Jun 1st 2011, 14:39 by R.A. | WASHINGTON
I'M NOW back from China, and I'm going to resist the temptation to draw grand, sweeping conclusions based on two weeks jaunting around the country. I will tell you some of my impressions, however. And I'll start with the primary question on my mind as I left to visit China: how real is its economic growth?
I came away from China a bit less worried about property issues than I'd been going in. Don't get me wrong, China is building an enormous amount of new housing, and quite a lot of that new housing is standing empty, even as prices rise. But this isn't necessarily the problem many people suspect, for a few reasons. For one thing, the flow of new demand for housing seems sure. Millions of Chinese remain underhoused while real incomes are soaring. In some cases, the Chinese government is coordinating the construction of several years' worth of demand for new homes all at once, justifiably confident that new units will ultimately be occupied. In other cases, Chinese workers are buying up new units as investment vehicles"”but are using savings, rather than debt, to fund the purchases. It's not impossible, or even that unlikely, that prices in the main cities may fall, but it would be wrong to assume that China's property markets operate in the way American markets do and share the same vulnerabilities.
Tightening restrictions on household purchases, and tightening credit, designed to rein in booming private construction, may produce a squeeze in some segments of the real estate market, leading to pain for some on the development and transactional side of the market. But a slowdown in private construction is unlikely to gut the broader economy, thanks to a massive government push for affordable housing construction that will keep workers and suppliers busy. And the government has the will and the ability to make sure any broader loan troubles are contained. I won't begin to argue that there aren't huge inefficiencies and costs to this system, but it doesn't look like the kind of structure that's likely to collapse, bringing the economy down with it. It's clear where the risk ultimately lies"”with the government"”and it's clear that the government can handle it.
What little I saw of China's manufacturing sector reinforced my sense that it's an impressive and productive part of the economy. China's manufacturing also spans the value-added chain. In the large coastal cities, deindustrialisation is already a reality; labour-intensive factories have already left for cheaper markets, leaving high-tech manufacturing and a growing service sector behind. In the poorer west, by contrast, the scope for movement up the value chain remains significant. Much of what rapid growth China has left will be powered, in no small, part, by the convergence of western provinces toward coastal development levels, and this process is well underway.
What's China's manufacturing isn't is labour-intensive, even at the fairly low-tech enterprises. As large and strong as China's manufacturing firms are, they're not able to absorb all that much of China's enormous labour force. China seems to compensate for this by absorbing huge numbers of workers in a growing service sector. Productivity levels in many service industries must be ming-bogglingly low. Hotels seemed to have as many employees as guests, teams of workers with hand tools maintained roadside greenery, and buildings of all sorts are staffed with large groups of greeters and security personnel. Cheap labour may make some of this sort of employment worthwhile, but officials also indicated that, in the past at least, the government used public service employment to help absorb workers displaced when hundreds of thousands of textile and electronic manufacturing jobs were lost to cheaper locales. This may be costly and inefficient, but one wonders if it isn't less costly and inefficient than America's habit of letting displaced workers linger in long-term unemployment, on disability roles, or out of the labour force entirely.
Chinese officials were quick to play down the country's dependence on foreign demand, pointing to progress in the country's trade surplus. There may be less to this than they indicate; Michael Pettis writes here, for instance, about financial chicanery in the country's copper trade that may have artificially boosted import totals early in 2011. China is also cultivating export markets in fast growing countries across central and southeast Asia. But candid Chinese professionals admitted that trouble in the US and European economies represented a big potential threat to the economy. That threat will slowly ebb as Chinese consumers become more active. Government officials repeatedly reported eye-popping real income growth figures. But more than one of the people I spoke with likened the Chinese economy to a large ship that can't turn on a dime. No amount of movement in exchange rates or wages or policies will move the Chinese economy to a more normal rate of domestic consumption overnight.
What seemed clear, however, was that the fundamentals in the Chinese economy are stronger than many Americans suspect. For this reason, a collapse looks unlikely, and the government has the will and the means to fight off a short-term crisis. The government cites stability as its source of legitimacy, and it draws a tight connection between stability and economic growth. Stability, and therefore growth, will be especially important given the looming handover of party and national leadership from Hu Jintao to (it seems certain) Xi Jinping. The present policy strategy is muddied somewhat by the rise in inflation, which is a big source of concern among the masses. China will trade off a little growth for control of its prices. Officials will try extremely hard to ensure that the landing is a soft one, however. (For more on the progress here, read this week's economics Lead note. Markets seem to be overreacting to signs of a Chinese slowdown.)
