Comments on: Exports versus domestic demand – the argument rages

By: Has the Chinese Economy Really Recovered? The Signs are Mixed. « The Ruthless Truth blog

Sat, 06 Jun 2009 17:39:17 +0000

[...] expert Michael Pettis analyzes a Financial Times article written by Wang Qishan – a Vice premier in the State Council and [...]

By: Houhui

Houhui — Thu, 21 May 2009 04:50:54 +0000

Twofish:

I would be interested to hear your thoughts on the points that Prof Pettis (and others ) made here saying that China’s policies risk “exporting unemployment”.

I don’t put too much stock in the US / EU ’s ability to pressure China over policies which harm the outside world, but in Aluminium at least, we are not necessarily talking just about the US and the EU.

Personally I see the Chinese govt. making the only choice (politically) that they could have made. This choice involves several doubtful areas (future NPLs, trade frictions, continued allocation of capital to over-capacity) and some would say a gamble or two, nonetheless, the weak and anxious political system pretty much takes away the other options.

By: chan-lee james

chan-lee james — Wed, 20 May 2009 13:26:54 +0000

Thomas: I don’t have any definitive answers to your questions concerning the reliability of Chinese investment or savings data.

Curiously,Angus Maddison (1998, 2001) and others claimed that China’s growth rate is overstated owing to provincial authorities’ tendency to report high figures to further their careers. But, the level of GDP is probably understated by 30-40 per cent, owing to a huge underground economy and high marginal tax rates (33 per cent corporate tax and top personal rates of 45 per cent). Revisions to national accounts in 2005 raised the level of GDP by 16+ per cent, virtually all in the private services sector. But, given 150+ million migrant workers, an explosion of small business and poor sampling procedures, these revisions capture only a part of the underground economy. Furthermore, China’s investment data do not fully correct for land sales, when land prices are rising sharply. In addition, China’s national accounts are internally inconsistent. If fixed investment was 45 per cent of GDP and grew by 25 per cent in 2006, then GDP growth would be 11 per cent even without booming net exports and rising consumption that officially added 6 percentage points to GDP. If expenditures data are accurate this would imply a GDP growth rate of 17 per cent. Incomes based GDP data have similar problems. China’s current account surplus was 7 per cent of GDP in 2005, based on “hard” customs data of importing and exporting countries. But, if the gross domestic investment ratio is 45 per cent, this plus the current surplus imply a 52 per cent domestic savings rate. By comparison, World Bank and sample surveys place the national savings rate at 44 per cent. In sum, the level of private consumption and GDP appear to be significantly understated (and probably GDP growth rates, albeit to a lesser extent). Hence, savings and investment ratios are also overstated. If savings and investment rates are indeed in the 34 – 37 per cent range, these would be similar to those in Korea and Japan during their periods of high growth. best regards James

By: Judy Yeo

Judy Yeo — Wed, 20 May 2009 01:25:00 +0000

Lost decade – perhaps a little too dramatic – lost five years perhaps (seeing as how they are so used to five year plans) ?

It will be difficult but transition is the only way out isn’t it – the silver lining is, when everyone else is suffering and there is someone else to blame – suddenly things don’t look so bad, particularly for the bureaucrats.

By: Houhui

Houhui — Tue, 19 May 2009 16:43:14 +0000

Twofish:

Yes, i see your point about the danger of using abstract ideals as compared to any realistic possibilities for comparison. I chose Chinalco as an interesting example – it is a State dominated Firm, it has listed abroad as well as in Shanghai, and it is heavily involved internationally – both imports and exports. I think we should be careful idealising the current system before we see how well it holds up – time will tell. Suggesting alternatives is very rarely useless.

I dont fully agree about the health of Chinalco however, their retained earnings in 2008 compared to 2007 show a drastic and horrendous decrease. I dont have the figures at home with me, but i think the 2008 figure is about 1/18th of the 2007 figure. (will have to check back – but eitherway it is dismal).

If we are to assume that this inability to fire workers is causing trouble at other SOEs, and i know it is at some i work with, including the SOCBs, then they are stacking up future pain (either government / shareholder or employee) for questionable short term “benefits.”

I dont think we would need to have an “ideal” system in order to improve on the current one. I guess this argument will all be answered in time.. I think many people who have watched China’s businesses becoming more and more efficient and “modern” over the last 10 years are a bit disappointed to see them being turned back into a surrogate welfare state tool, and equally disappointed to see them borrowing with no clear way to use the funds profitably.

Government subsidising of some of these loans as you say, could be seen as a partnership kind of agreement, you get very cheap money, as long as you use most of it to maintain social stability on behalf of the government. Fair enough.

