I am, still trying to work out the implications for China of a rise in US household savings, but here is how I see it. I welcome comments that may help me refine or refute this argument.
For the sake of simplicity I am going to assume that there are only two countries, the US, which represents all the high-consuming trade deficit countries, and China, which represents all the high savings trade surplus countries – cheap cialis.Although of course there are other players, these two represent the lion’s share of their respective blocs, and for the most part the impact of other large countries (Europe, Japan, the UK) simply exacerbate the problems as I see them.
For the past decade until the onset of the 2007-08 crisis, the US has been growing quite rapidly. Powering this growth has been an even more rapid surge in consumption; cheap cialis.When US consumption grows faster than GDP, two things must happen.
1. The US savings rate by definition declines
2. If the country is running a trade deficit, and consumption is growing faster than production (assuming that investment isn’t falling, or is at least not falling by more than the difference), then the country must run a growing trade deficit – cheap cialis.Another way of thinking about this is that if investment exceeds savings (and with such low savings rates, US investment needs were much higher than US savings), the country must be a net importer of capital. To be a net importer of capital the US must run a trade deficit. These are just different ways of saying the same thing.
In that case the US has been running a growing trade deficit powered by the decline in US savings.But everything must balance. Cheap cialis: if US consumption growth exceeds US growth in production (I am ignoring changes in investment because they are a relatively small part of this), then in China production must exceed consumption. This is just another way of saying that as the US savings rate declines and powers a surge in the trade deficit, the Chinese savings rate must rise and power an increase in the trade surplus. In fact this is what happened.
Notice I am saying nothing about the direction of causality – cheap cialis. It could be US consumers who caused the change, and forced China into reacting – cheap cialis. Or it could be China whose polices have forced an increase in the domestic savings rate (actually an increase in production greater than the increase in consumption, which amounts to the same thing), thus forcing the US financial, system to accommodate by making consumer financing easier. Or of course it could be a combination of the two. The point is that the balance of payments must and will balance. Actions in one part of the system will cause equal reactions in another part, and the direction of causality is never obvious (See Note 1); cheap cialis.
As a consequence of the global crisis we are now seeing a sharp rise in US household savings rates.This has been partly mitigated by a sharp rise in government dis-saving (borrowing), but nonetheless aggregate US savings rates are rising, and with them US consumption must decline (See Note 2). If US GDP is also declining, the combination of a rising savings rate and a declining GDP must result in sharply declining consumption.
What does this mean for China? Obviously the US trade deficit is contracting quickly. This means that China’s trade surplus must also be contracting quickly. In fact China’s trade surplus has been growing, and this is where my simplification (the world consists of the US and China) runs into a problem. Although all trade surpluses are contracting, the fact that China’s trade surplus is rising indicates that other surplus countries are bearing more than 100% of their share of the global contraction; cheap cialis. I don’t think this is sustainable and ultimately cheap cialis, perhaps even already, China’s trade surplus will decline. By the way the fact that China has been able to force at least part of its own adjustment onto trade competitors will likely lead to increasing anger with China, as it already seems to be doing especially on the part of Asian competitors, and will power a further rise in international trade tensions.
Here is the important point, I think: As long as the US was consuming more than it produced, Chinese GDP growth was constrained on the bottom by the growth in Chinese consumption. In other words, China’s GDP had to grow faster than Chinese consumption (which means of course that the Chinese savings rate was rising). In fact, while GDP was growing somewhere in the region of 11-13% annually, Chinese consumption was growing by around 9% annually; cheap cialis.Thanks in large part to US dis-saving, in other words, Chinese GDP growth exceeded Chinese consumption growth by around 2-3% annually.
So what next? Now that the US is raising its saving rate, this means among other things that the growth in US consumption will be lower than the growth in US GDP. If the US GDP grows slowly, consumption will be flat. If it contracts, consumption will contract sharply. In either case the US trade deficit should continue declining except in the very unlikely event that US investment grows by more than the increase in savings.
Since the balance of payments must balance, if US GDP growth exceeds US consumption growth, China’s consumption growth must exceed China’s GDP growth, and Chinese savings must decline. Chinese savings can decline because consumption rises cheap cialis, or they can decline because GDP declines, but they must decline.
That implies that Chinese GDP growth, rather than be constrained on the bottom by consumption growth (i.e.GDP must grow faster than consumption), will now be constrained on the top by consumption growth – cheap cialis. China’s growth in GDP, in other words, will be less than its growth in consumption unless there is a surge in investment. There has, of course, been a fiscally induced surge in investment, but with rising debt and collapsing corporate profitability, I think this can at best continue for a year or two, and probably much less.
So what does that mean for future Chinese growth? When China was growing at 11-13% a year, Chinese consumption was growing by 9% a year. The rapid reversal in the earlier decline in US savings might cause Chinese GDP growth to grow by at least 1-2% below consumption. So if we assume that Chinese consumption continues growing at 9%, this initially suggests GDP growth rates of 7-8%.
But hold on. If GDP growth rates of 11-13% translate into 9% consumption growth rates, is it reasonable to assume that GDP growth rates of 7-8% will still result in 9% growth rates in consumption? I doubt it. My guess is that the growth in Chinese consumption will also slow. This suggests that while the US is adjusting, China’s annual growth rate must be significantly below 7-8%, perhaps 5-6%, or even lower. The key is the rate of Chinese and US fiscal expansion, in the former case to permit the rise in Chinese savings rates not to constrain domestic growth, and in the latter case to slow down the contraction of the US trade deficit.
But this is just a guess, and the example of Japan after the 1987 crash and the subsequent reversal in US dis-savings suggests that while a credit bubble can keep the game going in China for a few years longer, ultimately the surprise may be on the downside. On that subject let me note something that an unnamed official confessed about the impact of the US crisis on his country’s economy:
We intended first to boost the stock and property markets. Supported by this safety net – rising markets – export-oriented industries were supposed to reshape themselves so they could adapt to a domestic-led economy. This step was supposed to bring about an enormous growth of assets over every economic sector. The wealth effect would in turn touch off personal consumption and residential investment, followed by an increase in investment in plant and equipment; cheap cialis.In the end cheap cialis, loosened monetary policy would boost real economic growth.
It sounds plausible and like it might work. Cheap cialis: except that it didn’t. The unnamed official was not an anonymous friend of mine at the PBoC – cheap cialis. According to Tomohiko Taniguchi, in Japan’s Banks and the “Bubble economy” of the Late 1980s, the speaker was an official at the Bank of Japan and he made the comments in 1988, during a period when Japan was routinely referred to as a “creditor superpower” (and a country, by the way, with enormous foreign currency reserves, and whose currency would within one or two decades, everyone knew, become the world’s reserve currency); cheap cialis.
