One of the striking features of China’s continuing growth as an economic power is its extreme (as in unprecedented in the modern era) dependence on exports and investments as drivers of growth. Even more troubling is that as expansion continues, consumption keeps falling as a percentage of GDP.
As countries become more affluent, consumption tends to rise in relationship to GDP. And the ample evidence of colossally unproductive infrastructure projects in China (grossly underoccupied malls, office and residential buildings, even cities) raises further doubts about the sustainability of the Chinese economic model.
The post crisis loan growth in China, in tandem with visible signs that a meaningful proportion of it has little future economic value, has stoked worries that Chinese banks will soon be struggling with non-performing loans. China bulls scoff at this view, contending that China’s 2002-2004 episode of non-performing loans was cleaned up with little fuss (I never bought that story and recall how Ernst and Young was basically bullied by the Chinese government into withdrawing a 2006 report that NPLs at Chinese banks were a stunning 46% of total assets of its four largest banks. Note estimates of the NPLs as a percent of total loans from that crisis vary widely, even excluding Ernst, from 20% to 40%).
The latest post by Michael Pettis links the two phenomena, the fall in Chinese consumption and the cleanup of its last banking crisis. If his analysis is correct, this bodes ill for any correction in global imbalances. China needs to increase its consumption in relationship to GDP to rebalance its economy, but a banking system bailout along the lines of the last one will push them in exactly the opposite direction.
From Pettis:
Throughout modern history, and in nearly every economic system, whether we are talking about China, the US, France, Brazil or any other country, there has really only been one meaningful way to resolve banking crises…The household sector…always pays to clean up the banks.
There are many ways to make them pay… If the regulators are given a longer amount of time during which to clean up the banks, they can use other, less obvious and so less politically unpopular, ways to do the same thing, for example by managing interest rates. In the US and Europe it is fairly standard for the central bank to engineer a steep yield curve by forcing down short-term rates. Since banks borrow short from their depositors and lend long to their customers, the banks are effectively guaranteed a spread, at the expense of course of depositors. Over many years, the depositors end up recapitalizing the banks, usually without realizing it.
Yves here. We commented here from time to time that Greenspan did precisely that in the wake of the savings and loan crisis, and that the Fed appeared to be resorting to this playbook in the immediate aftermath of the crisis, when the yield curve was again particularly steep. Back to Pettis:
There are two additional ways used in countries, like China, with highly controlled financial systems. One is to mandate a wide spread between the lending and deposit rates. In China that spread has been an extremely high 3.0-3.5 percentage points. The other, and more effective, way is to force down the lending and deposit rates sharply in order to minimize the loan burden and to spur investment. This is exactly what China did in the past decade…..
By most standards, even ignoring the borrower’s credit risk, the lending rate in China during the past decade is likely to have been anywhere from 4 to 6 percentage points too low. Over five or ten years, or more, this is an awful lot of debt forgiveness…
The combination of implicit debt forgiveness and the wide spread between the lending and deposit rate has been a very large transfer of wealth from household depositors to banks and borrowers. This transfer is, effectively, a large hidden tax on household income, and it is this transfer that cleaned up the last banking mess.
It is not at all surprising, then, that over the past decade growth in China’s gross domestic product, powered by very cheap lending rates, has substantially exceeded the growth in household income, which was held back by this large hidden tax. It is also not at all surprising that household consumption has declined over the decade as a share of gross national product from a very low 45 percent at the beginning of the decade to an astonishingly low 36 percent last year.
This is how China’s last banking crisis was resolved. It did not result in a collapse in the banking system, but it nonetheless came with a heavy cost. The banking crisis in China resulted in a collapse (and there is no other word for it) in household consumption as a share of the economy.
This is an extremely important observation, and one I fear will not get the attention it deserves. And the implication is obvious: as long as China keeps on using increasingly unproductive debt to fuel growth (it now takes $7 of debt to produce $1 of GDP growth in China, versus $4 to $5 in the mature US), its need to work of growing amounts of bad debt on the sly at the expense of consumption will keep it at loggerheads with its trade partners.
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I keep looking a the data you provide along with the narrative about China and have different thoughts and questions.
I remember average consumption of non-US countries being something like 35% (no source). Why then is it “astonishing” to have a consumption level at 39%? Given the lack of faith in any China statistics and their applicability with any consistency across such a large population and combine that with how the definition of consumption percentages relates to social health and this all gets into wu wu land.
I look at what you provided and think, good for the Chinese for rejecting Western commercialism and while it is too bad about all those folks that invested in trying to do this to China, the Chinese people will need to make less adjustment going forward than Americans. They don’t have as far to fall.
Tell me how Americans are going to adjust to multi-national corporation wages and how soon that reality is going to really hit home? I think we need to clean up our ethically and physically bankrupt economy before we cast too many stones at those of other countries.
China has gone from consumption in excess of 50% of GDP in 1990 to about 30% now, per a chart I have locally based on OECD data from a presentation at the AEA conference earlier this month.
The 35% figure you cite I am pretty certain is not correct, but a quick Google search does not turn up any good data or comparisons.
And Keynes pointed generally to underconsumption being a problem inherent to capitalism.
And Keynes pointed generally to underconsumption being a problem inherent to capitalism. Yves Smith
The fractional reserve lending model is to steal purchasing power from the population and invest it for their own good (supposedly).
No wonder then that there is over-investment/underconsumption.
When we learn to do money ethically then the boom-bust cycle should go away.
Kline,
Unfortunately, China has imitated the mistaken development model of the West with the party members as state capitalists. To think they thought that they could develop all this commercial and residential real estate without any reasonable expectation that there was a broad enough middle class of people earning enough to buy these apartments and shop at these retail outlets is surprising. A fair guess of their motivation might be that the “right ” people were getting wealthy building and funding these private projects. At least the Chinese are investing in infrastructure.
Look at the crumbling remains of infrastructure built before the south east asian crisis of 1997. You tube has videos, iirc hugh henrdy made one too of him on a boat travling down a river admiring all the crumbling buildings.
@F.Beard
There is no such thig like fractional reserve system….
