It Was More Like a Couple of Asian Decades Than a Century

Yves here. I was a true believer in the idea that Japan would take the leadership mantle from the US. American business executives (perversely) were more intimidated by Japan in the 1980s than they are by China now, perhaps because they were blindsided by the speed of Japan’s rise and because Western efforts to break into the Japanese market were largely unsuccessful, due to a host of factors bundled under the headline of “non-tariff trade barriers” (such as the difficulty of navigating Japan’s complex and fragmented distribution system and the strong preference of Japanese consumers for Japanese goods, ex French luxury brands). So having once been burned on the notion of Asian dominance (at least any time soon), it’s not hard to see that China faces the same challenges that Japan failed to navigate successfully, the most important being managing the transition from being investment and export led to consumption led. No major economy has made that shift without suffering a financial crisis.

By Marshall Auerback, a market analyst and commentator. Produced by Economy for All, a project of the Independent Media Institute

It’s become media orthodoxy to suggest that the era of U.S. hegemony is slowly slipping away and migrating to Asia—with China as its locus—as we proceed into the heart of the 21st century. There is, however, a competing narrative, one recently expressed by Michael Auslin on, who makes the case that the “Asian Century” “is ending far faster than anyone could have predicted. From a dramatically slowing Chinese economy to showdowns over democracy in Hong Kong and a new cold war between Japan and South Korea, the dynamism that was supposed to propel the region into a glorious future seems to be falling apart.”

Auslin makes a very compelling case: As he notes, Asia is increasingly falling prey to the kinds of intra-regional geopolitical disputes that have long characterized other parts of the world (Japan vs. China islands dispute, South Korea vs. Japan trade dispute, Beijing’s ongoing efforts to subvert democratic reforms in both Hong Kongand Taiwan, to cite a few examples). Disputes, even rivalry, between nations are expensive. The American growth model came at quite a discount: partner countries didn’t (and still don’t) have to burn their GDPs on economic and military defenses to assure their positions—that alone can siphon off the share of GDP any country would wish it could call “growth.”

Additionally, the region, especially China, looks to be on the verge of consuming its entire available capital and labor resources. Mercantilism is becoming a non-starter, as protectionist backlash mounts, debt-fueled GDP growth is fading and productivity gains are dissipating. That’s a serious problem that is largely underestimated in the West.

To be sure, there have been predictions of gloom before. In 1994, Paul Krugman arguedthat the bulk of the so-called East Asian “miracle” could be largely explained not by the far-sighted long-term national planning on the part of its mandarin class, but rather via traditional “inputs” common to all emerging economy success stories, notably high savings rates, good education, and the migration of underemployed peasants from the agricultural hinterland into the modern urban centers. Krugman argued that these factors largely explained most, and in some cases all, of the growth in the Asian economic “miracle” (i.e., its growth “output”). His analysis seemed remarkably prescient once the region went down in flames during the 1997/98 Asian financial crisis.

Although the region did recover from that crisis, Krugman’s larger point still stands: if one looks at Asia over the past two decades, trend growth rates in most of the region have slowed down, especially trend productivity rates. The same thing happened earlier in Japan, where potential output (the output a country can produce on average over the course of a business cycle) began declining more than three decades ago, just when some Western experts became convinced that the country was about to surpass the U.S. as the number one economy in the world. (It should be noted, however, that the myth of Japan’s “lost decade” is also massively overhyped and that the country today surpasses the U.S. on many economic and social metrics.)

Japan’s relative decline may have been exacerbated by the fallout from its own financial bubble collapse in the 1990s, but on the whole, it is not an unusual story. Rather, it reflects a typical evolution of economies moving from emerging markets to a higher level of advancement. Unfortunately, many economists and strategists (who today predict that Asia will eventually rule the world) forget this trajectory when they mistakenly extrapolate future trends based on recent past performance.

What about China, which is the real elephant in the room and the main reason why we ought to be somewhat skeptical about the case for the Asian century? There are a variety of assumptions made about the Chinese economy that are questionable. Let’s consider a few.

The consensus has long assumed that China’s labor force is still growing and is likely to do so, well into the future. In reality, that’s not the case. The working age population peaked in 2016, according to the World Bank, and is likely to decline by 10 percent by 2040, in large part a legacy of the country’s one-child policy. That means labor force growth may be turning negative (although the impact might be limited by labor automation, which is extremely highly skilled and high risk). Japan is a world leader here, but its historical rivalry with China does create issues in terms of collaboratively creating a globally dominant Asian economic bloc.