After the 1987 Crash in the US, many expected the Japanese markets also to crash; cheap cialis. But they didn’t – cheap cialis. After faltering briefly, the Ministry of Finance ordered the Big Four brokerages to support the market, and support it they did – cheap cialis. Within a few months the Nikkei was testing new highs, leading a Ministry of Finance official to boast that manipulating the stock market was easier than controlling foreign exchange. Check Edward Chancellor’s Devil Take the Hindmost for an illuminating take on the Japanese bubble economy of the 1980s.
The comparisons with China are cheap cialis, and of course are meant to be, a little worrying. This is not to say that China must repeat Japan’s spectacular 1990 crash and subsequent lost decade (or two); cheap cialis. It is simply to point out that none of what we are seeing in China is particularly new and far from being a source of great strength cheap cialis, the intense manipulation of monetary and fiscal policies and the financial markets can actually make the necessary adjustment for China much more difficult. Cheap cialis: just as Japan failed to come to terms with the sudden collapse of the US trade deficit and tried to export and monetize its way out, China may be doing something very similar.
But one way or the other if the US is raising its savings rate and so forcing more rapid growth in US GDP than in consumption, China is likely to see its consumption growth constrain its GDP growth. This suggests to me that once the effects of the (I think) unsustainable credit bubble being inflated by policymakers here run their course, we are in for a longish period of much slower GDP growth.
Note 1. I know I will be assailed on both sides by people saying that only a fool is unable to see which way causality runs in this case, but let me suggest that if you know beyond any doubt the direction of causality here, then you probably do not understand the problem.
Note 2. Except, of course, in the case in which US GDP is rising much more quickly than the US savings rate, which is a complication I don’t think we need to worry too much about.
This is a long and convoluted way of saying that China will not be able to hold its double digit growth in the future. I wonder who in his right mind is arguing otherwise?
Comparison w/ Japan is a mute point, simply because its productivity had peaked while its own bubble burst. China’s LT growth ultimately depends on its ability to increase productivity, rather than any policy from OECD nations.
A very interesting exposition professor. And no Cindy6, this is certainly not simply a convoluted way of saying something that everyone already agrees with. Many pople are still predicting a return to double-digit growth after a one- or two-year interruption, just look the projections by the commodity and chemical industries.
And much more importantly, Pettis is not simply saying that China won’t return to double-digit growth. That is a strange interpretation. If I read him correctly he is suggesting that GDP growth will average 5-6% for many years, and possibly much lower. Since Goldman has predicted 8.3% this year, and above 9% next year, I believe that Pettis his arguing for some of the lowest estimates out there. Whether he is right or wrong, he is cetainly not stating the consensus.
And perhaps the comparison with Japan is more appropriate than you realize. Aside from the fact that Chinese productivity growth peaked more than a decade ago, it is incredibly foolish to argue that credit bubbles can only occur at the point where productivity growth has peaked. In that case you would undobtedly argue that bubbles cannot occur in Latin America, where productivity growth still has a long way to go.
By the way, everybody’s “LT growth ultimately depends on its ability to increase productivity.” This is not a feature unique to China.
And finally, the point is “moot”, not “mute”.
Not beyond doubt of course, but my feeling is that in the end of the day the causality runs from the chinese side and its mercantilistic policies, which found a fertile soil with the housing bubble and lax regulation in the US financial sector. One could not have extended so much without the other, that is for sure, but the fact that you have one big (very big) player (China) fixing a critical price (the exchange rate) distorts the adjustment of the system. In a big way this is related to the workings of the international monetary system, which causes an underlying deflationary force in global demand as surplus countries do not face any constraint that forces them to adjust. The emergence of China as a big a systemic relevant economy is the big happening of the decade. Of course, everybody realizes this, but not its full implication. Given its size and its exchange rate policy, China forced the rest to adjust. Given the fact that the US authorities were blindly accepting the rules of engagement by not increasing the pressure on chinese FX policy – if buying 2 trillion is not to manipulate I do not know what is – the US chose to accept a passive role. In other words, the US was very active in trying to be passive (maybe because the misguided view that the chinese, by holding large amounts of UST, could deter the US from demanding an adjustment in its FX policies…Hillary Clinton’s stance in China recently was pathetic). US authorities reacted in a non strategic way by not seeing the full picture of where they were heading (perhaps also the chinese did not see the dollar trap they are in now becoming so big). On the side of the US, it is difficult to argue with the idea, for example, that the Fed was just following its mandate all along: trying to keep the economy at full employment, even if that meant consumption growing above GDP (because the rest – investment and exports – were being constrained and the US does not control its exchange rate). So, it works as if the americans (and all deficit countries) were not the active parties. Anyhow, I guess the critical issue is to analyze the consequences the the world economy of having a big player (china) avoiding a crucial price (the exchange rate) to clear. As long as this is the case deflationary pressures will shift around countries.
Another reason why the comparison with Japan might be a bit misleading: At the time, Japan’s living-standard was much higher than China’s average living-standard right now. There’s lots of things that most Chinese households don’t yet have and probably aspire to have. Question is: Can they be tempted to go out and buy those things, and is the government willing to help them along with the right kind of policies?
[...] the whole story here: Michael Pettis aggregated by [...]
just to complete the above post: when I mention FX policy I mean it more or less as the ultimate reflection of a whole range of policies affecting trade. In China’s case for example, economic policy has been in a broad way directed to enhance surpluses. Given high productivity growth and ever high external surpluses, the result should be a natural trend of yuan appreciation (not only in USD terms but in real trade weighted terms), which has not even started to happen.
I think China could improve productivity but a lot of what needs to be done in land reform for agriculture is an anathema to the party’s ideology, ditto more SOE reform. The problem is that the party in a number of respects has itself in a bind between standing for anything Communist/Statist at all and actually getting things done. Let’s hope for China’s sake they go to much more practical Singaporean route and that the hardliners in the Party get marginalized.
Your assumption is the problem. China’s manufacturing is not competing with the US manufacturing. It is competing with manufacturing of India, Brazil, Mexico, Africa, etc. US is not the only market for China’s goods either. US demand on Chinese goods can be replaced with those from Europe, Japan, Australia, Africa, Middle East. You will not have a more accurate look if you over simplify the situation.
The most important factors for Chinese growth are internal: running out of cheap labor (underemployed rural farmers) to be converted to high paid labor (migrant factory workers), which was the source of Chinese high growth rate in the past decade. When labor becomes hard to come by, in the next decade or so, forcing labor cost to go up, the competition from Africa, India, Indonesia, etc. will become the replacement of China as manufacturing location. Don’t forget the fuel cost hike either, affecting transportation costs. This would put cost pressure on Chinese made goods vs Mexican, Eastern Europe exports to the North American, South America and EU.