It simply does not exists. It’s creature of myth, just like a unicorn…
http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/
Yep, I know. It is actually “fictional” reserve lending. But “new debt in exchange for new temporary money (credit) plus non-existent interest” is quite a mouthful.
And Keynes pointed generally to underconsumption being a problem inherent to capitalism.
And with the benefit of 20/20 hindsight, he should have pointed specifically toward the inherent problem of capitalism to demand overconsumption.
Regarding Pettis’s argument, I also have serious reservations about his conclusions. I don’t have all of his information in front of me, but that said some of the basic premises advanced here don’ seem well grounded. He’s saying in essence, ‘Chinese deposit rates are seriously suppressed so that most Chinese depositers can’t withdraw a profit on them and consume it; ergo, they are underconsuming relative to their incomes.’ That’s how I read his words anyway.
. . . Really? The principle, and far more impactful, reason that Chinese consumption is lower than most developing and developed nations is that the Chinese _save an exceptionally high proportion of their incomes_. There is little in the way of a socical safety net. Many earners have aging parents with no savings to speak of. If earners get a decent job, many of them, it may be transient so they save a lot. If times take a downturn, and they either lose that job or are uncertain of its tenure, they save even more because the opportunity may be or has been lost. They can do all this because they are starting from very low levels of consumption _and_ very low levels of personal debt relative to other societies (speaking of the bulk of the Chinese population). All of what I just wrote is well-documented and not particularly controversial; all of it has to be taken into account in any reasoning regarding debt and consumption of the domestic population there. Indebted, consumption-addicted Rich Country People ‘just can’t’ save like that because they have high, locked-in debt levels. So the real driver of Chinese consumption levels isn’t whether or not they make 1% or 3.5% real return on their deposits. In fact, if they did have a higher return, they would very likely just leave it in the bank rather than consume it: that’s why they have large deposits to begin with.
From this perspective, the direct and meaningful linkage between lower consumption and inadequate deposit return which Pettis posits strikes me as unproven at best, and frankly as unfounded at worst, certainly as unlikely. Now, suppressed deposit rates do appear to be in effect in China, I’m not arguing against the potential for a problem there. A more substantive problem—because actually documented and discussed intermittantly for years—of suppressed return rates on deposits is that it puts pressure on Chinese small and medium depositers to take some of their money and speculate as they only way to get meaningful returns, particularly when inflation turns up. This was suggested as a driver for the Chinese equity bubble which spiked just as the world financial crises took hold, the only really demonstrable bubble we have had in China over this term so far I might add. This withdraw-and-‘invest’ component was a feature not a bug of public policy there, or that is how I’ve heard it discussed, because private _underinvestment_ was perceived of as more of a problem than underconsumption. And it is a reasonable supposition (though again one not documented solidly) that inadequate deposit return rates have been a powerful driver of speculative Chinese real estate price run-ups, most likely of the present real estate run-up though hot money is. The final conclusion _there_ might be that a putative Chinese underconsumption is in part caused by a diversion of income to speculation which are partially forced through public policy. Blaming that all on low deposit rates does not strike me as an efficient analysis, since to begin with it’s a _policy_ problem not an instrumental one.
Pettis’s points that Chinese banks have had, likely do have, and likely will continue to have truly excessive rates of non-performing loans are surely relevant to understanding China’s growth rates and prospects. But I don’t think the line of argument pursued here is terribly productive. And we shouldn’t be surprised at those NPL rates nor compare them directly to such rates in, say, the EU since: 1) many of those banks are state owned, 2) all of them are closely state-controlled, and 3) their lending volumes if not necessarily their loan targets are a matter of state policy there; something no one doubts and that Pettis points out here as well. China can simply recapitalize the banks if it chooses. But the _behavior_ of the banks is not in the first instance directly comparable to ‘historical examples’ because we have very few instances of a public-‘private’ synthesis in a financial system of the scale we are presently seeing in China. That is not a defense on my part of Chinese policy; gross mistakes can be made, and all but surely have been made. But it needs to be acknowledged that analyzing the dynamics of China’s bank development process has to be considered on its own terms.
Which brings me round to a point of agreement with you here, psychohistorian. Chinese economic statistics are widely understood to be ‘managed.’ Yves has stayed on top of this relevant problem for years now. Given that, I question the validity of sweeping comparisons leveraged on a very few, statistically defined parameters such as Pettis makes here, regardless of his goals where those econometric conclusions are founded on highly questionable Chinese data. Wu-wu indeed. We don’t really know their growth rates. We don’t really know their employment rates. We don’t really know their income rates. We don’t really know their return on investment. We definetly don’t know their loss rates. All of those vary drastically across sectors of society and parts of the country, and we have no good way of breaking that out, regionally, sectorally, or demographically. So a conclusion based on aggregate numbers from weakly grounded statistics of these things just doesn’t proceed on good ground. What we need are more facts. Empty cities in Inner Mongolia: somebody is going to take a heavy financial loss on those. Surging property prices in Shanghai; we don’t know whether those will finish in the red or the black yet. Putative wage increases in much of China: how real, and what of that is going into consumption, into savings, and into speculation? Facts. Before we start trying to have answers.
And as a final point, ‘underconsumption’ is a highly problematic consideration. I personally hope that Chinese do not remotely rise to the bloated and destructive levels of consumption in most (over)developed economies. The proposition that they ‘should’ to make economic models predicated on gross and unsustainable overconsumption elsewhere ‘balance’ is not one I endorse; rather that is a proposition I strongly question. The authorities in China have been explicit over the last twenty years that they do not seek, nor in any way believe that they can or should attain, the levels of personal consumtion seen in other developed economies. Their motives are not necessarily benevolent in that regard, in the same way that the one-child policy was both grossly totalitarian and a pragmatic intervention. If by ‘consuming more’ we might mean, for example, that China needs some kind of health care system, I heartily agree—except that it would surely be run by the government there, and not be calculatable directly as personal consumption, so the ‘consume more’ modality doesn’t truely apply. Whatever one thinks of China’s development strategy, and the imbalances imputed and real which result, the idea that China ‘should consume more so everybody benefits’ is not the starting point for any proposition I would endorse.