Related to that is China’s “total factor productivity” (TFP), which measures how efficiently and intensely inputs are used in the production process. That too is declining sharply. TFP rose steadily throughout from 1998 onward, and reached an extraordinary level of 8.0 percent in 2003 (almost matching the level of 8.2 percent earlier reached in 1995). It fell again to 2.9 percent by 2004, before rising again to 7.6 percent by 2007. During that period, the migration of surplus labor from low productivity agriculture to the highly productive modern sector was around 20 million people per year. Most of that total factor productivity surge was almost wholly due to this internal migration of surplus labor from the countryside to the urban areas. Since then, the flow of internal migration has probably fallen in half or more, and with that TFP has collapsed, even as the modern sector workforce has doubled.

Lastly, with a ratio of fixed investment to GDP of over 40 percent for several years now relative to a falling trend rate of GDP growth (determined by falling labor force growth and declining productivity), China’s economy has witnessed hugely diminished returns to fixed investment. Capital deepening can no longer be contributing to growth the way it did in the past. Building “ghost cities”, constructing roads to nowhere, and duplicative investments in basic industries (often adding to existing surplus capacity) do not constitute a form of capital deepening that adds to economic growth. The universal goal has to be to have a mixed economy, rather than a redundant one. Michael Auslin’s thesis is validated using the available macroeconomic data available to us.

China’s champions have long maintained that, after the country completes its subways and highways and railways for the 21st century, it will then pass the baton to its consumers, who will be able to enjoy the achieved modernity in full, thereby creating a whole new growth dynamic. But history tells us something else: that when investment booms go bust, they take down the consumers who work in the investment industries first. Recall that in the post-war Keynesian macro model, fixed investment was the driver of the business cycle, and fixed investment always had a multiplier effect—in layman’s terms, the input of capital investment causes a larger change in an output, such as gross domestic product. It is only after this multiplier has run its course that consumer spending can take over within the context of economic growth.

We may be at this stage now in China, but deflating a huge capital expenditure bubble, while shifting the baton seamlessly to the consumer, is unlikely to occur without significant economic disruption. This is because the smaller the share of the consumer in any economy, the harder it becomes to seamlessly spend more to offset a contraction in investment expenditures. Financial Times columnist Martin Wolf himself noted that in 2018, Chinese consumption “was still as low as 40 per cent [of GDP],” implying that this passing of the baton from fixed investment to consumption in the current Chinese context would be far from seamless. That is a titanic gap to fill in five decades, much less a two-year trade war.

It is a great virtue in many ways that China has gone far down the road as a hybrid economy; that has made it far more efficient and far more responsive than the pure command economy of Soviet communism. But when China’s policymakers deploy fiscal and monetary stimulus aggressively to ratchet fixed investment higher and keep the boom going, their scattershot credit expansion finances not only fixed investment—they have also financed speculation in assets, notably the stock market and real estate. In these credit expansion–fueled booms, private parties—many of them consumers—borrow and speculate in overvalued assets. The scattershot credit expansion not only leads to fixed investment problems; it also leads to households getting deeply into debt with vulnerable inflated assets as their collateral. If that sounds like a familiar plotline, recall how that worked out in the U.S. after the 2008 crash. At least the U.S. has developed systems to mitigate the worst of the resultant shocks. Not so in China, especially as major economic disruption literally poses existential risks for the ruling party, which is already moving in a more authoritarian direction under President Xi Jinping.

Beijing is not oblivious to these risks, which explains their “stop-start” monetary and fiscal policies. The country’s policymakers are seeking to gradually deflate the capital expenditure, real estate and stock market bubbles, without risking a full-blown debt deflation crisis. The problem is that each time the authorities move to avert a deeper financial crisis, the resultant speculation inevitably flows back into those very activities that Beijing is seeking to discourage. Speculation abhors a vacuum.

As Michael Auslin observes, “U.S. policymakers bet that China’s economic modernization and peaceful rise would lead to an era of global prosperity and cooperation, linking advanced economies in Asia with consumers in the United States, Europe, and elsewhere.” But that calculation looks more like a Pollyannaish fantasy today. That’s not to say that this gives new life to American hegemony. Rather, the world is increasingly likely to settle into a 19th-century style balance of power type of regional competitions, of which Asia is but an element, rather than the dominant player.