China has to revamp its farming industry to reduce labor demand in the farms, to release more workers to the manufacturing, to keep its labor cost low in order to maintain its growth.
If I might offer my two cents, I think the comparison to Japan’s experience makes a mistake that many of the similar comparison’s to prior downturns and events are making. Not that it diminishes your point.
Japan was in many ways in a much superior position to that of China currently. During the massive appreciation of the Yen, the popping of Japan’s bubbles and their lost decade, their main export market went through a massive increase in buying power. From the early 1980s to this decade, household debt in the U.S. went from 45% of GDP to close to 100%. The U.S. was in a multi-decade consumption binge.
It may seem odd to take the position that Japan was lucky during the period from 1990-2007, but weren’t they? What if the jump in U.S. savings began after the 1991 recession?
It seems to me the lesson China took from the Japan episode was not to allow itself to be forced to take a big revaluation like the Yen went through in 1985-87. But that only aggravated the imbalances that fed the U.S.’s credit bubble and quickened the pace of its growth.
Now China faces an environment almost diametrically different from that which Japan experienced. Their main export market is going through a period of abrupt contraction in both consumption and credit.
Essentially, China now needs an economy completely different from the one they’ve built. And yet, they are expending a great deal of energy, credit and capital trying to revive that outmoded economic model.
I believe it’s within the realm of possibility that China can maintain growth in the 7-8% range, but I’ve yet to hear from anyone a reasonable scenario for how that happens.
From about 1910 until 1930, U.S. was producing more than it consumed. The adjustment period that followed was not one of increased consumption.
Very enlightening piece, and here I thought the US was supposed to be the Japan stand in.
Just to check my understanding, is it fair to say that this equation works:
(Production + Savings) – (Consumption + Investment)= Current Account balance
Where the four above components are understood to be the sum of all sectors of the economy.
Cindy6, I would think the implications for China are much more severe and complex than not being able to hold its double digit growth rate. This momentous imbalance could potentially make Japan’s crash look like a tea party.
Michael, after reading this article and looking back on previous discussions here, I am gaining more appreciation for your article on ‘It’s not just the Currency’.
I haven’t worked it out yet, but is has something to do with an illusory connection between running large fiscal deficits and planting the seeds of protectionism.
My initial concern is that governments who increase deficits to stimulate their economies are increasing their dependence on production. Government spending/investing directly into production inherits political attachment which increases the motivation to protect it.
The rapid increase of fiscal deficits may address the short term liquidity crises, but nurturing the seeds of protectionism is a real threat to global trade flows. Do you get what I am trying to say?
I’ll give you fresh example other than in the automobile industry – A new Canadian law is going to be passed to ban tobacco products infused with fruit and candy flavors, which health officials say entice youngsters to smoke, and they want the US tobacco lobby to ‘butt out’ of Canada’s health laws. The political investment into Canada’s nationwide health care is being protected in this case by legislating contagious trade barriers which are very likely to encourage other countries to follow.
We are already seeing ‘Buy American’, ‘Buy China’ and ‘Buy Canada’ government purchasing restrictions at the provincial, state and local levels.
Free trade is looking more mythological to me these days.
Michael,
I think you have the basic dynamic right, but it seems you are ignoring the (relatively fat) tail risks. “Japan” is an analogy that tells us tail risks don’t exist: “lost decades”, Japan-style, are relatively benign events, after all. Your experience in Latin America should give you a different set of tools to work with.
The most significant tail risk is the impact of a Chinese trade deficit on BWII and U.S. interest rates — the impact higher, that is. So China gets to grow fast for a couple of years, as you say (after all, it controls monetary velocity by fiat, which is something not even Japan could pull off). Then what? U.S. rates spike, not because there aren’t enough savings, but because the price-insensitive buyer is now a seller. What is the impact of higher U.S. rates on the global economy? That depends on whether the Fed allows real rates to rise as well. Plausibly, the Fed and Treasury step up deficit monetization as they are stanch output-gap enthusiasts (no inflation as long as there is one). The tail risk of higher global inflation is obvious.
On the other side, what happens if China rachets back lending? Can there be a “soft landing” from this sort of policy? What is the impact of a consumer-spending GDP growth cap on unemployment in China? The answers point to a severe deflation should China create a dependence on velocity (lending) policies and then attempt to wean the economy away from them.
The Japanese “lost decade(s)” was akin to jumping off a trapeze and landing on a high-wire of slow growth/mild deflation. It would be a true “gray swan” event if the China/U.S. couple could pull off the same feat.
Yes, very important post. It seems to be using very simple arithmetic you are making a very convicing case to expect much slower growth than almost anyone else proposes. This argument should be more widely circulated.
How much of the slack do you think India can pick up from Chinese adjustments in commodity purchases? It is nowhere near comparable now but perhaps in 5-10 years?
The demographic situation is quite different too as China has an inverted pyramid while India has a normal shaped base of young/elderly social safety net supporters.
The mercantilist world has not enacted the policies necessary to sustain a proportionate middle-class, i.e. domestic consumer, commensurate with their capacity. In fact, the ‘elites’ of these countries have benefited a lot from mercantilism and see little reason to change, regardless of the difficulties.
Widespread bigotry and prejudice based on social status is the social tip of this iceberg. Listen to how wealthy people in Hong Kong talk about their maids. Yes, the developed world has problems of this nature, but nothing compared to what you will hear in the parlor rooms of Manila, Bangkok etc. Why give the workers more when they are ‘inferior’ ?
First, I’m not sure how big a revelation the conclusion is. For a few decades most people have talked about China in terms of export demand versus domestic demand. China’s growth has been a weighted average of these. Domestic demand was already contributing more to the GDP growth in 2007 than were exports. Thus in 2007, the upper bound on growth was already “consumption” growth. So yes, we saw double-digit growth driven by domestic consumption. You seem to have worked to this conclusion backwards.
Second, your US-China model is pretty much broken. Try to include China’s trade deficits with Korea, Japan, and Taiwan when discussing overall exports to the US. The deficits with those three countries have historically been equal to the surplus with the US. Since China usually adds value to the technology from these countries, those net deficits matter in context of the US.
Third, the surplus HAS dropped year on year. There are seasonalities that vary with the shipping season.
Fourth, there WAS an abnormal increase in the surplus back in late 2008. This was almost solely due to the countries noted in my second point. The semiconductor and other technology areas completely stopped production. Utilization basically went to zero. That is how those industries operate. Meanwhile, retail numbers were relatively steady (dropped very slightly compared to the 60% drops in semis). China exports are there to fill the supply chain to the retail stores. Thus there was a huge gap between purchasing and selling. This has already reversed. When a full recovery comes, it will mean a massive drop in China’s surplus. But that will be a good sign, not a bad one.