The longer-term picture is far murkier, however. Nothing that I saw on my trip convinced me that the country's economy is becoming more nimble. There are large structural problems in the economy that will begin to bite as China exhausts its potential for rapid catch-up growth. And what then? The private economy is growing in importance (many of the larger companies in the economy remain state-owned or controlled, including a substantial number that "look" private). Chinese citizens are no strangers to entrepreneurship. But entrepreneurial activity isn't always consistent with party goals. Successful start-ups may threaten established firms with state connections, leading officials to either rein in the start-up or take for themselves a direct financial interest in it. Will China be able to embrace the hurly burly of the entrepreneurial marketplace? If it can't, the middle-income trap may loom.
There was one question to which I could never get a satisfactory answer on my trip. Chinese officials, I was repeatedly told, take a very long view. They're focused on the next few decades, not the next quarter. And they're very cautious, always anticipating things that might go wrong. Responding to this, I'd point out that China hadn't experienced a full year of economic contraction in three decades, and that this streak was unlikely to continue; eventually, every economy has a recession. What were China's far-sighted leaders planning to do when the economy slowed, and how would the slowdown affect the country's stability? The answer was always a bit of a non sequitur. China has a model that works for China, I was told. Confidence in China understandably soared in the wake of the global crisis and recession. But I wonder if the government has learned too much from its ability to negotiate the crisis without suffering a recession. Eventually, China's economy will hit a true bad spot. The more China's leaders believe that it won't, the less prepared they may be to handle it when it does occur.
Of course, westerners may overstate the impact of a slowdown on political stability. Many of us assume that when the first downturn hits, support for the party will collapse. That needn't be true; China's government seems to have built up a remarkable reserve of goodwill in recent decades. From the perspective of the average Chinese worker, it must seem blindingly obvious that the current Chinese system is the ideal, a sure route to prosperity. Still, stories like this and this and this give one pause. From my (admittedly limited) view of China, arguments that China's economy is little more than a Ponzi scheme, in which any slowdown will lead to implosion, are mistaken. I left with more questions than answers about the political system, however. I simply can't say how legitimate and stable the current government appears in the eyes of the Chinese citizenry. But I feel fairly confident that it won't be that long, perhaps 5 or 10 years, before we find out.
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"Markets seem to be overreacting to signs of a Chinese slowdown."
That's because the world has never seen anything like the China of the last 40 years. It is truly remarkable.
We could learn a lot of good economics from China if people were willing. What took the West 300 years to accomplish China is doing in a generation. But most seem to be drawing the wrong conclusion, which is that the state can guide the economy.
The state controlled the economy before Deng and failed. People starved. The economy began to grow, and people quit starving, only with freer markets. The state did nothing but get out of the way.
Today the state is wasting huge amounts of Chinese savings, but it has little effect because the savings rate is so high in China and foreign investment is the highest in the world.
The only mystery about China is how it accomplished such stunning growth with little in the way of protection for private property through the law. The answer seems to be that the expatriates who invested in China used their family connections and bribes of government officials to keep powerful officials from stealing their investment, a practice they had sharpened in other SE Asian countries.
But how long will that last? And can China make the transition to the rule of law that protects and encourages investment in the long run?
I agree the stability argument is overplayed. I think the more likely risk is that an economic slowdown will lead the Chinese to focus more on external enemies as a source of its economic problems. The Communist Party is in a very strong position to manipulate popular perception and has a number of tools it can use to prop up employment, if not in an efficient manner. The stability argument assumes that popular ire is focused on the incumbent party, much like it is in a democracy. This isn't likely to be the case in an autocracy which has exibited substantial skill in manipulating public opinion.
The main thing I'd be worried about is what a downturn would do to the security of foreign investment. The Party knows that it can survive by trading off economic growth for stability, and it has the necessary tools to coerce those that object. While the Party certainly does believe that stability is linked to economic growth, unlike foreigners it also has always shown an understanding that economic growth is just one of several props it can use to maintain power. It's a western bias (admittedly one promoted by the party, but the Qing did the same thing with greater emphasis on the cultural element as well as the economic) to assume that the economic aspects play the central role in China that they do in Western thought, instead of being one of several concerns that the Chinese weigh heavily. My analysis of China has tended towards interpreting their actions as seeing economic growth as a very useful tool but secondary to more traditional methods and objectives of attaining a "harmonius society."
@Fundamentalist
Meh, half of Europe went from poor peasant countries to advanced economies in less than 50 years around the last turn of the century, Germany being the most famous example, Japan of course did a few decades later.
It seems that as long as you have working insitutions, trade and education it is bound to happen sooner or later.
@Fundy
Sorry, sounded much more arrogant than was meant to be. My point was that I don't think there is that much new to learn from China and that we have actually seen this several times before.
jgradus, good point, but in 1900 Germany had a much narrower gap to close than did China in the 1970's.