Richard Kline,
Suppose that instead of households “saving”, what savings accrues to China is mostly in the form of foreign currency reserves. This is an arrangement between our central bank and theirs and the population of China neither has access to the dollar reserves nor a venue to spend them. If workers were saving a lot they would be able to purchase the reams of residential units that sit empty, instead owned as “investments” by those connected to the Party who do have some access to the nations external income.
With regard to quality of statistics and comparative definitions of consumption, I completely agree. However in the context of the argument Pettis is making, at least as I understand it, the declining share of consumption within overall demand in the Chinese economy does pretty well suggest any continued growth in China is driven by printing presses in Beijing. And while I don’t like the formulation that “inflation is always and everywhere a monetary phenomenon” because money is a meaningless idea without the trade in goods and services it supports, what is the point of a national economy if not to make the people of the nation better off? And how is that happening if people are not making more money and spending it to improve their lot?
In the same way that our economy has deprived citizens of growing income in favor of corporate profitability since out governing elite set up its economic condominium with China’s elite, China’s economy has deprived its citizens of growing income in favor of the Party.
By the end of the Cold War the US had made itself in many ways as a capitalist mirror of its expiring Soviet competitor. That structure was at the time bolstered by a capitalist recognition that it had to advance the standards of living of its people to win against Soviet Communism. Now, ironically, the main distinction between US capitalism and Chinese capunism is “civil rights”, which we have to the degree we individually can afford to litigate them and “economic rights” which they have to the degree that the Party is afraid of the people. With one in 7 Americans getting their food with food stamps, our system has thus far papered over its unfairness with no fear of the population while theirs runs around like a chicken with its head cut off trying to figure out how to keep people to busy to think about the Party. We have corporatism with a smiley face, they have it with a frowny face.
It is ironic, and I find it a little frightening, that everyone can agree that more mouths to feed and a better quality of life, here or in China are pure cost. Life is for the living, if peoples relationship to money makes lives look expensive, what is the answer? I submit it is to change how we value money relative to lives. But of course in America, any suggestion of compassion for a fellow human expressed outside of a church is communism!
It is ironic, and I find it a little frightening, that everyone can agree that more mouths to feed and a better quality of life, here or in China are pure cost.
Two separate issues. Better quality of life is an issue that certainly the US either can’t or won’t address over the long term – even for its own citizens – and it remains to be seen whether the Chinese will be able or willing to either. As to the issue of the number of mouths to feed, certainly the Chinese have long since taken that issue to heart and at least dealt with it in a pragmatic, if possibly objectionable, manner; while the US, with it’s exceptionalist and misguided belief in “free markets” and the magic of technology, most certainly has not.
One thing’s for certain, the number of mouths to feed will be an increasingly important issue in the decades to come, as US levels of opulence are aspired to, expected, and indeed, demanded of developing economies in order to support the dictates of first world exponential growth expecting financiers, even as all of that flies into the face of the dawning age of resource scarcity.
Not hard to figure out how all of this is going to end, but rest assured, those who are profiting most handsomely from the current system will be the last to admit defeat.
“The principle, and far more impactful, reason that Chinese consumption is lower than most developing and developed nations is that the Chinese _save an exceptionally high proportion of their incomes_. ”
You are incorrectly designating the symptoms of Chinese underconsumption as the causes of that same phenomenon. Chinese save income become the investment environment for them is unsophisticated: Chinese save income and invest in “safe” commodities like gold, silver, and jade, all of which have skyrocketed in price, not to mention, real-estate:
http://chovanec.wordpress.com/2010/09/21/the-rising-price-of-jade/
Furthermore, Chinese underconsumption is a recent phenomenon. Its decline almost perfectly mirrors the ebbs and flows of China’s financial system since the early 1990s. Historically, Chinese consumption makes up anywhere from 50%-60% of GDP: not that much less than the US (roughly 70%). However, once the economic restructuring in the 1990s gave the state most of the economic power, the major stories in China’s economy have been:
1) over-investment to drive growth
2) cheap exports
3) inflation, which has crippled consumers
Investment drives 2/3rds of GDP growth, since it is the “easiest” way to return superficial, high growth rates. But it squeezes out consumption by means of the excess liquidity it dumps on the market, the subsidies it gives to industry (which obviously have to be repaid at some point, always by households), and the bank bailouts it necessitates (make no mistake: the 2001 Chinese banking crisis was more serious for China that the 2008 was for the US, since it cost the nation at the time more than half of its GDP…imagine a $7.5 trillion bailout in the US).
Pettis is not always right, but he has proven himself to be the most rational, sophisticated, and innovative China commentator in the world. His blog is essential reading, not only for his astute forecasting (his next prediction: Chinese growth slows to about 3-5% on average), but for how thoroughly he obliterates every myth about China, from the “power” of its forex stash, to its allegedly quick ability to “rebalance” toward consumption, to the idea that all 30 years of its post-Deng growth were painless.
So Alex, a few points of concurrence and far more far critical with your remarks.
Your point that the Chinese investment environment is unsophisticated is certainly valid (I would say immature instead), especially for the bulk of small earners who are liable to have most of their savings in bank deposits. The run-ups in jade and gold are symptomatic of this I would agree. Given a chance to diversify their savings into opportunities for higher return, I’m sure that the Chinese would do so—because they already do so. A clear driver of land price surges is exactly this desire, to get money into a solid asset that is going to appreciate. This is perhaps even more true of agricultural land because that is where the economic liberalization began and where many in smaller towns and the countryside can see profitable change happening _and available to them_. And this has driven small-scale equity buying in the past, though given how often equity buyers have been burned I suspect that many Chinese non-professional investors are staying back from that; and buying, say, gold.