Fascinating (and easy to understand) analysis, Mike!
Of course, this all seems to rest on the assumption that US savings rates go higher and stay that way. But what if they don’t? What if Americans are just waiting for a recovery to resume their spendthrift ways?
Thank you once again for an erudite and clear post Prof. Pettis!
On the trade deficit for China, whilst initially the surplus was growing, i believe that trend has reversed in the last two months of data available. In April and May, Chinese imports fell by less than exports. (although the margin of difference was small – 1 or 2 %points)
However, I see a little problem with the idea that export surplus countries (such as the other Asian economies) are simply competitors to China, and thus that if China’s surplus grows, these countries will be angry as they are “bearing more than 100% of their share of the global contraction”. Given the nature(particularly in Asia) of the international supply chain, the failure of Exports to fall at the same rate as the fall of imports (for China) could be the result of Chinese end assemblers / exporters adjusting to the fall in end (export) demand before continuing with importing parts etc from the rest of the region for continued production.
As for the Chicken – Egg debate, i think it is pointless. As Prof. Pettis points out, the key is what must happen next. It is difficult for anyone to complain (as a moral issue). On the one hand, Chinese growth has undoubtedly gained tremendously from its trade surplus / currency policies in the past. On the other hand, US consumption has been much higher than it could have been due to the situation too.
Whilst it may look as if the Chinese side was at least more active in creating the situation (as the PBOC / SAFE etc actively borrowed chinese companies’ USD to invest them in US treasuries etc), there are two sides to any coin.
I disagree with some posters here claiming that most people are not expecting such low growth in China in the future. There are a sizeable amount of economists / analysts i know who agree that within a few years China’s growth will be severely hindered. Of course on the sell-side there is reason for optimism before that time comes. Also, there are still questions about Chinese numbers during crisis periods. There are some economists suggesting that China’s true growth is a few points below the official percentage, and not just due to YonY reporting differences.
Bill, i don’t think you can really say that “Chinese manufacturing is not competing with US manufacturing.” I realise that the sectors look different, but there is significant overlap and they are obviously competing on such diverse products as aluminum, cars, computers, coffins, etc etc. (The list is very long.) I like that you bring in other structual long-term factors to the Chinese growth decline. How much of Chinese growth has been resulting from once only (although years long) reforms in the economy? A good question. The rural labor —> manufacturing labor is just such change. Increasing productivity per worker in farming through increased mechanization will be one part of freeing up more rural labor, but the government have been consistently dragging their heels on this, suggesting that there is not a problem yet with labor shortages (and especially not since the crisis struck!). The book The China Price offers a fascinating insight into China’s model from the workers’ perspectives.
Thomas, to suggest that what has happened to Japan cannot happen to China because Japan has and had a much higher standard of living than China is also a-historic in the same way as Cathy6’s comments. Actually the kind of liquidity bubble Japan experienced has happened both to countries that are much richer than Japan, an example being the USA in the past two years, and to countries that are much poorer than China, including my own country and other countries throughout history in Latin America and Asia, and indeed to China itself at earlier times when it was even poorer than it is now. The fact that a lot of Chinese are poor and have aspiration towards greater levels of consumption in no way implies that consumption will automatically surge to the point where the credit bubble is justified. I would further argue that just because a country is relatively rich doesn’t mean that it doesn’t have as the same aspirations towards greater consumption as poorer countries. Most consumption is positional, and middle class people in the US, Europe and Japan are as eager to increase their consumption as they are in Ecuador or China. A Chinese or Ecuadorian peasant may aspire mightily to my standard of living, but I too have quite a lot of things I aspire to. To take a simple example, I would love to have a much more complete wine cellar, but my poor apartment in Mexico is too small to accommodate one. The past decade in the US should have shown pretty clearly that the desire to increase consumption is not a characteristic only of the poor. Of course there are differences between Japan and China, as professor has noted many times, but that is not one of the important ones. Both countries relied on export-intensive growth models and both countries have responded to a substantial change in the export environment which should force them to jettison their development model by, at first, trying to reinforce the model though liquidity creation. I think that is the point Pettis is making.
Paul, I definitely agree that it is incredible to think that policies which have resulted in the largest trade surplus and the largest reserve accumulation in history were not in some way responsible for the global imbalance. For some reason many commentators assume they are being sympathetic to China when they claim that Chinese policies have had no part. Apparently this would suggest that Chinese policies cannot affect their own country, let alone the world, and that only misguided US and European policies can cause things to happen. One of my professors used to call it the only-white-people-can-create-history theory. In fact given the size of the economy, the size of the population, and relative power of the central government and the pace of recent growth, it is a pretty safe bet that much of what has happened in China and the world is explicitly a result of Chinese policy choices, misguided or not. However I don’t want us to fall into the trap of thinking that either it is all the fault of crazy American consumers or all the fault of crazy Chinese mercantilists. It required a combination of banking and monetary policies in the US and banking, monetary and industrial policies in China, among other policies in Europe, Japan, and elsewhere, to get us to where we are. By the way I agree with you that Hillary Clinton’s position was pretty weak and betrayed a serious misunderstanding of how the balance of payments work, but in her defense this seems to be a vast mystery to an awful lot of people who ought to know.
Nemo, I would argue that not just land reform but also financial sector reform, both of which are political issues before they are economic ones, would go a long ways towards giving China the next wave of productivity growth.
Bill, your point comes up over and over in the comments section of this blog. Aside from the fact that it is not at all necessary for trade policies to cause an expansion in one country’s tradable goods sector and a contraction in another’s only by direct competition (a common but completely incorrect assumption), the claim that “China’s manufacturing is not competing with the US manufacturing” is only true if you require 100% overlap. But as has been pointed out many, many times, there are actually a lot areas in which they compete (ask GM). The head of a German chemical manufacturer in China recently told me how China was expanding massively in chemicals even though it lacked any comparative advantage, thanks to currency, procurement, interest rate and other subsidies. Not only German but also US chemicals manufactures were finding themselves unable to compete, even though they had the technological and raw material advantages (which are the key advantages in chemicals, not labor costs which are negligible). The simplest way to refute this point I think is simply to note that while China’s tradable goods sector expanded massively in the past decade, the US tradable goods sector contracted just as massively. It is hard to believe that the areas that lost out in the US are now, only a few years later, so far beneath our ability to replicate that that it would be impossible to reopen those plants.