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  1. PlutoniumKun

    It wasn’t just in the west that everyone thought Japan would rule in the 1980’s, there were plenty of quotes around to indicate that the Japanese thought so too. With hindsight, it was never likely (Japan is just too small by itself), but I’m inclined to think there are structural limits to how much most Asian countries can grow. Only South Korea and Taiwan to some extent have ‘cracked’ the problem of getting to a stable high income status, and even those countries have their particular issues. Singapore is a special case and can’t really be replicated (whatever London based Brexiters think).

    I was very sceptical for years that China would avoid the middle income trap – when I first visited in the 1990’s I was both impressed by the sheer scale and speed of the growth, and horrified by what (even then) the growth was hiding. Pollution was terrible and it wasn’t uncommon to go into a brand new hotel to find fixtures like bath taps (gold plated) come off in your hand, followed by a torrent of dubious looking water.

    For years I was expecting it to all grind to a halt (this comes from having read too much Gordon Chang), but it never happened. The question though is whether this is because the naysayers are wrong, or that China has such momentum and scale that it can keep its model going for years longer than it should, but only postponing the inevitable correction.

    Anecdotally, China’s economy is under much more strain than the official story is telling. Its never good when economic strain hits just as the time comes for major political changes – the HK situation comes at a very bad time for Beijing, and they’ll be tempted to hit the accelerator again – they are just like an alcoholic always saying ‘one last drink…’.

    The big question is whether a financial crunch in China will set the scene for necessary reform and further growth (as to an extent the 1990’s Asian crisis did for South Korea and other Asian countries), or whether it will mean China will end up in the sort of see-saw growth/stagnation mode that has characterised South America for decades. I’ve given up prognostication as I’ve proven so bad at it, but the most convincing China analyst I’ve read – Michael Pettis – seems to be going for the most pessimistic side.

    As for the rest of Asia, I do think the Japan/South Korea spat is something very new, and very serious for Asia – my guess is that its an inevitable result of the US’s weakening hand in the region. Asia seems to lack many of the structures needed to resolve issues like this – if Japan and South Korean can’t resolve this fairly minor issue, then the really serious ones elsewhere in the region won’t be resolved peacefully either. its no wonder nearly everyone in the region seems to be arming up with serious military hardware.

    1. Susan the other`

      Old grievances die hard. It seems like South Korea is looking toward reunification with the North. And nobody has ever been able to smooth over all of Japan’s awful misbehavior in WW2. It’s not hard to imagine that all of Korea still hates Japan. And now Japan is planning to release the Fukushima water tanks which will poison both Koreas’ and China’s Pacific coasts. Unless of course it’s just hype as some pro-nukes claim. I don’t happen to believe it is harmless at all. So very many chickens coming home to roost these days. Does economics have a tutorial on chickens coming home to roost?

      1. Synoia

        And now Japan is planning to release the Fukushima water tanks which will poison both Koreas’ and China’s Pacific coasts. Unless of course it’s just hype as some pro-nukes claim…

        I believe there are many pictures of Nagasaki and Hiroshima which bare evidence it is not pro nuke hype….

      2. elkern

        Fukushima Nuke Plant is on Japan’s East (Pacific) coast. Anything dumped there goes to Alaska, not China/Korea.

        I’m not enthusiastic about it, but there are many far worse things to worry about.

    2. c_heale

      I don’t think it’s a minor issue. Historically (going back centuries) relations between Japan and Korea haven’t been good. I think maybe the USA (totally motivated by it’s own interests – which were often not in the interest of the people of these countries) has been the glue between the two countries having relatively good relations in recent times.

  2. Jason

    Yes, but
    (1) dominance is a relative concept so if Europe and the US don’t get their act together …
    (2) there are 2 billion people in India and Southeast Asia that can exert gravity even as China slows.
    (3) maybe it’ll be nobody’s century, because climate change.

    1. Olga

      A good point…
      I am unpersuaded by author’s arguments. To me, it is a reflection of the typical western short-term thinking and basic misunderstanding of what China is trying to do. Additionally, using the FP article as the starting point is not helpful. And comparing Japan (with much smaller population) and China (with 1.4 billion people) – and then basing conclusions on Japan’s troubles leads to observations/conclusions that tend to defy logic when applied to China.
      The western thinking is all about a zero-sum game – I am hegemon or you are hegemon. As if there were no other way to organise the world! What about a cooperative world? In which nations are cooperating for a better outcome for all? I think we’ve had enough of this “winner take all” mentality that has only led us into a cul-de-sac of development.
      I’ve travelled widely in Asia, Europe, and N. America – Asia is rising, there is no question about it. There is absolutely nothing comparable to it in the western world. No one has said that the rise will be linear, without any glitches or things to be worked out. (Wasn’t there an article at NC about how Japan’s rise was scuttled in the late 1980s by the US… I remember reading something like that.)
      And my sense of things is that China is not trying to replace the US as the next hegemon – it is trying to diminish western dominance (of the last 500 yrs) that has brought so much misery to the rest of the world. Nothing wrong with that – in which case I don’t see what the point of the two articles really is.