By: Thomas

Thomas — Tue, 19 May 2009 14:42:41 +0000

Quote CNM Zhige: “Also, if you study large SOE financial statements you will see that a very big share of their profits come from huge slugs of depreciation and are backed by weak operating cash flows.”

I don’t understand that sentence: Profits cannot “come from depreciation”. Depreciation reduces profits.

If you have a lot of depreciation in your p+l, cash-flow is much higher than profits, not the other way round.

By: Thomas

Thomas — Tue, 19 May 2009 14:38:21 +0000

Quote chan-lee james: “the official investment figures as % of GDP are way overstated by including land sales”

I’ve heard this statement a few times (that Chinese GDP investment figures allegedly include land sales).

Is this definitely true? Do you have any idea as to how much of official GDP is accounted for by “land sales”?

It sounds weird, because why would land sales be included in official GDP statistics?

By: CNM Zhige

CNM Zhige — Tue, 19 May 2009 13:37:19 +0000

Twofish, my professed Kenynsian friend, what we need more of in China is private demand, so build the big projects I say, they are fine, but make sure that one of them includes a helicopter factory so that the government can air drop cash into consumers. This would be a far more effective way of achieving the kind of stimulus everyone wants to see instead of a means of stimulus that compounds structural imbalances and unhealthy path dependencies. Sure, China needs a lot more infrastructure, thousands and thousands of hospitals, and investment will be a big part of the growth picture for a long time. The point that you miss is that over time the model has become increasingly inefficient at creating jobs and income. Also, if you study large SOE financial statements you will see that a very big share of their profits come from huge slugs of depreciation and are backed by weak operating cash flows. Net out upstream energy and raw materials and it looks pretty ugly. This is what the stimulus you so love to hail is propping up. The net effect is the weak link between high growth, job creation and income distribution, and the ability to rebalance the economy over time, and during times when stimulus is not needed. Based on what you have written above, it would seem that you would agree that if just giving away cash was more effective at producing employment than building either the steel plant or the apartment building, than cash would be better. The reason is that the Chinese model is a supply side model running out of steam precisely because there is inadequate underlying demand being created. Bridges, steel plants etc. don’t change that at this point. I say just give away an extra trillion yuan, and they would get more for it.

By: CNM Zhige

CNM Zhige — Tue, 19 May 2009 11:30:02 +0000

Twofish, you still do not understand the income side of the equation, and is it key to creating adequate consumer demand, and is seperate entirely from the distribution of capital. It has to do with returns on specific factors, and China has always been unbalanced in this respect, and even more so as a result of the distribution of capital. The result is the shrinking wage share of GDP, and the consequent fall in the private consumption share on the expenditure side. ALso, we are still talking about Keynsian stimulus at a time of relatively high growth, which is not what Keynes had in mind. The problem is that the job stimulus is taking place in a manner that will not produce sustaining income effects, and will not absorb enough of the excess labor to solve the problem. This is like making a fire with lighter fluid as the fuel. Burn up the capital and then what?

By: chan-lee james

chan-lee james — Mon, 18 May 2009 09:27:38 +0000

Two Fish: I agree with many of your thought provoking ideas.
A lot of the criticisms of China’s developmental policies, such as capital misallocation and NPLs appears to come from comparing apples and oranges (i.e. applying neo-classical 1st best criteria to a dual economy).
China’s dual economy has a huge rural sector with say some 250+ million unskilled excess labour supply. The shadow price of the latter is zero — hence the logic of Asia’s Developmental State and “smart protection”. This approach has big inefficiencies (NPLs, capital misallocation) — but 10% growth absolves many past sins. Why? — because “inefficient” output per head in the “modern sector” is three times that of the rural sector and you can “grow out” of your inefficiencies.
The mystery is how China has been able to navigate these treacherous waters over the past 30 years despite incomplete institutions, poor governance and a weak banking system and capital markets. At the same time, TFP and profitability appears to be pretty good — and in a few sectors — it is developing world class technology and companies.
Intiguingly, the Develomental State has mostly failed for the reasons noted above (Africa, Latin America, Middle East) or hit a glass ceiling (e.g. Japan, Korea, Phillipines, etc.).
Hence, I think the big issue is whether China will meet the same fate — now that the options of export cum investment led growth are less appealing?
PS I don’t want to muddy the waters, but the official investment figures as % of GDP are way overstated by including land sales and inconsistent price deflators. Data for consumption are also understated by incomplete sampling and coverage of newly created business, the self-employed and migrant workers. If we had decent data, China might look a lot more like a “normal” developing country. regards James.