And institutions was part of my point. Freer markets have done a lot for the Chinese, but today they lack the institutions that Germany enjoyed in 1900. Look how quickly Germany recovered from WWII. Institutions matter.
When China began its rapid development in the 1970's it lacked the institutions to protect investment. I remember McDonald Douglass, the aircraft maker that Boeing bought out, losing millions of dollars in investment in a new plant in China when the state decided it wanted the plant.
But expat Chinese who were doing most of the investment in China had learned to protect their investments in other corrupt SE Asian countries.
"In the large coastal cities, deindustrialisation is already a reality; labour-intensive factories have already left for cheaper markets, leaving high-tech manufacturing and a growing service sector behind. In the poorer west, by contrast, the scope for movement up the value chain remains significant."
As I understand China, only about a quarter of the population or so has been significantly impacted by the industrialization. Suppose it is a third or even 2/5, that is not material to my argument. But if the richer provinces and cities now move up the value chain, and start producing knowledge intensive products like commercial airliners and software while the western provinces take over labor intensive production, it seems to me the West, and the United States in particular, may be all out of manufacture and practically mortgaged to China's central bank by the time industrialization reaches the proverbial last village of China because the US may have few comparative advantages left, if any, when China's scientific and engineering innovation start to take up serious high-end productions that Americans imagined they would make a living from in this century.
Gald to see you back, safe and sound.
Thanks for the updates and your perceptions.
Regards
Any comment on this? http://www.reuters.com/article/2011/05/31/us-china-economy-debt-idUSTRE7...
Another 3 trillion yuan removed from the banks' balance sheets onto the tax payers. How long do you think a country with this level of financial repression is going to keep going while demand continues to be erased in the West?
Housing is a vehicle for saving because there is no other alternative that isnt being gobbled up by inflation and as many in the West found out housing is a highly illiquid source of savings. And this is China, where the concept of home equity loans has not yet arrived, thankfully. So workers might "save" but how will they then monitize these savings? Will a whole generation of workers sell of their expensive condos to pay for elderly care? And how do you address the fact that home ownership in China is becoming more and more concentrated, at least at the upper reaches of the market. Do you think people rich and hence powerful enough to afford to put down millions of dollars for apartments in Shanghai are preparing to share them with their servants? Short of some sort of neo-Maoist Communist re-ordering of the social sphere you are going to see the Manhatinization of China, with nice real estate owned by the financial types and rented out to everyone else while the poorest of the poor are condemned to the outer borough hellholes.
Excellent.
You do kind of have to wonder about the foregone growth that makes all these assurances possible, but that's hard to count and 8% is good enough.
Morani ya Simba: "the United States in particular, may be all out of manufacture and practically mortgaged to China's central bank"¦"
You're confusing competitive advantage with comparative advantage. Unless the Chinese can produce everything China needs plus everything the US needs, there will always be room for the US to produce things, even if the costs are higher.
But as China grows, so will the demands of its citizens who will purchase a great deal of China's output. At the same time, the debt problem will impoverish Americans over the next generation and reduce demand for Chinese products.
@fundamentalist, thanks, that's a good point. It will take a very serious re-balancing of trade balances though and, based on the histories of America's trade with China and with other Asian economies, I am somewhat skeptical about the extent to which access to the Chinese market will be provided.
Whoever you are, you've learned quite a bit during your trip to China. Suggest you travel more often and build on your newly acquire knowledge. Well done!
What does the title of this piece have to do with the article?
the Chinese economy is full unfair competition between State firms and private, and people don't trust each others in general because of our moral maneuverability has long since surpass of those corporal drones in the US.People literally,will do anything for a buck. The lack of moral constrains in the pursuit of making money,has brought down the national image.
However, this among of all these darkness and dreadfulness, there are signs of hope. For instance in a recent Newsweek article, "China Is Rewriting the Book on Genome Research " , a private non-profit research institute had turn a shoe-factory surrounded by truck repair shops and scrap yards in ShenZhen to The world's largest(in terms of producing results) genome-mapping facility in just less than four years. From shoe making to the ultra-high tech genome research,Speaking of industrial upgrade of a city. http://www.newsweek.com/2011/04/24/high-quality-dna.html The Chinese government has laid out plans for all sorts of technology and industrial upgrades in all three sectors of the economy, and many is already happening. So. Yes There are major issues with the Chinese economy and its wealth and political power distribution and management. But China is no Ponzi scheme.It's still too early to think about your disaster plan of a China implosion.
the Chinese economy is full unfair competitions between State firms and privates. people don't trust each others in general, because of our moral maneuverability has long since surpass of those corporal drones in the US.People literally,will do anything for a buck. The lack of moral constrains in the pursuit of making money,has not only brought down the national image,but is also hampering future growth.
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