      1. Marshall Auerback

        Whenever I hear comments like “typical western short-term thinking” I know I’m dealing with someone who resorts to “orientalism” to explain the long term planning methodologies of Asia’s wise mandarin class, or criticises “western thinking” when I am simply dealing with classic development growth economic theory.
        I really don’t see the point of this comment is since it substitutes analysis with your own anecdotal observations.
        As for the “cooperative world” working for the benefit of all, great aspiration. Give me one historic example of this.
        PS No question the US advocacy of financial deregulation largely contributed to Japan’s bubble and certainly catalysed its collapse. In fact, I wrote about this for NC (Yves also wrote a few herself).

        1. RepubAnon

          Be they Asian or Celtic, “Tiger” economies have a common factor: loose or unenforced regulation of the financial markets. The US saw this with the savings and loan (“S&L”) crisis after Ronald Reagan weakened the S&L regulations – and again when the banks were “freed” from the Glass-Steagall regulations. It’s never immediate, but the crash always occurs about 4-10 years after deregulation.

          This time around, most of the world’s economies have been frantically trying to keep things going by increased risk tolerance. Look at, say, Italy’s banks, or China’s covering up losses by government fiat. We’re getting closer to the day when someone starts the big sell-off, and Humpty Dumpty has the big fall.

          1. Yves Smith Post author

            Your high level story line is correct but details are not.

            The formal revocation of Glass Steagall was irrelevant save for allowing Travelers to acquire then Citibank. It was shot full of holes before then. Commercial bank Credit Suisse completed its phased acquisition of Wall Street bulge bracket firm First Boston in 1992, a full 7 years before the official repeal of Glass-Steagall. Plenty of other examples.

        2. Olga

          With all due respect, Mr. MA, I thought ad hominem comments were against rules. You’ve no idea where my thinking comes from. I would hope we can talk about the merits of the article (and my points, which you did not get), without denigrating the other person.

        3. Gilbert Reid

          The analysis is, I think, very interesting; being bigger, as China is, can make adjustments even more difficult than for smaller, and more homogeneous countries, such as Japan, which can be more agile and rapid in their response to problems and structural shifts. As for a “cooperative world,” I think the best one can hope for is a world of shifting equilibrium, or balance, in which there are several global and regional hegemons, operating as benignly as possible (because of the balancing presence of the other hegemons or great powers) towards the smaller sovereignties, and where international cooperation, underpinned by the balances of power and of interest, is ensured through multilateral organizations which define and apply the “rules of the game.” This is what the West and its allies had, GATT, Bretton Woods, NATO, OECD, etc., more or less, after 1945, and was extended, gradually, or in lurches, to the rest of the world, not without lots of ambiguity and self-interest and misdeeds on the part of the hegemon, that is the US. If the various transitions are to be managed the US needs to rediscover its role as an in appearance benign hegemon and stop behaving like the wrecker of the system which gave it much of its global pre-eminence and which, for better or worse, has ensured world peace and generalized prosperity (with blips and hiccups of course) for roughly 70 years. The US should discover, or re-discover, the virtues of multilateralism and of moderation. It can pursue its own self-interest in more intelligent and cooperative ways. As for China, the challenges Beijing faces are immense, and the temptations of an authoritarian and xenophobic turn must also be immense. As for Japan and South Korea, the US, in the old days, might have gently knocked a few heads together. And, yes, US pressure did help create Japan’s late 80s asset boom and then early 90s crash, the complex consequences of exchange rate adjustments.

      2. Some Guy in Beijing

        I work in Chinese state media. My observations make me feel it is very much the goal to be hegemon. If not, that understanding is at least popular.

  3. The Rev Kev

    I read once something about Japan that told me all I wanted to know about their prospects for the 1990s. It was reckoned that the value of all the real estate of central Tokyo was equivalent to the total value of the real estate for the continental United States. And that Japanese corporations were borrowing money against these hugely inflated land values. If true, no wonder the wheels came off for them.

    1. Oh

      If I recall correctly, didn’t the Japanese corporations borrow big time using their stocks as collateral? When the stock market took a dive, the value of collateral plunged too and the banks forced the corporations to sell the real estate holdings, thereby crating the crisis.