You misread me if you think I describe Chinese saving as ‘causal’ of low consumption (although I’ll grant I’m writing at a brevity here that leaves points other than clear). You contention that high savings are symptoms of lack of investment opportunity though, Alex, don’t strike me as engaging with the behaviors involved. There have been interviews and studies and anecdotal data regarding ‘why do you folks save so much?’ done directly with the Chinese; these have been variously reported in the media. And the answert _they give_ isn’t “nuthin’ else safe” but the reasons I listed: family care needs, old age, job uncertainty, and the like. The ’cause’ of their behavior is a social position and strategy NOT a financial/economic constraint per se: they save on purpose, not because they are compelled by default to do so. This is what I see going over what is reported. Chinese are _quite_ willing to consume conspicuously IF they are sure of their income and assets. They try their damndest to find some way to make profitable investments too; they’re not dumb. But they save on purpose, for social reasons, and these have to be included in analyses discussing their savings and investment behavior; that is my point.
Second point Alex, your usage as a basis of comparison of Chinese GDP data pre-1990 is, frankly, bizarre. Chinese domestic production before liberalization was _ENORMOUSLY SUPPRESSED_ relative to the population, and does not represent a number you can compare to a functioning capitalist economy. They had a trivial consumer sector. Agriculture was woefully underproductive. There was little money, and that closely controlled. No markets period to say nothing of no liquid markets, and so little in the way of marketable or serviceable assets not owned by the state. Their industrial production ws state mandated. They were a desperately poor society, so _of course_ ‘consumption’ was going to be high relative to production: hundreds of millions produced nothing but what they ate, and not enough of that. What I am saying here, Alex, is that the GDP number for China pre-liberalization is wildly and structurally distorted. It is not a number that can be handled without weighting it in some way for that substantive reality. —And it is exactly for reason of this kind of functionally naive usage of aggregate statistical numbers and rates that I took issue with Pettis’ remarks, and so that I dissent from yours.
China has an enormous population, with hugely distorted demand and production relationships relative to comparable cases. Their consumption rates in the 1980s, their growth rates in the 2000s, and I suspect their valuation rises in the 2010s all need to be discussed from the understanding that the underlying economic context has been hugely skewed for interpretation by underproduction. I don’t really see any regularly commenting anlayst on China in the West making such adjustments in their remarks, with the partial exception of Michael Hudson. I don’t see Pettis making this adjustment. I don’t see you making this adjustment, Alex, so it is difficult to take your conclusions on merit. Yes, bubbles can and have happened in China over the last twenty years; malinvestment can and has happened; under-regulation has happened; unintended consequences from currency valuation has happened. There is nothing which exempts the trajectory and events of China’s economic development from fundamental dynamics of economic activity: the same rules apply. But China is starting from a radically underdeveloped and underperforming productive base with an enormously larger population and domestic demand potential well than anyone ever has on a comparative basis. I do wish those who have something to say about China’s economic context would take those _inescabeble and fundamental drivers and constraints_ in account rather then just plucking a number and plugging that into standard expectations of outcomes . . . .
Alex: “Investment drives 2/3rds of GDP growth, since it is the “easiest” way to return superficial, high growth rates. But it squeezes out consumption by means of the excess liquidity it dumps on the market, the subsidies it gives to industry (which obviously have to be repaid at some point, always by households) . . . .” That investment also employees literaly millions of people who in consequence have money to spend rather than engaging in subsistence agriculture with low produciton returns. This has been an direct, and on the part of the state an intentional, subsidy of consumption. But the first thing that many of those making a bundle for the first time in their lives have done with it has been to stick it in the bank, or buy a small plot of land, so the ‘consumption’ has lagged behind. Your contention that all that state-driven investment has driven out putative ‘prouctive’ investment assumes that there would be someone funding said ‘productive’ investment other than the government or its designated foreign investors. Insofar as I can see, the productive investment is happening right along side of all the ‘unproductive’ investment, because the government is funding both: technology-transfer and development-multiplier investment and ‘keep the proles busy’ ticky-tacky investment. You assume, and reading Pettis’ comments he assumes also that ‘the public will pay’ for all the NPL which result. Which is certainly how it’s done in the West. On the other hand, the Chinese seem as willing to simply write-off many of those bad loans in the financial system rather than to bill the public, hence their “it was 20% not 40% remarks from earlier in the decade.” Most of those loans are from one government enterprise to another; this can’t be stressed enough. Writing off those loans is a political decision, clearly which is made at the highest level and argued over bitterly, but a political decision. It seems clear from published remarks that the Chinese financial authorities don’t want to promote “we’ll forgive it all” because that is a clarion call for gross malinvestment and embezzelment, and also discourages foreigners from dealing with Chinese banks. (And perhaps foreigners _should_ be circumspect in dealing with large, state-owned Chinese banks, I would add.) But concern over ‘needing to tax/yield curve the proles for the losses’ is not much in evidence. There is far more to discuss on that point that I care to or have the information base to do meaningfully, but I will go so far as to say that the assumption that “the Chinese public will be made to pay for all that NPL bumf” is not at all proven.
I continue to plead for China analysts to see China more _as it is_ in their evaluations rather than as they expect economies in general to behave. We have a hugely distorted, and for that reason exceptional, economic context in China. More facts, please, and more actual ‘thinking’ about them . . . .
“Given a chance to diversify their savings into opportunities for higher return, I’m sure that the Chinese would do so—because they already do so. A clear driver of land price surges is exactly this desire, to get money into a solid asset that is going to appreciate. ”
This is textbook bubble/mania thinking. Real-estate prices always go up, except when they do not; ask American homeowners from the post-“ownership society” boom. China’s real-estate bubble is already bigger than Japan’s was in the 1980s.
“This is perhaps even more true of agricultural land because that is where the economic liberalization began and where many in smaller towns and the countryside can see profitable change happening _and available to them_. And this has driven small-scale equity buying in the past, though given how often equity buyers have been burned I suspect that many Chinese non-professional investors are staying back from that; and buying, say, gold.”
Real-estate speculation is largely confined to coastal or urbanized areas, rather than farmland. In any case, what is gold a hedge against? Inflation.
