT” opposition just public/private elites interested in capital accumulation. So, park western notions of democracy and equality – they are not UNIVERSALLY shared values! And increasingly, not even in the WEST. Just ask John Galt!

What if Chinese “development” has more to tell us about our future than our “Western” historical model has to tell us about the path that China must follow? Isn’t such “determinism” intended to assure us that the Chinese are becoming more like us when in fact the WEST may be undergoing a transformation similar to that occurring in China and elsewhere – the emergence of highly developed enclaves surrounded by increasingly marginalized areas/populations in a neo-feudal corporate order that encompasses the globe. One in which ruling CAPITALIST elites are at “home” because the good life can be had in Shanghai, Singapore, Paris, New York, Tokyo, Berlin, Sao Paulo, etc if one has the means to enjoy it.

Meanwhile, when labor market conditions become unfavorable in China, investment will quickly migrate to greener fields elsewhere, maybe even back to Akron or Detroit where the peasantry will only be too happy to work the dayshift. Given enough time, there will be a global minimum wage for all of us – if we’re lucky. But this road to serfdom isn’t the one contemplated by Hayek.

DownSouth says:

December 4, 2009 at 12:27 pm

Mediocre intellects like Hayek and von Mises, who existed in what Reinhold Niebuhr called a “paradise of innocence,” believed it was a simple question of expanding and restoring the private realm. The public realm could be neglected and ignored, and the individual could withdraw into this private, hermetic world.

But in reality what Hayek and von Mises offered was a bait and switch. Modern society had destroyed the private realm, obliterated it beyond recognition. So instead of private property, what von Mises and Hayek proposed in its stead was wealth. But as Hannah Arendt points out, property and wealth are not the same:

[P]roperty, as distinguished from wealth and appropriation, indicates the privately owned share of a common world and therefore is the most elementary political condition for man’s worldliness…

Expropriation, the deprivation for certain groups of their place in the world and their naked exposure to the exigencies of life, created both the original accumulation of wealth and the possibility of transforming this wealth into capital through labor. These together constituted the conditions for the rise of a capitalist economy.
–Hannah Arendt, The Human Condition

What we are seeing now is the logical progression of capitalism, the expropriation of property, the substitution of property with wealth, and the consequences Arendt warned of over 50 years ago:

Just as the family and its property were replaced by class membership and national territory, so mankind now begins to replace nationally bound societies, and the earth replaces the limited state territory. But whatever the future may bring, the process of world alienation, started by expropriation and characterized by an ever-increasing progress in wealth, can only assume even more radical proportions if it is permitted to follow its own inherent law. For men cannot become citizens of the world as they are citizens of their countries, and social men cannot own collectively as family and household men own their private property.
–Hannah Arendt, The Human Condition
- Mickey, Akron, Ohio says:
  
  December 4, 2009 at 2:45 pm
  
  [P]roperty, as distinguished from wealth and appropriation, indicates the privately owned share of a common world and therefore is the most elementary political condition for man’s worldliness…
  
  But then by what right does anyone lay claim to what is common to us all?
  
  Rousseau [The Social Contract] understood where private property was leading way before Hannah Arendt made the distinction between property and wealth. EXPROPRIATION would seem to be the keyword…

Wade Phipps says:

December 4, 2009 at 12:14 pm

Having been to China quite a bit in the last 11 years, one of the things missed by the report is that wages are low in China manufacturing because of gross inefficency. Everywhere you go in China, they over employ for the amount of work that gets done. The last time I went to China, we went to a book store that was about the same size as the one I go to here in Austin. Here there are 3-4 employess in the Austin store, not counting the Starbucks which the Chinese one did not have an equivalent of. The Chinese book store had 21 employess for the same size. I walked around and counted. They either stood in one spot in the store or worked the register. When I went to get parts to fix stuff in the in-laws house, the equivalent to Home Depot had over thirty employees that I could see. The super market had over 25 employees.

When I went with the wife to look at a manufacturer for one of here customers, it looked like my friend’s hobby metal/machine shop where everything that he owns was made prior to 1950. A lot of hand fitting and assembly was going on that wouldn’t happen here. All the machines, except for one was manual with no digital readouts. People were employed to carry things when here there would have been a conveyor belt or overhead crane to move them.