      1. Yves Smith Post author

        Not stocks. Real estate. The valuations for urban land (Japanese attributed no pretty much no value to buildings) was grotesquely high when there was no market whatsoever. No company would ever sell its land. Huge emotional attachment + it would be an admission of bankruptcy + the taxes would be ginormous, making any sale largely counterproductive. There was only one case of a land sale in central Tokyo when I was there due to a business failure (enormous fire or somesuch) and that did go for an insane price. But valuing a market based on one isolated trade is fallacious.

        Oh, and the banks would lend 100% against land.

        1. Synoia

          Interesting, here in the Western US land rises in value if it it has water, roads and buildings are valued as improvements…

          There is much very inexpensive land in CA which does not have water.

        2. Jessica

          Not sure about the corporations, but what I heard living in Japan in the late 80s was that people bought stock with land as collateral and land (in the rest of the 23 wards) with stock as collateral. So any much drop in the one triggered a drop in the other, which triggered another drop in the first one and values spiraled down.
          Also, because the destruction in WW2 had set the baseline so low, people didn’t have so much experience with market ups and downs and were not prepared for any significant downturn.

  4. Susan the other`

    So, basically, the party’s over for investing in China? Because (per yesterday) gravity. And all those fabulous profits have disappeared for the multinationals. First they killed the US; then China. Tsk tsk. The detail about “factor productivity” is instructive. The efficiency with which inputs to production are used. It is declining sharply because there is overcapacity no doubt. Economics as we know it seems to gladly take transitory conditions (like evolving “factor productivity”) and treat them like a sure thing – just go ahead and invest in China, it can be profitable for eternity. Nobody ever starts from the cautious position that a “boom” is not an “economy”. One thing that might slow China back down to a century of (slow) growth is a diminished source of oil. There’s something almost tragic about Xi. In his effort to maintain a smooth course for China he keeps all the doors open. His gushing over Putin as his best friend (or was it his only friend?) was revealing. China might be more planful than we see – if they are starting a massive agricultural project in southern Siberia, replacing their own southern tropical agriculture because it is threatened by ocean rise, that can pull labor away from the “modern” workforce and help create some balance.

    1. MyLessThanPrimeBeef

      A couple of potential issues with farming souther Siberia.

      1. Manchu Chinese came from areas including those north of Manchuria (ceded to Russia in the 19th century). If not a problem now, potentially it could.

      2. More human activities in a warming Siberia could a. mean additional humans, in large numbers, will encounter, close-up, unexpected ancient life forms, and 2. making it evern warming.

      1. Summer

        “will encounter, close-up, unexpected ancient life forms…”

        Like ancient viruses and bacteria especially.

  5. Bazarov

    I find these sorts of articles cute, in the sense that they project a “future” for the “economy” of an organized industrial civilization.

    Climate change will put an end to “Capitalism with Chinese Characteristics”–it will put an end to capitalism, full stop. The concern will no longer be “growth” or “GPD” or “productivity.” The concern, for most people on Earth, will be basic survival in a milieu of rapidly falling standards of living, and the concern for polities will be finding a way to hold the beast together in a context of utter deprivation, cataclysmic migration, and heightened conflict between nucleared armed powers over basics like fresh water.

    We should expect to see, where and if polities survive on a large scale, the end of “economy first” cultures and forms of governance. The concern will be basic security and cultural preservation in an era of escalating catastrophe. Since democracies cannot govern well in a crisis, expect their retreat and replacement by more (if not entirely) authoritarian governments (think Napoleon III), where government proves possible.

    So yes, Chinese “growth” and economic dominance will come to an end well short of the foreseen “century,” but so will the entire world order as we understand it due to climate change.

    1. MyLessThanPrimeBeef

      Since democracies cannot govern well in a crisis, expect their retreat and replacement by more (if not entirely) authoritarian governments (think Napoleon III), where government proves possible.


      That sounds like, for humans anyway, democracy is a luxury, affordable only when things are going well.

    1. MyLessThanPrimeBeef

      That’s an interesting question. I am not sure what the answer is. Maybe other readers have some stories to tell.

      My own qeustion is whether government money that went to those ghost cities, directly or indirectly, could have gone to improving food safety. Perhaps I should say I believe that that stimulus money should have gone towards ensuring better food safety.