By the way I disagree with you completely that the sole important factor for Chinese export growth was cheap labor. This is true in certain sectors, but if it were generally true China’s most rapid growth would be in labor-intensive tradables. In fact as the World Bank and many others have constantly harped on, China is overly reliant on capital-intensive production, not labor-intensive production. This makes subsidies, especially through very low financing costs, especially effective.
Bob, you may be right. The fact that Japan was forced to make its adjustment during a time when the US adjustment was much smaller, perhaps even non-existent except during the very early 1990s, suggests that if the US is truly adjusting as I think it is, the process will be more difficult.
Stoneweapon, yes, I think this entry is very connected to the June 3 and May 29 entries. It is all part of a continuing attempt on my part to try to understand the mechanics of the recent boom and the coming adjustment.
David Pearson, thanks for your comments. I am not sure whether I would predict a Chinese trade deficit in the next few years. I expect they will continue to run surpluses, albeit much smaller ones. And if the contraction of the US trade deficit is caused by an increase in household savings, I am not sure I am too worried yet about rising interest rates. I know this is a very controversial point, but I am on Krugman’s side in this debate, not Ferguson’s.
In Debt, I am not sure what is going on in India, but I do expect long periods of steadier growth there absent political disruptions. They may pick up some of the commodity-buying slack, but I have to confess I am an agnostic on the subject of the rising commodity prices.
Sean, I think you are wrong. In 2007, and in fact in the last 20 years until now, consumption was not the upper bound but the lower bound. It will now become the upper bound. That is the whole point. I am not sure of the relevance of your second point. Your third point is, I think, also wrong. The Chinese trade surplus this year has been 14% bigger, not smaller, than over the same period last year, and this even with very strong evidence of significant stockpiling and rebuilding of strategic commodity reserves, which have temporarily and artificially boosted imports. I need to think more about your last point, but it seems to me that if it is even partly true, it further undermines your first and third points.
GE Anderson, yes the fundamental assumption is that US savings rates will rise. This may be a false assumption, but I doubt it, and if it were, the consequences would be delayed but much worse.
Houhui, yes, April and May surpluses were marginally lower, but don’t forget that there has been a lot of pretty well-grounded speculation that China was rebuilding strategic commodity reserves, so this may have accounted for at least part of the decline. We need several more months to see which way the numbers go. There is no doubt in my mind, however, that eventually that the trade surplus will decline sharply. You may be right in arguing that there are perfectly natural and reasonable causes for China’s relatively better performance, but I would argue that a number of policies (and statements by leaders) aimed at improving trade competitiveness must have had some effect. At any rate, trade disputes are not always rational. If China’s competitors suffer more than China from the global import contraction, they will and already are) going to be angry. As I said I think Saturday on Dialogue, to avoid a rise in serious trade disputes we will need statesmanship from the US, China, Europe, Japan, and other Asian countries, so of course I am pessimistic. That may sound a little glib, but the historical precedents are not very encouraging.
Mr. Pettis,
Government deficit spending is a big factor that I think is being left out of your model. While the US personal savings rate is rising, the government is amassing debt at a faster rate to try and compensate. Meanwhile, in China, a large amount of government sponsored investment is intended to make up for decreased exports. In both cases, GDP is propped up even though the extent of the relationship between private Chinese saver and private US borrower is declining.
Increased government spending may be as unsustainable as consumer spending was, but at least for now US deficit spending is helping to sustain the trade gap by slowing the total decline in US wages and consumption.
While the US trade gap is about half of what it was a year ago, almost half of the decline is related to the decline in petroleum prices. We have yet to see the bulk of the adjustment to a more sustainable balance of trade.
I recently returned from 2 1/2 weeks of traveling through China and trying to assess how well the Chinese economy is adjusting to the global economic rebalancing process. My conclusion is that China is doing quite well. China is engaged in some major economic restructuring to develop the consumer economy, while also repositioning Chinese industry to compete in new export markets to make up for lost production in existing markets. Increased Chinese competitiveness across a broader range of industries will compensate for rising Chinese living standards and a stronger RMB.
In my view, the level of economic foresight shown in China is sorely lacking in the US and other nations.
Roger: Government deficit spending is a big factor that I think is being left out of your model. While the US personal savings rate is rising, the government is amassing debt at a faster rate to try and compensate.
Me: I think Pettis does mention government deficit (i.e. fiscal) spending several times. In fact based on Brad Setser’s numbers he says, contrary to you, that fiscal spending is growing more slowly than private spending is contracting. Does anyone else have numbers on that?
Michael, have you ever seen any good texts or pieces on China’s tax and welfare systems? I figure the capacity for this system to move the $$$ from SOE/government balance sheets to consumers is going to be a big part of getting consumer spending going – real estate bubbles and credit for all can only take you so far. As a person on the trading side this systems viability will determine how much more legs the fiscal/credit expansion can go, though in the much longer run reform is the only way forward.
Prof Pettis.
Thank you again for taking the time to answer our comments!
Personally I think i mostly agree with you (I am a pessimist here too! – although it was amusing to see the host of Dialogue the other week introduce you as the “pessimist”), China’s situation / policies are damaging other Asian nations, i was just pointing out that there may be other factors confusing the situation.
Undoubtedly the export tax rebates, currency policy and other chinese policies are giving an advantage to the exporters.
I think India – China is one area to watch, they have had trade rumblings for a while, and more recently there has been border tension too (i would suggest as a result of the economic tension).
As for Strategic commodity reserves, my feelings are that there is build up, but that this process didn’t start till late February / March, and probably didn’t get into full swing till late March. This may indeed explain the last two months data somewhat…as you say we will have to wait and see the next few months.
I am in total agreement about the bizarre weakness of the US administration’s relationship towards China on the Treasury purchasing problem. Geithner was a bit strange too. On the other hand, for the Chinese to seek assurances that their dollar holdings are “safe” was also bizarre from a balance of payments point of view, given past policies which they selected to operate. As Geoff Dyer noted (or quoted someone else as noting) in an FT article earlier this year “China’s Dollar Dilemma” it may well be a gigantic game of chicken. So far it seems that, in public at least, the US side swerved first!
On that last point, I think the Chinese could be glad that the US didn’t pursue certain stimulus policies which would have further damaged the value of the dollar investments.
Hi Janice,
Thanks for responding.
He mentions government borrowing once on the US side, but discounts it. I think government policy is essential in looking at where we are heading and what we should be doing. My main points would be:
1. We haven’t seen the really big adjustments yet in US consumption and production patterns that we eventually will have to see. Hopefully the US will figure out that it has to become more competitive as a producer if it wants to sustain a high level of consumption. If we don’t, the forced reduction in consumption could be much more painful than what we’ve already seen.