“The ’cause’ of their behavior is a social position and strategy NOT a financial/economic constraint per se: they save on purpose, not because they are compelled by default to do so. ”
While Chinese may be sentimental about saving, that explanation makes no economic sense. China’s GDP growth has far, far outstripped its per capita/household income growth, in part because (as Pettis notes) households had to mop up the last banking crisis, and have suffered from multiple bouts of inflation since the 1990s (going back even further, it is more than likely than Tianenmen was a result of unrest stoked by inflation). When you build your economic engine disproportionately on investment, consumption inevitably suffers, because it is consumers who end up paying for the investment and for the inflated food and energy costs that excess liquidity (from investment) necessitates.
“What I am saying here, Alex, is that the GDP number for China pre-liberalization is wildly and structurally distorted. It is not a number that can be handled without weighting it in some way for that substantive reality. —And it is exactly for reason of this kind of functionally naive usage of aggregate statistical numbers and rates that I took issue with Pettis’ remarks, and so that I dissent from yours.”
There is data about Chinese economic history going back centuries: the Maoist era picture you paint is but a blip in the larger scene. It is interesting that you refer to the post-1993 China as “liberalized,” when in fact, the “reformed” China of today arguably puts more of a squeeze on individual consumption and economic freedom than pre-reform China did. It relies more than ever on investment, and the current consumption percentage as a share of GDP – anywhere from 30-36% – is probably an all-time low…for any country, anywhere, ever.
“China has an enormous population, with hugely distorted demand and production relationships relative to comparable cases. ”
The population will begin to decline, especially in terms of working-age citizens. The much-cited “demand” in China is not organic, but manufactured by the state and its focus on investment:
http://www.telegraph.co.uk/finance/china-business/8272388/SocGen-crafts-strategy-for-China-hard-landing.html
“But China is starting from a radically underdeveloped and underperforming productive base with an enormously larger population and domestic demand potential well than anyone ever has on a comparative basis. ”
I disagree that China represents an exceptional case. Its case is in fact, very by-the-book, and mirrors that of postwar Japan and Germany. No one started out lower than Japan: devastated by war and completely isolated, with a rapidly expanding population (today’s China has a declining population), it pursued the same high-demand investment strategy, supplemented by cheap exports, to rise back to respectability. China does have a large populace, but its growth strategy is not particularly attuned to translating that mass number of citizens into material gains in output: in other words, China’s growth is currently all about inputs, or mobilization of resources, investment, and the like:
http://www.foreignaffairs.com/articles/50550/paul-krugman/the-myth-of-asias-miracle
“That investment also employees literaly millions of people who in consequence have money to spend rather than engaging in subsistence agriculture with low produciton returns”
See my previous comments about the disparity between overall GDP growth and per capita GDP growth. Many of these workers will begin reverse migration once the investment boom in China ends, which it inevitably will:
http://www.businessinsider.com/chart-of-the-day-chinas-about-to-hit-an-investment-wall-2011-1
As such, these jobs are not the best means by which to construct a consumer class. Sure, migrant workers will have some money, but most of it will go into inflated food, which is costly precisely because of the same investment strategy that supplies their employment.
“This has been an direct, and on the part of the state an intentional, subsidy of consumption.”
How does that subsidize consumption? Excessive investment in construction dumps major liquidity on the market, driving up food prices, while also requiring additional importation of energy supplies and, in turn, higher energy costs for households. Construction companies and industry alike in China, whether rail or cement, are heavily subsidized so as to put the squeeze on American competitors. Who pays for subsidies? Households. Who are also going to be footing the bill for the next banking collapse.
“You assume, and reading Pettis’ comments he assumes also that ‘the public will pay’ for all the NPL which result. Which is certainly how it’s done in the West”
That is how it was done in China, too, in the 2000s. And Japan in the 90s. It is not a strictly Western phenomenon. The last banking crisis in China kicked off the decade-long decline in consumption and marked the beginning of higher investment, since it was apparent that consumers would not be picking up the slack in China’s growth strategy.
I read this article an the Pettis one to mean that anyone who expects that the Chines consumer will bail out the world economy will be disappointed. In other words, China will not be the world’s locomotive for economic growth. What you see now is an artificially inflated bubble created by world capitalists that will pop – or at least significantly deflate – at some point.
Capitalists don’t have any answer they just keep kicking the can down the road, trying to deflect attention to other venues in an attempt to save their collective a**.
Eh Psychohistorian!! Are You Paul Krugman?
psychohistorian:”I remember average consumption of non-US countries being something like 35% (no source).”
No wonder you have no source. That is a bogus assertion. It is utterly false. China’s consumption share of %36 is the lowest share of consumption EVER in ANY significant economy.
See Martin Wolf, FT.com
http://www.ft.com/cms/s/0/a1df57c0-c5b5-11df-ab48-00144feab49a.html#axzz1BqApQd6H
we are all one country now. Whatever happens over there happens over here and vice versa.
Take Paulson’s book On The Brink. He writes more about talking to Chinese officials than to Dick Cheney! He was actually worried they might pull out of their hundreds billions of Fannie/Freddie debt, or that they might not invest in Morgan Stanley which they own some big percentage of.
If china goes down, fannie and freddie go down, and so do the US investment banks. Its 2008 all over again except this time we wont be holding the ball, a bunch of communist party bureaucrats will.
i love these people on here praising the ‘low consumption’ in china. ‘low consumption’, also known as ‘poverty’. and i wonder how many of you personally have given up your own personal ‘western consumption’, if it is so damned evil. of course, i wouldnt worry about consumption growing in china, because wages probably wont grow, because in china there is only one labor union, and its controlled by the government.
“good for the Chinese for rejecting Western commercialism and while it is too bad about all those folks that invested in trying to do this to China, the Chinese people will need to make less adjustment going forward than Americans.”
I am not that convinced. What China has build in what was called NEP (New Economic Policy) by Russian Communists in Late 20th with Communist Party controlling the key economic positions and some limited capitalism in certain areas of the country (mainly large cities and coastal areas). Historically this policy was first initiated by Lenin and it is known for its immediate efficiency: it managed to bring the USSR out of the economic collapse caused by long and extremely cruel Civil War. But with time its efficiency subsided and it start to undermine the foundations of the political order (autocratic, neo-theological one party rule). I think that this was one of the reasons it was abandoned by Stalin in 30th.
