Thread: China Growing

"Company line" claimed no one could have foreseen the economic turbulence, this article quotes economists that predicted the meltdown of the financial markets while the mainstream outlets were still pretending everything was fine.

Sorry Cmind, but Communism/Corporatism just doesn't work and someday you'll have to accept that.

Nouriel Roubini, the NYU economics professor that predicted many elements of this global meltdown, writes (at RGEMonitor, reprinted with commentary at JapanFocus) that there is strong evidence that China is facing a hard landing. Roubini points out that a hard landing actually still means a 5-6% growth rate. 9-10% growth is needed to absorb 24 mm new entrants into the labor market, including 12-14 mm poor rural farmers. A 5-6% growth rate means a significant risk to social stability and continued political control, so its clear that Chinese leaders are in a tough place.

Note that China is an economy is structurally dependent on exports: net exports (or the trade balance surplus) are close to 12% of GDP (up from 2% earlier in the decade) and exports represent about 40% of GDP. Real investment in China is about 45% of GDP and, leaving aside the part of this investment that is housing and infrastructure spending, about half of this capex spending goes towards the production of new capital goods that produces more exportable goods. So, with the sum of exports and investment representing about 80% of GDP, most of Chinese aggregate demand depends on its ability to sustain an export based economic growth.

China’s growth to date has been phenomenal, but it was based on exports and investment, at the expense of consumption. China almost aimed to be a supersized South Korea: in 2005, capital investment made up more than half of China’s gross domestic product. The capital-intensity of its growth also meant profits grew strongly as a share of GDP. But employment growth has slowed since the 1980s, so workers have gained small benefit.

Undervalued RMB and a lack of domestic safety net have caused Chinese households and companies to save. This “Supersized Korea” inadvertently created a “savings glut” which poured Asian savings into Western countries, flooding the markets with cheap capital.

…it also turned out that China never really carried through on its 2004 and 2005 and 2006 and even 2007 rhetoric that it planned to rebalance its economy.

Back in 2004 China’s leaders generally got the benefit of the doubt…most observers expected that China’s leaders would be able to deliver when they announced their plan to shift the basis of China’s growth away from exports and investment. Chinese policy makers generally had a pretty good track record of doing what they said they would do.

But four years after China indicated that it wanted to rebalance its economy, its economy looks more unbalanced than ever – its current account surplus is far far larger than in 2004, and investment accounts for a higher share of GDP than in 2004…

The underlying problem we are faced with is a global shortfall in demand. Because China did not allow its currency to appreciate when times were good, and did not stimulate domestic consumption, China can only help soak up their own production overcapacity through government spending.

The key to social stability is adequate employment growth. That growth either has to be fueled by maintaining exports, or increasing domestic consumption. But there are important reasons why domestic consumption won’t increase. For one, the lack of safety nets in health and elder care cause Chinese households to save in order to self-insure their risks for illness or health care emergencies.

The “super-sized Korea” response would be to stimulate exports, depreciate the RMB, and try to get the export machine humming again. But China is simply too big to play this game.

Most people are comparing the United States of today to the United States of the 1930s. But Pettis argues that this is not the right analogy. The correct analogy is between the US of the 1930s and China of today. In both cases, each country was the source of massive productive overcapacity, and export-led growth. In both cases, domestic consumption was not sufficient to soak up domestic production. And in the case of Smoot-Hawley, US policy makers responded with protectionism because European demand for US goods crashed by 70% in 3 years. And ultimately, the US bore the brunt of the pain.

Here’s my conclusions:

China’s equity markets could fall further. Many listed companies are dependent on real property or export markets.
China’s property markets could fall further. Not only are private individuals freezing up, but the government is also making significant investments in public housing. That might have some effect on price levels for private housing. To early to buy.
RMB will neither appreciate or depreciate. It will likely hold the dollar peg at the current level, for quite some time.
China’s labor markets will get more attractive to employers, but less attractive for employees and job seekers. There will be a large number of unemployed new graduates. There is risk of social unrest.
Freedom of speech and media will likely be curtailed further in the future as the risk of social unrest increases.