2. China can keep boosting government spending to keep employment levels high because the Chinese competitive position is strong and continues to improve. If China did not have the strongest manufacturing economy in the world, with room for growth and expansion into additional markets, spending on improving the domestic economy and living conditions would have more substantial negative implications.
On both sides of the trade imbalance, I see competitiveness as being key factors effecting what countries can and should do to adapt to the changing economic realities.
Rodger
Is it accurate to think that Japan’s current account surplus occurred without a fixed exchange rate, because Japanese people were saving and investing their savings in the US, so that there was a demand, in Japan, for the US dollars that Japanese exporters received for their goods? Whereas in China, the government contributes to the current account surplus by fixing the exchange rate?
http://experts.foreignpolicy.com/posts/2009/04/03/stimulus_for_protectionism
In Defense of Protection
by n6532l on Fri, 04/03/2009 – 11:01pm
“There are two problems with your advocatory of free trade. The minor problem is that the subset of people who are consumers is almost identical to that subset of people who are workers. Therefore protecting consumers at the expense of workers is a loser.
The more important problem is that bad things you ascribe to trade protection are not consistent with the American experience.
For most of our history we were a high tariff nation. Cambridge University economist Ha-Joon Chang taking issue with notion that Smoot-Hawley was a significant contributor to the Great Depression says:
“This is a misreading of history. The depression-era shift to protectionism was much less dramatic than is often claimed. The conventional story says that the world trading system collapsed because the US introduced the Smoot-Hawley tariffs in 1930. But this was not a radical shift in policy. America had been the most protectionist country in the world for the previous century, while Smoot-Hawley only raised average industrial tariffs from about 37 per cent to about 48 per cent, well within the historical range of US tariffs until then. Tariffs in other countries did rise after 1930, but only moderately, and economic historians have shown that trade shrinkage after the depression had more to do with shrinking demand and the drying-up of trade credits.”
To see the manifest advantages of protection over free trade compare the performance of the American economy from 1869 to 1900 under tariff protection with the period 100 years latter 1969 to 2000 under free trade. From 1869-1900 tariffs were above 40 per cent while from 1969-2000 they were below 10 per cent. From 1869 to 1900 GNP quadrupled while real wages increased 50 percent, and retail prices dropped significantly. Under free trade a century later real wages declined. Real wages of most Americans peaked in 1973 and are down since.
Professor Ha-Joon Chang concludes his article with:
“The reality is that free trade has never worked very well, especially for developing countries, but it is going to malfunction even more in the coming years. Rather than trying to nurse this ailing sacred cow back to health, we should slaughter it—and concentrate our energy on designing a new system of international trade that pragmatically mixes free trade and protectionism.”
His article is at at http://www.prospect-magazine.co.uk/article_details.php?id=10628
If you can do it you are not bragging. Protection can do it for the United States. Protection has demonstrated over more than a hundred years that it can do all the things free traders say protection can not do. Free traders on the other hand are braggarts and bluffers who have to cherry pick and spin their data.”
Hi Michael,
You say ‘Powering this growth has been an even more rapid surge in consumption.’
The way I look at it is not that consumption powered production, but production allowed consumption. Demand is infinite and consumption is only constrained by production. Its a minor point, i know, but it means that there is no reason to assume China’s consumption rate will slow from 9% and that production will fall to 5-6% as a result. Consumption rates in China may rise, causing the trade surplus to shrink faster not causing production to rise faster.
Essentially, this is the argument for economic decoupling. ie the US consumer has not been the driver of global growth but rather the main beneficiary.
[...] not necessarily a sign of strength Posted in Uncategorized by Ravenor on June 21, 2009 Michael Pettis on Japan’s response to US import [...]
Michael,
Thank you for writing a single piece that can serve as a foundation for discussion of the issues China is likely to face from US’s increased savings. Your argument is well structured. Your assumptions are easily mapped and reasonable. And your simplification down to two countries really helped me to finally grasp these points without being distracted by secondary points. Complexity can always be added, but I needed some clarity first and you’ve provided that brilliantly.
A few questions:
- “The lion’s share of their respective blocs” – anybody have time to quantify this more clearly? It is difficult to heartily endorse a two country simplification without numbers to back it up.
- With the quote: “We intended first to boost stock and property markets”, you say it sounds plausible and like it might work. – What is the real chain of causality here? It doesn’t sound plausible to me. Who is ‘owning’ this enormous growth of assets? And how would these owners touch off personal consumption? Or is it merely an attempt to psychologically persuade people that because the markets are going up, it is safe to invest and consume?
A final question – maybe this should be addressed to Victor Shih
- Is the Chinese government encouraging brokerages to support the market? If no, is that another tool left at their disposal?
I wish newspapers would allow op-eds of this length. Most topics worth opining about are far too complex for 900 words. The format seems to encourage hasty conclusions and misty evidence.
@TR
Sure, bubbles can pop in rich and poor countries alike. And rich people can certainly also aspire to consume even more than they already do.
However, it does seem to me that Japanese consumers are less into “positional consumption” and “conspicuous consumption” than in most other countries. Japanese culture doesn’t really work that way.
So encouraging Japanese consumers to spend more was quite possibly a harder job than encouraging Chinese consumers to spend more.
Actually, I’m not sure if the Japanese government even tried to encourage consumption back then (I mean directly encourage, not via some indirect wealth-effect as mentioned in Michael’s quote), or if they concentrated mostly on building bridges to nowhere.
Professor Pettis: Thank you for your insightful post as it clarifies the issues.
According to the IMF April 09 WEO, the US current account deficit had been running around 6-7% of GDP in 2008 and will be halved to just under 3% in 2009. They simulate a similar figure until 2014 under their “benign scenario” — assuming (I think) a stable foreign debt/GDP ratio — with trend GDP just under 3%.
For China the CA surplus was 10% of GDP in 2008; rising slightly in 2009 and dropping to 9.4% by 2014. Their GDP growth rates are 6.5% in 2009, 7.5% in 2010 and 10% in 2014.
These figures are obviously debatable as the scenario is based on the assumptions of UNCHANGED exchange rates, declared macro policies and neutral “real” commodity and oil prices. In short, it is basically a “business as usual” projection.
By contrast, your post implies that this benign scenario is rubbish because the “exchange rate mechanism” is blocked and China risks much lower consumption bound growth.
To get out of this box, how big an effective revaluation of the RMB is needed in your opinion?
The estimates I have seen are all over the map — ranging from zéro to 30%. Getting a feel for this is important in terms of the feasability of selling such an adjustment to the CPC. Are there alternatives such as a 15% revaluation plus fudging a solution via continuing purchases of US Treasury paper? regards James
Adressing the commodity factor in Chinese imports, Andy Xie writes an interesting article in today’s CAIJING
Another excellent post Michael!