    2. Some Guy in Beijing

      Was living in Ningbo, a city on boom times. It’s full of half- and non-occupied apartment buildings. They keep developing the city outward in all directions, even as there’s no demand for what’s there now. I’m guessing they want to make it like Beijing. Once the subway system is complete, the central area will be gutted and redeveloped. It’s already partially underway. The center of Ningbo is shopping malls and luxury stores, with more under construction.

      Beijing is a hell for many residents, most of whom commute more than an hour because they can’t afford to live closer to their offices. My Chinese coworkers all envy my modest apartment behind the office, while my friends and family back in the States think I’ve underachieved for my age.

      I can rant for hours about the economic and political insanity I observe here.

  6. Synoia

    Good luck walking away from the unduplicated supply chains in China.

    Yves keeps pointing out the supply chain for a finished product is key to getting the product built, and that China contains the majority of supply chains.

    When Japan was in the ascendant the US had domestic supply chains. In the period since China’s ascension into the WTO, the supply chains have apparently shifted to China.

    I suggest anyone believe otherwise pay a visit to Shenzhen. 30 to 40 years ago it was a village. Now its a well designed city of millions, delivering a finished product because of the breadth of manufacturing and supply chains, and the billions invested in the manufacturing.

    In the US to visit a supplier in another city, I have to rent a car. In Shenzhen I just got on their subway, then walked to the Hotel, and walked from the hotel to the supplier.

    Who is going to invest the billions to move the whole of that industry out of Shenzhen to other places, and how competitive would a fractured, dislocated or diffused manufacturing system be?

  7. MyLessThanPrimeBeef

    The problem is that each time the authorities move to avert a deeper financial crisis, the resultant speculation inevitably flows back into those very activities that Beijing is seeking to discourage. Speculation abhors a vacuum.


    If that is the case, it’s more than just about nature abhoring a vacuum.

    The real problem is its predictability – the authorities will come, and if you hold on (to whatever you’re in trouble with), you will be good again. In fact, you probably could double down….buy low, you know.

    Contrast that with Trump. His aim, whether he has been successful or not is another issue, is to be unpredictable (he said so at the start).

  8. Sound of the Suburbs

    China has made all the classic mistakes that everyone makes who uses neoclassical economics and its economy has stalled.

    Their stimulus since 2008 has gone into all the wrong places that didn’t grow GDP; the private debt soared, but GDP didn’t. It’s the classic mistake and this is why its economy has stalled.

    At 25.30 mins you can see the super imposed private debt-to-GDP ratios.

    Japan, the UK, the US, the Euro-zone and now China.

    They were growing by adding more and more debt, but they can’t do that anymore as they have seen their Minsky Moment coming.

    What’s different about China?
    They are working out where they have gone wrong, which is something we haven’t seen in the West.

    Davos 2018 – They know financial crises come from the private debt-to-GDP ratio and inflated asset prices

    The PBoC know, why don’t you tell the FED.

    Davos 2019 – They know bank lending needs to be directed into areas that grow the economy and that their earlier stimulus went into the wrong places.

    High housing costs eat into consumer spending.

    Disposable income = wages – (taxes + the cost of living)

    Actually, this is my equation, which should be at a level even Western policymakers can understand. They weren’t aware there is another term in the brackets with taxes.

    1. Summer

      “They weren’t aware there is another term in the brackets with taxes.”

      They know about the cost of living, they just don’t give a rats about most lives.
      It’s not included because if it isn’t a problem for them, the policy makers, they do not care.

      1. Sound of the Suburbs

        Business leaders complain when the minimum wage goes up.

        Disposable income = wages – (taxes + the cost of living)

        If they had my equation they could see the minimum wage has to rise with housing costs and the cost of living.

        Higher wages mean lower profits and this drives off-shoring.

        US firms off-shore and import back into the US causing problems with the trade deficit.

        Employees get their money from wages, so the employer pays through wages.

        When US firms work out they are paying those rising housing costs at the expense of profit, they will care.

  9. John k

    Mal-investment everywhere masquerading as growth.
    Not even mentioned are the big soe’s, steel etc, propped up with ever larger loans because they employ so many… Beijing terrified at the thought of these firms dumping vast numbers of workers on the streets, so no change possible here.
    Similarly construction… stopping means dismounting the tiger…

  10. Sound of the Suburbs

    There was so much to learn from Japan.

    Japanification – Turning Japanese.

    Japan lead the way in the 1980s and everyone followed like lemmings going over a cliff.

    The UK, the US, Euro-zone and China:

    At 25.30 mins you can see the super imposed private debt-to-GDP ratios.