Watched them build freeways and buildings with small cement mixers and wheel barrows in the biggest costal cities. In the country side there are a lot of small factories that do wood working, stone carving and the like. I assume that they don’t make crap as a lot of the houses in the area didn’t have glass in the windows or in some cases doors. Every stitch of land that could grow something was being used to grow food. A lot of the labor in the fields was manual with no way to get machinery anywhere near the fields.

In Shanghai, a GM worker makes about 300-500 /month. An average condo costs 300-400 per sq foot in PuDong area of Shanghai and they go up to 2000/sq ft near the river. Lots of rich people, but a lot more folks who don’t make so much. The worker class has been priced out of the city for the most part. Prices doubled in Shanghai for food over about 3 years. A lot of the reason is that the open air or small markets have been razed to make way for buildings and western style super markets.

My in-laws are rich and seem completely oblivious to the class that is not. The government for the most part is too. Corruption is rife in every part of life. Everyone who is in a position to do so demands kickbacks a lot of which is in the form of gift cards instead of cash. The police station next door fills the side street with private cars. The average cop makes 300-400 per month. A cheap car costs 20k USD and most weren’t low end models. You can guess where the money for the purchase comes from.

Business is slowing for small businesses and factories, but large business and factories are being flooded with government money and loans. My brother in-law builds roads and bridges. He is doing well on the government stimulus, but a lot of others are not getting a piece. Much less traffic this summer in Shanghai then the prior year. Less people on the subway too. Lots of ships high in the water in the river and less of them.

Lots of see through buildings on the edges of the city. New residencial properties are bought roughed in and then interiors are finished after you buy. A lot of units aren’t finished by those who bought them are investments. My in-laws finally started work on their other house (western style with garage and fron/back yards) after is sat unfinished as an investment for five years. It’s value increased 5 fold since purchase. They intend to sell their condo, which increase almost as much.

A lot of unhappy people with much harder lives since the embrace of capitalism makes for a tinder box. Any hicup in grow could bring the whole house down. The imbalances are probably worse than before the communists took over.

craazyman says:

December 4, 2009 at 5:06 pm

Very interesting post Wade. I wonder if a dissolute-and-hopeless-police-state-anarchy or a some sort of neo-communist revolution will be the end game of all this. I’ve never been to China, just Chinatown in New York, so I don’t know, but if I had to bet money it would be on a dissolute police state anarchy. I did date a Chinese lawyer for over half a year and she was an authoritarian psychotic who’d rake me verbally with a bayonet tounge if I had a spot on my pants or dirt on my shoes. Somehow it was taken as a sign of disrespect, not a sign of my endearing otherwordly fixations. Now I’m sort of an intellectual bohemian type and dont’ really care what I wear, but I work out hard and have a good bod, so she would have her fit then let nature take over and she’d forgive my attire, but it got so bad I had to bail out completely and bust town for two months just to escape my own personal Tianamen Square. I hid out in the woods, where I talk to the trees and the clouds. But it was so bad I worried about my physical safety. Now I always see the world in unfolding fractal petals of structural metaphor and the other thing is that she would cry at the slightest provocation and everything in her world was about Money and a dull and plodding endurance of body in the face of some inarticulated and undefined murderous headwind. This is not a daughter of John Locke or Thomas Paine. This is a daugter of the dragon, with a true capacity for transcendence but one so inarticulate and so inchoate that it has no channel for expression. So if I look at China through her aura and her Chinese dna cloud I really worry that there’s a big implosion coming down the pike that the fragile and rigid authoritarianism will not be capable of molding itself too without at least 30 or 40 million dead and that might be an underestimation. Now that could be through prison, poison and exhaustion, or through armed conflict with garden hoes and steak knives, but they will be dead. I don’t need macroeconomic analysis to see this, it is clear from direct Gnostic perception of the higher order of things. This is why they are so obsessed with Dragons. I think of some painter’s St. George and the Dragon when I stood there as a 8 year old kid looking up at it in the National Gallery, all those greens and silvers (I don’t think it was Raphael’s ’cause his dragon is brown as a turd) and that weird twisting dragon with a crouch like a cat and the Knight and a spear through it’s scales and into its heart. What was that all about? I had no idea. But Now I know. DNA, the serpent, the snake, the Manichean multiplier. The fight with self and snake. The dragon is self and it is snake and the fight is to the death or to the life of the higher life. The dragon will bust you down and eat your soul like Doritoes. The dragon projects itself into the mind screen and makes itself known to the knower. I worry that they need a cool jazz revolution or some sort of higher madness than money madness and dragon madness or the money madness will turn itself into a dragon in a Protean morphic resonance and it will be 4 or 5 years, tops before the mind cloud of the place breaks like a falling chandelier. Our mind cloud is breaking here too. It’s not just them. But there’s no St. George or any Saint at all there. There is a hard board upright standing with a fist, and no water or wine. It would worry me, alot, to be reincarnated into that. What could you do, except be a martyr or a murderer? That’s a very frightening thought. They need a new morphic field to tune into for salvation they need songs and words and to let loose a bit. God help them. I don’t think Confucious can, Maybe Li Po but he’s dead and I think even he’d have a hard time with that dragon. But to tell you honestly, I sort of liked that Chinese lawyer because I could see her spirit like a flower budding into something it couldn’t understand. It must be, like dying, I would think, to finally bloom. It’s hard and scary, I guess, to loose your bearings. Usually it’s bloody.
- Mickey in Akron,Ohio says:
  