My knowledge of history in this area is very limited, so I would like to ask…. Has any nation that has followed the Export based development model ever stopped? Did Japan, Taiwan, Korea etc., ever move towards balancing trade? It seems to me that there is a strong political addiction to such a model that persists long after the benefits.
PS. Today Korea announced new rules that will effectively prevent the importation of Chinese lithium ion batteries.
Professor Pettis,
I think you are ignoring the 500 pound gorilla in the room, the fixed assets investments. This is especially true if you are weighing the downside risks to GDP growth. As of 2008, FAI was 57% of GDP, growing somewher about 25% nominally, thus making up for much of the GDP growth. Consumption can probably bring no more than 1/3 the share of growth than investments.
I am pretty convinced that it is the dynamics of investments that will govern the GDP growth figures in coming years.
There are several points:
1. Investments are now growing 30% yoy so probably making up near 60% of GDP this year. I think this is largely unprecented in history. If this dynamic breaks, GDP growth will not moderate to 5-6%, but rather fall to minus 5-6%
2. Investments are largely financed from corporate cash flows because of the high depreciation of the probably 70-90 trn FAI stock. Probably there is around 10 trn yuan depreciation a year (which is cash flow and can be readily reinvested), vs profits of about 3 trn and net borrowing of 3 trn.
3. It is clear that such high amount of depreciation compared to profits can only be upheld with very low wages and low taxation. If chinese consumption is to grow, either taxes or wages have to grow. This way corporate profits and cash flows are going to erode killing the investment machine that kept China growing in the past years.
I think this is the very challenge that China has to solve in the medium term: raising wages and/or taxes thus cooling down investments without crashing the economy.
I have a gut feeling that it can only be achieved with a massive growth of net corporate borrowings.
Problems:
a. Profitability will suffer even more as companies have to pay interest, higher wages and higher taxes – will not be there a wave of bankruptcies? Surely, but will there be new economic activities to replace the investment machine that feeds on low wages and taxation?
b. structure of the Chinese banking system- can it sustain a loan growth 2 or 3 times higher than present?
c. sources of financing – assuming that chinese private savings are to slow or stagnate, it must be external sources’ – this have the gravest consequences to consumer led economies, esp. US, UK, Spain, Eastern Europe.
Mr. Pettis, I was recently pointed to your present article by Brad Setser, who is having a similar discussion on his CFR blog site. (http://blogs.cfr.org/setser/2009/06/21/the-good-and-bad-news-in-the-world-banks-china-quarterly).
Your point on the historical precedent for trade disputes being settled amicably as being bad seems ominous. I had run across the following Wikipedia entry for the Smoot-Hawley tariff (and the 1930′s U.S. adjustment from trade surplus) that also seemed highly similar (in the spirit of Mark Twain’s old adage that history does not repeat itself, but sure does seem to rhyme).
It’s interesting to me that it seemed that U.S. imports (regardless of Smoot-Hawley) crashed more than exports back then, leaving the U.S. still running a surplus even as exports fell. Which, in my admittedly limited understanding, is currently where China is at.
You seem to imply that you then think it is likely that some form of global trade dispute will come out of this. In addition, I was curious if you believe China (if it is not lucky or careful) likely to experience a “Minksy Moment” of its own in the future, similar to 80′s-90′s Japan and 20′s-30′s U.S., as larger numbers of these stimulus loans become non-performing? Could this (if it happens) further lower GDP and/or perhaps multiplying any GDP hit it may take as a surplus country in an era of global demand contraction?
http://en.wikipedia.org/wiki/Smoot-Hawley_Tariff_Act#Economic_effects
“At first the tariff seemed to be a success. According to historian Robert Sobel, ‘Factory payrolls, construction contracts, and industrial production all increased sharply.’ However, larger economic problems loomed in the guise of weak banks. When the Kredit-Anstalt Bank of Austria failed, the global deficiencies of the Smoot-Hawley Tariff became apparent.[9]
U.S. imports decreased 66% from US$4.4 billion (1929) to US$1.5 billion (1933), and exports decreased 61% from US$5.4 billion to US$2.1 billion, both decreases much more than the 50% decrease of the GDP.
According to government statistics, U.S. imports from Europe decreased from a 1929 high of $1,334 million to just $390 million during 1932, while U.S. exports to Europe decreased from $2,341 million in 1929 to $784 million in 1932. Overall, world trade decreased by some 66% between 1929 and 1934.[11]”
Where is the discussion of the massive Chinese Real Estate Bubble in all of this? Shanghai built 500 million feet of commercial space during the past few years, 100 million of which is vacant (a vacancy rate that will rise). Even at peak Chinese absorption rates, it would take 14 years to fill that space. The loans that supported that construction will, sooner or later, default.
There has also been massive overinvestment in the residential real estate sector in China. Many units have been built and sold, but never occupied (by the buyers or renters. The sole factor keeping that going, is a belief that prices will continue to appreciate. But what happens when that belief stops? There is no secondary market for condos in China, and if everyone tries to sell at once, the units will not fetch the amount of the mortgage. At least the typical downpayment in China was 25%, on a 10-15 year amortization, although that quicker repayment schedule for principal will cause banks to have to write down loans faster when principal stops coming in. And what happens to units not occupied for several years? Will they even be habitable enough for sale? It’s almost as if, as one person hypothesized, Chinese buyers of property view those condos not as an investment or cash-flow vehicle, but rather as a store of value. What happens to Chinese banks when (not if, but when) that belief falters?
Just as in the US, government-driven economic misallocations and malinvestments will result in a crash.
And the drop-off in younger people due to the one-child policy will not make things easier.
GSMA! (Green Shoots My A–)
Prof Pettis,
Just a simple question,why can’t a country run both a trade surplus and capital account surplus at the same time? It seems that overall balance must be zero is just a accounting rule…confused…
thx!
Moneyillusionist, let me give it a try. As long as foreign currency is not used domestically it is not just an accounting rule but a necessity for the balance of pyaments to balance. If a country is receiving more dollars from exporting than it pays to import, it must do something with those excess dollars.
Ultimately either private investors invest the excess foreign currency abroad or it ends up as increased reserves at the central bank. In the latter case the central bank, of course, would invest it abroad. In either case the net dollars that come in from the current account leave through the capital account.
If a country runs a trade deficit, it must come up with the foreign currency to support the net outflow. Either it borrows the money, sells domestic assets to foreigners, or sells existing foreign assets (the central banks usually does this) to pay for the net imports. In that case net outflows on the current account are matched by net inflows on the capital account (and, like Pettis, I am including the central bank actions as part of the capital account).