    The sequence of events:
    1) Debt fuelled boom
    2) Minsky moment
    3) Balance sheet recession

    China was the lemming that looked down before it went over the cliff; they saw their Minsky Moment coming.

    The Australian and Canadian lemmings will be going straight over the cliff. They haven’t got a clue what they are doing.

    Japanification – What do they mean?”

    Technically they are talking about a balance sheet recession and the Japanese know all about it as they have been in a balance sheet recession for nearly thirty years.

    Richard Koo explains:

    In the balance sheet recession people are deleveraging from an earlier debt fuelled boom

    The money supply ≈ public debt + private debt

    The “private debt” component is going down and the Japanese maintained the money supply with Government borrowing to keep debt deflation at bay.

    Bank repayments destroy money and so the “private debt” component of the money supply shrinks (debt deflation).

    QE can’t get into the real economy due to a lack of borrowers, though it can still inflate the markets through the financial sector.

    Understanding the problem is the first step in finding a solution that works.

    Western policymakers didn’t understand the problem and used QE as the solution not realising it couldn’t enter the real economy due to a lack of borrowers.

    I know what Japanification is, you know what Japanification is, and when policymakers find out, they can use the appropriate policies to deal with the problem.

    1. Tom Pfotzer

      Great post.

      Another issue decidedly un-addressed in the west is wealth-disparity. Poor people spend income immediately on stuff they need, rich much less so. Leads to fall in monetary velocity, hence the shoveling of debt onto consumers as method to increase aggregate demand.

      A few other aspects of China’s situation left out of the article above:
      a. China has an actual, bona fide national industrial policy that’s generally, mostly implemented
      b. China’s attached to a land mass that includes most of the people, area, un-tapped natural resources and consumer demand extant on the planet
      c. China’s people are capable. They know how to do stuff, to make stuff. They’re nationalistic and motivated. They believe in Chinese-ness, the Long March. They’re used to having it rough.

      Those things count.

      The value to the West of watching China, in my view, is that it gives us the inspiration to re-acquire these key strengths (individual capabilities and sense of common purpose, e.g. effective and widely-committed-to policy) that are key ingredients in any nation’s success.

      In my view, that’s what made the Asian tigers, it’s what’s making China…but not so much any Western nation at the moment.

      1. Kasha Laran

        If China reaches Japan GDP per capita and stagnates, it will be like the largest economy in the world by very very far.

  11. Anon

    The scattershot credit expansion not only leads to fixed investment problems; it also leads to households getting deeply into debt with vulnerable inflated assets as their collateral. If that sounds like a familiar plotline, recall how that worked out in the U.S. after the 2008 crash. At least the U.S. has developed systems to mitigate the worst of the resultant shocks. Not so in China, especially as major economic disruption literally poses existential risks for the ruling party, which is already moving in a more authoritarian direction under President Xi Jinping.

    So what were the US systems used to mitigate the worst of the resultant shock after the 2008 Crash? A Bailout of Wall Street at the expense of the proletariat? Quantitative Easing (buying toxic –valueless– assets at market price? TARP surely did pose existential risks to the Democrats; it brought about our own Jinping (Trump)

  12. Godfree Roberts

    1990. China’s economy has come to a halt. The Economist
    1996. China’s economy will face a hard landing. The Economist
    1998. China’s economy’s dangerous period of sluggish growth. The Economist
    1999. Likelihood of a hard landing for the Chinese economy. Bank of Canada
    2000. China currency move nails hard landing risk coffin. Chicago Tribune
    2001. A hard landing in China. Wilbanks, Smith & Thomas
    2002. China Seeks a Soft Economic Landing. Westchester University
    2003. Banking crisis imperils China. New York Times
    2004. The great fall of China? The Economist
    2005. The Risk of a Hard Landing in China. Nouriel Roubini
    2006. Can China Achieve a Soft Landing? International Economy
    2007. Can China avoid a hard landing? TIME
    2008. Hard Landing In China? Forbes
    2009. China’s hard landing. China must find a way to recover. Fortune
    2010: Hard landing coming in China. Nouriel Roubini
    2011: Chinese Hard Landing Closer Than You Think. Business Insider
    2012: Economic News from China: Hard Landing. American Interest 
    2013: A Hard Landing In China. Zero Hedge 
    2014. A hard landing in China. CNBC
    2015. Congratulations, You Got Yourself A Chinese Hard Landing. Forbes 
    2016. Hard landing looms for China. The Economist
    2017. Is China’s Economy Going To Crash? National Interest
    2018. China’s Coming Financial Meltdown. The Daily Reckoning.
    2019. It Was More Like a Couple of Asian Decades Than a Century

    Marshall Auerbach has never, ever been right about China. His Fox News-based prognostications are nonsensical for anyone who has studied the foundation, evolution and direction of the Chinese economy.