I think that such sandwiched economy is inherently unstable. Supporting evidence is former Yugoslavia were NEP-style experiments were conducted under Tito. In a way, the latest attempts to institute NEP were by Gorbachev and they lead to dissolution of the USSR.
The main factor that makes it unstable is that combination of corruption with nepotism deligitimize the regime ideology and drives the resurgence of ethnic nationalism.
It also provides a powerful opportunity for Western Powers to destabilise the regime if they wish so.
The population can be kept in check with repressions, but the history of repressions already hangs over CCP. In a way the main problems with China is that they can’t throw Mao out of Mausoleum and start with clean sheet. The heritage of “Big Leep Forward” is hanging over China Communists like sword of Damocles.
The current crisis of neoliberal model was a powerful shot in the arm for CCP, but it does not solve mounting problems of incompatibility of two layers of China economy.
I would say that despite huge problems facing the USA it might be still is somewhat better position to solve them then China. I think that Roosevelt style state-capitalism style reforms and focus on infrastructure efficiency might help the USA. In this sense GOP, who are blocking those reforms, are the key allies of CCP within the USA, kind of fifth column. Quite a paradox.
I have read repeatedly in the last year or so that 65% of the Chinese economy is constructing new capacity and buildings. This is not being funded by savings, but by credit. Most countries, consumption is 70% or more, as it includes food and shelter costs. The Chinese game isn’t sustainable. Andy Xie, in an article I read on Caijing, stated that at the current construction rate, the entire needed supply of Chinese housing would be built in about 5 years and that China faced a demographic problem with its one child policy, not only too many old people dying off, but not enough women. This would mean for the distant future, the main business in China would be shrinking. Also, there are different definitions for urban in China than the US and their definition would classify Houston, Texas as rural. We are dealing with a lot of funny money there and I sense the boasted about reserves are more hot money than earned income. If this is Michael’s post from last week, I believe he also mentions the high potential for mal-investment from such a boom. This is something that almost always occurs. I sense this has gone on so long that it is like the US housing bubble, denied until it collapses.
A possible mistake in your analysis is the comparison with modern history.
My feeling is that we’re looking at an industrial revolution, something along the lines of what happened in the UK 300 or so years ago. Whilst the level of innovation is perhaps less in China, the social effects look similar: increases in income for a lot of people moving from subsistence agriculture to factory work, a corresponding move to cities from villages and rampant capitalism.
The railways in the UK are an example, everyone piled money into them, crony capitalism galore and bankruptcies and bubbles all over the place with the end result that after a century or so the country was covered in railways. Yes, there was mal-investment, funny money and all the rest of it; however none of that means that China is going to revert to a peasant economy in the forseeable future.
The analogy holds in the case of exports as well: the UK exported vast amounts of goods and ensured it had captive markets – expect the same from China.
This situation may be unsustainable but that doesn’t mean that things can’t keep going on for a long (in human terms) time. There are a /lot/ of Chiness people doing back breaking labour who would jump at the chance of a job in a factory and a flat in a city.
Opps, forgot to say:
“as expansion continues, consumption keeps falling as a percentage of GDP”
No doubt, but not a problem that will last for too long. The workers will unite, vote in militant communist (!) union leaders who will increase the workers’ share of the pie, bring about reductions in working hours, all that sort of thing.
[Also please read ‘Chinese’ for ‘Chiness’ in previous post]
Not directly related to your post – but definitely related to consumption of Chinese goods and trade imbalances with the States. Maybe the future of China – and the US – is undertaking some of the investment in US infrastructure that your fraudulent president is unwilling to commit to:
http://www.thestandard.com.hk/news_detail.asp?we_cat=21&art_id=107201&sid=30963299&con_type=1&d_str=20110119&fc=2
“Last year, then California governor Arnold Schwarzenegger said he hoped China will invest in the high-speed network. Construction, which is expected to take 10 years, is set to to kick off next year. ”
http://www.ft.com/cms/s/0/f3ae31fe-243b-11e0-a89a-00144feab49a.html#axzz1BlrNluej
“GE, the largest US industrial group, is this week announcing deals with China in energy, rail and aviation, which it says will sustain or create about 4,500 jobs in the US.”
Yeah, its called vendor financing. We all know how well that in the past has turned out.
Point taken. But at least something gets built, for Christsake – and the macroeconomic consequences of this! Better than debt accumulating purely for consumption of imports, surely…
Maybe I’m missing something, but I think much of Richard Kline’s argument can reconciled with Pettis’s article by acknowledging that the lack of an adequate social safety net [medical needs & retirement income, etc.] causes a high rate of savings, that is made even higher by inadequate interest rates. The inadequate savings rates also cause savers to invest/speculate in stocks or housing as a way of trying to earn better returns. I fully grant Kline his point that Chinese consumption hopefully will never get to the excessive levels of the US, but 35% could certainly be raised to 50-55%, without being excessive [and then could provide a better balanced economy, as Pettis talks about].
All in all, while I find Kline’s comments to be helpful, I don’t think they refute Pettis’s article in any way [as Kline seems to imply].
Yves: “”And the implication is obvious: as long as China keeps on using increasingly unproductive debt to fuel growth (it now takes $7 of debt to produce $1 of GDP growth in China, versus $4 to $5 in the mature US),….””
Note to financialists: The debt-based money system, colloquially the system of creating money using debts via private bank “credits”, a.k.a., fractional-reserve banking, does not, repeat does NOT, run in reverse.
Solution: Congressman Dennis Kucinich’s NEED Act of 2010.
http://kucinich.house.gov/UploadedFiles/NEED_ACT.pdf
The debt-based money system, colloquially the system of creating money using debts via private bank “credits”, a.k.a., fractional-reserve banking, does not, repeat does NOT, run in reverse. joebhed
It could be run backwards, here’s how:
1) Abolish FRL; require 100% reserves.
2) Bailout the entire population equally with new, debt and interest free United States Notes sufficient in total to pay off all private debt.
Handringing and Henny Penny concerns aside, consider that you normally accelerate sales and earnings(corporate) faster thatn you do compensation. The growth in personal consumption is obvious and irreversible. Don’t get bogged down in details as China continues to do what is best for China and not, for the rest of the world.
ps. Accepting the NPL thesis, I’m going to go out on a limb and say the rate of growth (in NPL’s) is decelerating as the economy expands, that would be called growing out of your problem.