TR
“to suggest that what has happened to Japan cannot happen to China because Japan has and had a much higher standard of living than China is also a-historic in the same way as Cathy6’s comments.”
“it is incredibly foolish to argue that credit bubbles can only occur at the point where productivity growth has peaked.”
This is a strange deduction from what I’ve said. Bubbles of course form regardless of level of development. But after bubble bursts, an economy w/ peaked productivity will not be able to climb out of the hell hole simply because there’s no new growth. In fact, the US resembles Japan way more than China in this regard.
While it’s true everybody’s LT growth depends on productivity growth, copycat industrialization simply is warp speed faster than the original one, unless your math is different.
My name is Cindy6, and thanks for ur proofing service.
Dear prof. Pettis.
I see your argument this way.
“Everything must balance” (meaning the balance of pyaments must balance or just reach a more balanced level?)
Country A
(excess) consumption (shortage) production
Country B
(excess) production (shortage) consumption
Dynamics: Everything must balance. Thus at some point (and I guess that point has arrived now with the crisis) one of the following has to happen:
Country A has to reduce its excess consumption or
Country B has to reduce its excess production or
Country A has to increase its shortage in production or
Country B has to increase its shortage in consumption.
Now in this case we are seeing (or are we?) that country A is reducing its excess consumption and not any of the 3 other scenarios.
About scenario 2. I can’t think of a sound reason why any country would reduce its production unless the market forces it to do so. (to me: Currency manipulation is just part of the game)
About scenario 3. I think that all countries at all times are trying to increase their production within the world market, so this scenario does not seem to be very useful.
About scenario 4 This is where the goverment fear of inflation and the saving versus spending debate comes in. This being said consumption can be increased by government intervention and is happing big time now.
As I see it only scenario 1 can really happen and then it should force on scenario 4?
and is this a recurring cyclic thing or just a freak of the world order?
Thoughts on causality..by my eye the key point was to negotiate the huge trade issues like currency manipulation ect..before… not complaining about it after…but trade reps in Washington were either naive/stupid or paid not to think hard and to forget history ..Why? ..because the goal was to avoid the overly bureaucratic west with built in excessive regulation, unions, health care costs, cost of living and a gone wild tort system ..which could all be minimized or avoided by decree or bribe in China ..not to mention the huge opening of future consumers..so that was the policy push from Washington side … and the opportunity to expand quickly was the Chinese impetus…now why these issues were left uncovered…because imo everyone involved had the same goals for different reasons and there is no US politician who doesn’t have plausible denial pre-packaged in mountains of reports from economists of every stripe. There is little question the US trade negotiations with China were driven by and favored (long term) 1) China 2) Western Corporations 3)Spendthrift congress ..at the expense of an ignorant consumer/American taxpayer …like the years of Greenspan testimony and Bernanke testimony and the buying of Triple A ratings ..everyone involved knows the game..and who’s getting what and why…yet only in hindsight do we know the consequences.. of policy by undo influence, crisis and bribe…painted in Red White and Blue and sold as democracy.
Michael,
I think you are right. I also happen to think the US authorities are trying to manipulate asset prices upward, through certain banks, to keep consumers spending.
With the recently announced policy directive that the stimulus money must be used to buy Chinese made goods, and I think from Chinese owned companies, Hasn’t China just enacted Smoot Harley?
Sounds like China needs to look beyond the overall picture and take note of the fine print. Hopefully The Power of Small ( http://tinyurl.com/cmdxg6 ) will be translated into Chinese.
High quality blog Michael.
Some points:
1) I too have been perplexed by the dichotomy between the collapsing US CAD (todays GDP revisions lowered it again for Q1), yet thus far China hasn’t seen its CAS change that much. Further, whilst acknowledging a non-convertible currency can circumvent the “Unholy Trinity” to some extent, there is nearly always leakage and it makes the explosion in lending stranger.
2) Your point on Japan shares one very large similarity: the Japanese dependency ratio peaked around 1990 – productivity was always going to decline. Chinese peak? 2010 (BTW US peak was 2000-02. Deutsche Bank released a great piece on this). China will have the glory of being the first country that gets old before it gets rich;
3) Therefore savings rates are not going down, implying your 5-6% growth rates are bang on. BTW someone posted an excellent piece on FAI – there is only one country that has run the same or higher level of FAI as a percentage of GDP for an extended period – USSR. And we saw how that ended.
4) I think we can confidently say our kids need not waste their time learning Mandarin for work(just to put the cat amongst the pigeons).
Long only, my two neices, besides learning the traditional family languages, English, Spanish and French (and for one of them, Persian), are also learning Mandarin. To say that China has problems means mostly that the China hype is absurd, but China will nonetheless grow faster than the world for many years and will probably become the second-largest economy within the next decade or two. By any standard I think it is an important country and one whose language should be learned, but having said that I confess that I am too old to have learnt it as well as I should have (that’s why I want my 7-year-old nieces to learn it now, while they are young).
Michael, was just stirring the pot. Whilst I don’t live in China, I have beeen there on almost a dozen occasions (for work and holidays) and always enjoy visiting the incredibly diverse range of cities – be it Xi’an, Wuhan or Shanghai. Indeeed I was in Hangzhou this year as a groomsman for a friend who has married a woman from there.
But I did use the phrase “for work” – which is very different from learning a language for interest.
My reference was more to the surge in the Japanese language learning in the late 1980′s – which whilst nice from a cultural perspective (and another place I enjoy visiting), has not turned out to be the resume necessity people thought it would be, despite still being the 2nd largest economy in the world.
I try not to let my biases on whether I like a place or not, colour my investment decisions – decisions, which are helped by this excellent blog I might add.
Most enjoyable article.
My belief when comparing China with Japan, is the main difference between the two is that the Japanese got rich before they got old. China, on the other hand, will do the opposite and this promises to be a much more painful process.
China is essentially facing a demographic Tsunami. In 2025 there could be 200 million or more senior citizens in China, nearly two and half times as many as there are today.
In China today the national retirement security system covers, at best, only one-sixth of the work force, and many estimates suggest its unfunded liabilities may run to 125 to 150 percent of current Chinese GDP. It would appear fairy likely that such a program is unsustainable and will likely cease to exist in 20 years.
It would appear that some of these simplistic factors are going to severely test the more bullish long term GDP forecast scenario that many believe.
Interesting point. The simplification of analyzing on two countries still does not mean that there is a direct relationship between increases in US consumption and increases in Chinese savings. The US, even in this simplified example, could drain investments or simply print more money rather than rely on Chinese savings. In addition, there are 2 other reasons the situation remained steady for so many years: low US interest rates & a pegged Chinese yuan.