    1. Synoia

      Bad news (and bad predictions) sell.

      Good news is considered fantasy and fairy sparkle.

      For example:
      Trump still has hair (inconsequential)
      Trump is loosing hair (Gasp!!! Clutch Pearls!!! Its Terminal Cancer, he might make an erratic decision and the world willl end!!!)

    2. Summer

      As those years went on, the integrated more with the schizo neoliberals.

      So after 2 decades of running with a bad crowd, it may be more of a possibility now.

  13. RBHoughton

    Most of the disputes regarding territorial sovereignty in Asia are the result of allied negligence after WWII. We victors just wanted to go home. Problems were left unresolved. There were people in North America and Europe who cared but not officials posted to Asia. That’s why ownership of all the islands is disputed.

    I laughed at Mr Auerback’s assertion of quote “Beijing’s efforts to subvert democratic reforms in Hong Kong” unquote. Hong Kong was offered ‘one man one vote’ years ago but the group now trashing the place on behalf of ‘you know who’ turned it down without a glance at what the people wanted.

    I did not know Beijing was attacking Taiwan democracy as well but that country was lost when the WWII allies allowed Chiang Kai Shek to ship his defeated army across the Straits to exterminate its ruling class, substitute army rule and institute a curfew for thirty years until a new generation had grown up conditioned in Chiang’d favor. Democracy indeed Mr Auerback!

    1. Synoia

      Its been done. Repeatedly. Mau Mau comes to mind.

      Not to mention the Zulu’s treatment of the N’debele (I think), the Shona’s treatment of the Matabele, the Euroba’s treatment of the Ibo and so on.

  14. Cal2

    Amazing what a people sharing a common language, culture, values and respect for each other can do.

    But without “diversity” or multiculturalism, how did they do it?

    Reminds me of the U.S. in the 1890s.

  15. Josephus P. Franks

    Isn’t TFP a dubious measurement of what normal people, not orthodox economists, would consider to be “efficiency”? If I invented a machine that produced everything the Chinese economy needed at a lower price, making me with my incredible productivity the only employed person in the country and everyone else unemployed, China’s TFP would be the highest in the world, no? (By drastically reducing the largest component of the denominator. Plus, TFP doesn’t include public infrastructure investment.) I agree that China’s further development is going to be rocky if it follows the same export-led capitalist growth model; but if the government switches to a more state-led model prioritizing equality and consumption (particularly in healthcare, education), and does what the scientific consensus says is required for human survival – investing trillions in renewable energy infrastructure – this may be one of many premature predictions of China’s demise.

  16. Tyronius

    Tales of imminent Chinese economic demise (reprised);

    Growth rates of Shenzhen vs Hong Kong, anyone?

    ’nuff said.

    I see far too many pundits mistaking growing pains for crises regarding China. If one must oversimplify the drive of a nation with 1.4 billion citizens, it is that they want a better life, are willing to work for it and their government understands its existential power rests on continuing to provide the best economic climate it can for them to do so. No magic sauce required- they save that for the noodles.

  17. Kasha Laran

    You are missing the forest for the trees.

    China’s GDP per capita is still lower than Greece, Turkey, Brazil, Russia, Malaysia.

    If you think that China will stay below these countries in terms of living standards you are dreaming. They will reach at least a taiwan status. Same people. So that is already a X3.

    Since they are also going to act as a financial center, technology center and green energy specialist (due to scale), they will reach a higher GPD per capita than Taiwan, so make it X4. And then it dwarfs the USA.

    Yes there will be bumps on the road. but there is no argument that can come to the conclusion that China will stay in the same league as Lebanon and Mexico in terms of wealth. none.

    And I have not started with India that has the GDP per capita of Nigeria.

  18. elkern

    I disagree with the OP. Sure, there will be some economic bumps ahead (though the most serious probably won’t be anything predicted here). China’s political leaders (“regime”?) have power over the financial sector, rather than the other way ’round (as in USA & the Rest of the West). Recessions can be cured by shoveling government money into new projects; some of the resulting infrastructure will even turn out to be useful.

  19. Lorenzo

    Good piece, but I think the author should substantiate claims like

    especially as major economic disruption literally poses existential risks for the ruling party

    I know this is a belief that is widely held, but in an analysis piece I wouldn’t expect that it be thrown out there as a given.

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