  December 4, 2009 at 7:48 pm
  
  Craazy,
  
  [t]o lose your bearings… is merely the first step to finding your way.
  
  The dragon, the bear, the eagle – all move to the rhythm of the Tao. To forget this is to invoke the mandate of heaven…

MyLessThanPrimeBeef says:

December 4, 2009 at 2:34 pm

Wade Phipps, your name reminds of that legendary law firm in Sligo, Ireland, Argue and Phibbs.

Perhaps one day, they will add a third partner, a Chinese husband and wife pair, to augment their business in Asia, Mr. and Mrs. Lai, Esq.

Imagine – Argue, Phibbs and the Lais.

In any case, here is my question to you.

The unhappy people you see outside of the affluent coastal pockets, are they also ethnic minorities? I am thinking the Uighurs who rioted in Urumachi. And poor minorities like the Miao people of Kwangxi, the Tibetans in Sichuan and Qinghai, the Sunni Hui in Ningxia, the Dai and Naxi peoples of Yunan, Mongols in Mongolia, maybe even millions of Koreans in Manchuria, and other races. Not only are they poorer and also not Han Chinese/different religion. I guess that’s unhappiness to the second power.

paper mac says:

December 4, 2009 at 3:26 pm

The Han make up 90+% of the population, so you can imagine that there are many, many impoverished, disenfranchised, and unhappy Han in China, even on the coasts. As you note, the ethnic minorities have a double whammy, although perhaps none so much as the Uyghurs. The rioting in Urumqi and Kashgar you refer to was mostly what are referred to as “min kao min” Uyghurs, which refers to those raised/schooled in the Uyghur language (a Turkic language with no relation to mandarin Chinese). The “min kao han” Uyghurs, those who have been educated in Chinese schools, are much more culturally Chinese, obviously speak the language and are thus more able to find employment, and are able to obtain the all-important guan xi (connections) within the system. The Han government are beginning to see the education and integration of the Uyghur minority (actually a majority within Xinjiang, their homeland- the Han there have mostly been settled within the last 30 years or so) as a priority in order to further their goal of a harmonious society. Of course, this will come at the expense of the loss of Uyghur culture, but at present I see no alternative, save a large diaspora (which is probably impossible given that most of the Uyghurs can’t get passports- in part due to a lack of guanxi!)

The Hui are an interesting point of comparison, as they speak mandarin and, from my observation, have been much better integrated into the Chinese society and economy than the Uyghurs, despite having a much less relaxed approach to Islam than the Uyghurs. Language is, I believe, a big part of this.

molecule says:

December 4, 2009 at 2:35 pm

“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.”