My Chinese teacher told me something very telling. Her friends from Beijing come to the US as tourists, and uniformly remark how cheap everything is here in the US compared to China!. This made no sense, as they are coming here to buy goods made in China. What they are buying are luxury goods, such as brand name hand bags. Apparently, the powers that be must tax the bejusus out of these in China. It sounds like the goal is to make luxury goods unavailable, so that the Chinese save more money which can be lent to us in order to buy their stuff. The US dollar no longer buys bargains in Beijing either.
Oxymoron: Luxury goods made in China.
So comforting to read all the optimism here. I do have one thought in mind though, “what is the percentage of the U.S. population have the ability & wherewithal to plant & grow their own food? With the continual squeezing of the middle class out of existence, just who is going to pay for the foods that will be required to feed the masses, who will be expected to work to pay off the debt that the Government continues to accrue?
I’m sure that there’s someone out there with stellar credentials that can produce a graft pointing out how each year, the unemployed grow? Be it from the vanishing workplace, the college graduates who can’t find employment, the college dropouts, the high school graduates & drop outs. This is a problem that the politicians keep avoiding to address, especially today with the Tea Party as well as some or all Republicans clambering to abolish the Education system in the U.S. I might also note, that these same politicians took advantage of getting an education while the costs weren’t as high as they are now.
As the infrastructure of the U.S. continues to deteriorate, with the expenses to rebuild being spent out of country, whether funding wars, propping up dictatorships, or just plain wild goose adventures, this country continues its downward decent, one thing has been made abundantly clear, the ruling class in this country won’t put a penny of their gains into paying for the upgrades needed.
While lack of robust statistics leads to speculation, debt growth far in excess of GDP growth is troubling. One must consider that large investments in public infrastructure provide a somewhat lagged ROI.
No one seems to have any decent data. High levels of NPLs and unproductive debt growth lead to dislocations. We know that China has a large trade surplus and a large NIIP. Like Japan, they owe the money to themselves. We also know that the ramp in Chinese imports is a big positive for many of their suppliers. A hard landing in China is likely to have a significant, negative global impact. At least no one else has to write down their bad debt.
The problem for China is not the level of investment, but what china (and it’s people) are investing in. Building offices and malls and industrial parks and the required support infrastructure in monstrous execess of what will be needed in the near to midterm future, is a huge waste of effort and resources( even if it provides secondary benefits such as growth of a steel and construction industries). If the communist party wants to maintain the ‘mantle of heaven’ on it’s shoulders it should focus on projects and initiatives, that will yield short and longterm benefits to it’s population. Projects such as improving access to healthcare(secondary benefit of improving medical research), green energy and pollution control(good for environment and human health and agriculture, secondary benefit is growth of research and development), institutional reforms to increase the share of income to ordinary people( which would drive consummers demand) and to shield china from potential negative effects of globalization( because rising Chinese wages and better pollution control would raise cost of manufacturong and development which would cause multinationals to look for the next low-cost stable countries to exploit.)
if china needs to pick hard visible projects , pick agriculture and green initatives and heavily subsidize from the governmeframework an MMT framework; both are visible to the ordinary people, generate growth, R&D opportunties, and lots of positive externalities. They would need counter balancing credit control pollicies to prevent excess financial based speculation and inflation due to the monetary injection from the government.
“Building offices and malls and industrial parks and the required support infrastructure in monstrous execess of what will be needed in the near to midterm future, is a huge waste of effort and resources( even if it provides secondary benefits such as growth of a steel and construction industries).”
With a billion people, what is excess? I read of people renting tiny spaces as opposed to McMansions. There are of course other variables such as income/affordability and location. Information that would be useful is the value and ratio of unoccupied property built within the last three years vs. occupied property. How much construction is based on weak or nonexistent business plans? How much construction is unwanted or unaffordable? Is it that same unoccupied mall or ghost town? I am unable to obtain any real sense of what is really going on macroeconomically. I am left with the likely incorrect impression that most everyone who is anyone is piled into the top cities and there are miles and miles of unoccupied cities elsewhere.
“With a billion people, what is excess?”
There is no housing shortage in China, which makes one wonder why there is so much new construction of condos and entire cities. Urban migration is not an irreversible process, but rather, a procyclical one that, in China’s case at least, ebbs and flows based on construction booms.
In my reply to Richard Kline, I posted a link to a businessinsider.com chart showing construction investment as a percentage of GDP in selected Asian countries since the mid-20th century. The abrupt end of the construction boom in Thailand, Singapore, and Korea were all contributing factors to the Asian Financial Crisis Of 1997-1998. Roubini:
“[N]o country can be so productive that it can take, every year, half its GDP and reinvest it into more capital stock without eventually ending up with a huge excess capacity and a mountain of bad loans.”
The Asian Tigers discovered this reality the hard way. But, in light of how much pressure China’s leaders are under to maintain high growth no matter how superficial it is, I do not think an “easy way” even exists: they either let the market demolish the investment sector, or demolish it themselves through radical fiscal tightening.
YS: “…it now takes $7 of debt to produce $1 of GDP growth in China, versus $4 to $5 in the mature US…”
I view this as a positive stat, for two reasons:
One, it means China has money to burn. Burrrrnnnnnnnnnnn….
Two, it is a clear indication that China’s Ponzi Scheme is more forgiving than ours, which means, it will last longer.
Much longer.
Remember, China could slide $600 billion off the top of their secondary chip stack, pay double the asking price for Goldman Sachs and General Electric — thereby purchasing, what, three/quarters of the American political system? — and financial pundits would heap scorn upon them.
“Those dummies! China will never get a return on their investment. Short ’em!”
And the pundits would be right, and they and their clients would make some money.
But Chinese historians, writing in the 22nd century, would undoubtedly view the duel purchase of two “American” corporate “giants” — at the start of this century — a little differently. A roll-up of Goldman/GE would be remembered, if it was remembered at all, as just one small move in long series of small moves made by their great-great-grandparents, all during the Epoch of Ponzi Paper, that allowed the motherland to buy up every square inch of the earth — with nothing — and rename it Planet China.
Ah this kind of thinking crops up from time to time when people discuss the ‘economically powerful other.’
Yes, the vast Chinese intellect, so cold and unemotional, capable of creating long term plans and then executing them perfectly. We must fear it for in our own short term perspective nothing can stop them. NOTHING.
China may have some sort of banking bailout, but like the 97-98 Asian Financial Crisis it will be a blip in the long-term scheme of things. Those two years saw a drop in emerging economies GDP relative to the developed world, then they were off to the races again. The long term trend of growth and power sliding away from the ‘West’ seems unstoppable.
I agree with an above writer; this is more like the railway expansion – which was a disaster in terms of making money, but quite successful in terms of development.
Sounds like you miss her already. Supposed you forgot that the US Gov routed the Army retires using their point man Dwight Eisenhower. Not a penny was paid.
Insofar as your blacks analogy: What era are you living in?
I’m learning Tai Chi and I suggest you do to.
It’s important to keep in mind that China is under extreme and constant pressure from its rural/poor population to achieve economic growth and raise standards of living. To make an historical analogy, imagine how much differently Congress would act if the Bonus Army (i.e., Depression-era folks who camped out in D.C. in order to demand federal aid) were to reemerge and set up camp in downtown D.C. I mean, tents on street corners, beggars sleeping in Metro stations, pickpockets and common thugs literally instilling fear in the public and the government, etc. etc. etc.
And then imagine if these were mostly blacks.
Well, that’s a relatively accurate analogy to what the Chinese government is presently facing.
My girlfriend of 1 1/2 years was born and raised in China (grew up in Tianjin, attended Peking University) and just went back for a visit this morning. She keeps in touch with her parents and friends regularly, and one of the recurrent messages from her fellow Chinese citizens is very simple; crime is out of control and the general population is growing angry.
It would be difficult to describe the nature and extent of these issues in a university-level thesis, much less a Naked Capitalism comment, but what’s significant is that poor folks have flooded many Chinese cities and – after an unsuccessful job search – have resorted to crime. To complicate matters, many of these folks are Uyghurs; an ethnic Chinese/Muslim minority. Uyghurs hail from Xinjiang, an area which is somewhat comparable to Tibet in terms of ethnicity-based resistance and unrest.
Now, it’s not like Uyghurs are the only folks flooding Chinese cities, or even that they are a majority of this impoverished subset, but their presence (and the potential political fallout of harsh retaliatory measures by the Chinese government) has led to criminal impunity. Literally, a Uyghur can rob a woman in broad daylight, directly in front of the police, and the police will rarely take against the thieves. It’s too explosive a situation, particularly because these folks band together and don’t exactly meekly submit to police authority.
Of course, this Uyghur issue isn’t the only domestic issue facing China (not by a long shot), but it is yet another block of C4 placed at the foundation of Chinese Communist Party rule.
The general message I gather from my girlfriend’s parents [note: her mother is a member of the CCP] is very simple; discontent is rising and things are getting quite volatile on the streets of China. Whether or not this will lead to a revolution in the near future is uncertain, but I think we need to be careful with the ol’ “Going Concern” assumption when it comes to the present Chinese government. Tiananmen Square almost ripped the country apart, and it only took a few short weeks for that spark to become a conflagration.
These are volatile times. I wouldn’t be completely surprised if China faces domestic disruptions before any of these economic boogie-men come to fruition.
Not all billion folks can achieve a Western standard of living within two decades. The long term growth rates are remarkable as it is.
The Chinese could solve their “Uyghur Problem” by vacating Uyghur lands and ending their colonial adventure in Eastern Turkmenistan. The Uyghurs were dragged into China by force. Who are the Han Chinese to complain about alleged street crime by impoverished and dispossessed Uyghurs when their government has overrun the lands, culture and people of Eastern Turkmenistan?
Umm…9 million Uyghers out of a total population of 1.3 billion. Seems someone here has a problem with distorted perceptions.
China was/is a cash society (save for the rainy days with storm clouds always on the horizon) much like the early days here in the US (if you didn’t earn it you couldn’t spend it). Nixon sold the Red China on our banking system which is now failing here in the US, about a 100 year time frame and you are watching time being compressed as Red China will run the course in less than fifty years. Communists don’t make good capitalists no matter how they paint a self-portrait.
The banking system of each are now one in the same, a Ponzi scheme where the bottom feeds the top and top allows the bottom to feed (eat). If the bottom doesn’t participate in the scheme (by requesting money-credit-loans) the house of cards falls. Non-participation results in incentives (relaxation to purchase things) then punishment (confiscation of property), depends on much the little people can withstand before rioting and they always revolt, always.
I never understood why Red China buying up natural resources was a good thing for anybody. They buy because they need it not because they are trying to corner the markets long term. A couple of pandemics or drought years and they are back to where they started from, a very fragile Country.
India has a better chance of success entering the modern world but the world as a whole will come at loggerhead over all outstanding debt and realize only after near warring that we are all in it together, maybe not evolving into a world currency but more respect given to controlled growth and anchored fiats bench-marked against a basket of currencies and commodities (the bottom has to be allowed to work for food).
A few thoughts:
* Its not a loan if you don’t expect tot get the money back.
* This controlled capitalist system in China will end badly.
* U.S. trade with China helps sustain the system but new “policies” will only make things worse.
One reason why the savings rate in China is high is because of the sex imbalance. Here is an interesting study of the sex imbalance vs the savings rate.
http://www.voxeu.org/index.php?q=node/4568
http://www.forbes.com/2010/02/02/china-saving-marriage-markets-economy-trade.html
The increase in the savings rate well above the norm in East Asian countries during similar stages of economic development, correlates closely with the imbalance in the sex ratio. It starts going up in the late 1990s when the first people born under the one child policy starting reaching the age of 15-16. The savings rate was 16% in early 1990s and is 30% now. According to the study 50% of the increase in the savings rate is due to the sex imbalance