My Chinese wife was a lecturer at Wuhan University in the heartland province of Hubei for sevaral years. She quit this spring but still misses that job. Base salaries are not very high ( 4-5000 yuan/month about $650. There is also a sizable housing subsidy(even those who own one or more apartments already qualify) and other minor monetary compensation based on hours worked. Private teaching and tutoring can add another $400/month.

Most old guard teachers own government provided apartments ditributed in the past by the university. Many also own other real estate which they sometimes rent. They have no mortgages, no real estate taxes, no home insurance costs, perhaps minor HOA costs for the newer gated communities($10/month). Also, they have almost no heating costs. If yo’ve ever been to China you know that the heat is never on in the winter. Two years ago I was the guest of a $ multi millionaire, in the winter. It was brutal. They wear their heavy coats indoors when eating dinner.

It’s then fair to say that their housing expenses are almost zero. A side note here, most of those who own real estate own free and clear, though they might have borrowed from relatives to buy initally(not from banks). This pattern might have changed more recently.

University teachers have guaranteed jobs, free health insurance(this is now becoming only 80% covered), decent relative salaries and no fixed costs. Food is their only non-discretionary expense. Most cook at home so there is a lot of cash left over for savings every month. Unlike the US, there is still a significant prestige attached to the job. All in all, they are doing well.

apachecadillac says:

December 4, 2009 at 4:22 pm

This thread illustrates the old maxim that people tend to see what they are looking for, or as the behavioral psychologists put it more formally, the existence of a confirmation bias.

Kudos to Yves for observing in the initial post that something is amiss is the existing formulaic understanding of the situation. The two disconcordant factoids I am personally trying to get my head around this week are:

reported 7.8% growth in the Indian economy despite a bad monsoon (as in, huh? how did that happen?)–admittedly not relevant to this thread; and

(relevant to this thread), a claim in an interview by Andy Xie to the effect that a double dip recession in the United States would be quietly welcomed by Chinese authorities for its cooling effect on the overheating Chinese economy.

mxq says:

December 5, 2009 at 6:46 pm

here is an article at shanghai expat that rails on the statistical nonsense put out by the cpc with respect to wages (fyi…i saw this on a comment thread via econ. view) Whatever hard statistics are available are deeply flawed, as you can see from the comments in the shanghai expat bit.

furthermore, try looking at MNC’s that operate in industries that aren’t/can’t be heavily subsidized in order to get a better view of the real health of the chinese consumer. for example, look at YUM! brands recent 2010 update (no position) – they have 2400 restaurants in over 500 cities in china — they said to expect “Fourth quarter estimated same-store-sales performance of -3% in mainland China” — while not stated in the forecast, this is the fifth quarter in a row of decelerating comps. Furthermore, McDonad’s announced in November that “4.7% increase in Asia/Pacific, Middle East and Africa’s October comparable sales was fueled by Japan and Australia, partly offset by China” — albeit they only have 1000 or so locations…it’s still enough to realize how poor the non-subsidized, consumer behavior has become since the 1H08 slowdown.

mxq says:

December 5, 2009 at 6:47 pm

(sorry…also no position in mcd)

Steve Diamond says:

December 6, 2009 at 2:51 am

What no one on this either understands or is willing to admit is that the “coastal elite hogging the gains” story is told by neo-maoists in China and abroad who want to argue that some how there is a fundamental divide in the CCP between what is left of the maoist “socialist” revolution and the new capitalist class.

In my view, this is an illusion. Yes, there are factions in the party that might take the form of maoist v. capitalist rhetorically. But the development of China under the CCP has been one of capital accumulation at the expense of Chinese workers and peasants since 1949. The regime has lurched from one economic policy to another in pursuit of capital accumulation.

One test of the neo-maoist position is to ask them if they support genuine unions in China. Free trade unions would unleash precisely the wage push rebalancing everyone supposedly agrees is necessary. But they would also threaten the political power of the CCP itself and therefore are off limits for neo-maoists and the “capitalist roaders” too.

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