Subscribe Feed (RSS)More debate about the validity of economic data
August 3rd, 2009 by Michael Pettis | Filed under Economic growth, Fiscal stimulus.Some of the blog readers have noticed some weird goings-on with recent entries. From time to time an entry will pop up that seems totally inappropriate to current events.
Sorry. This is because the old host of my blog, when it was on a different site, is closing down, and I have been going through the time-consuming and boring task of trying to take as many entries as I can from the old site and posting them in the archives on this site. The repetitive nature of this process leads me sometimes to forget to post the original date of the entry, in which case it shows up as the current entry until I see the mistake and change it.
I am still planning to post the longish piece I wrote, on my view of what the SED discussions should have been about. However since I am beginning tomorrow an eight-day trip organized by two different banks to meet with and speak to their clients (full disclosure: since one of the meetings is in Bangkok I am sneaking out to Phuket for a couple of days to get in some beach time), I thought I would save that post for during my trip and talk about a few other interesting things.
First off, a lot of investors and government officals have recently been trudging to Beijing in spite of the heat and mugginess and seem to be eager to discuss the outlook for China. Perhaps because the press, and more importantly a lot of Chinese academics and think tank types, are beginning to worry much more in public about the medium term outlook, the conversations seem to be a lot more worried than they have in the past. On my upcoming trip I hope to get some more idea of what big investors are thinking, and if I am allowed to repeat their views, I will.
Next, I see that recent US GDP numbers are getting a mixed reception. Second quarter GDP contracted by an annualized 1.0%. That isn’t a good thing, of course, but it is much better than the 6.4% contraction in the first quarter, and also better than the 1.5% contraction that the market was expecting. According to an article in today’s Financial Times:
While the contraction was much smaller than in the previous three quarters and slightly better than economists had expected, the data showed that the government stimulus and a slowdown in imports had cushioned the drop.
Of course most analysts continue to be worried about, and debate, whether the US is better off slowing the stimulus, and so reducing debt while speeding up the needed adjustments at the cost of higher unemployment, or continuing pushing forward – a debate very similar to that taking place in China. Given my focus on China my main concern – no big surprise – was US consumption, which declined by more than GDP, which I expect to be a regular feature of the next few years.
Consumer spending, which represents about two-thirds of GDP and has traditionally been the engine of US growth, fell a much worse-than-expected 1.2 per cent as Americans continued to cut back in the face of rising unemployment and the falling value of their homes and investments.
In Japan, a country that I am spending more and more time learning about because of some worrying parallels between their 1980s and China’s current condition, the numbers continue to be very poor. Again the Financial Times today tells the story:
Wages in Japan suffered their sharpest drop in nearly two decades in June, fuelling concerns that the economy would remain under pressure from depressed consumer spending. Monthly wages, including overtime and bonuses dropped 7.1 per cent from a year earlier for the 13th decline in a row to Y430,620, according to the Labour Ministry. It was the steepest drop in wages since the government began compiling data in 1990.
Wages in China, on the other hand, seem to moving in a very different direction – no surprise, I think, given the extent of the stimulus package. Here is what Xinhua said on Wednesday:
Average wage per capita for Chinese urban employees grew 12.9 percent year on year to 14,638 yuan (about 2,149.78 U.S. dollars) in the first half of this year, said the National Bureau of Statistics Wednesday. The growth rate was 5.1 percentage points lower than that in the same period last year, the bureau said.
Even acknowledging all the distortions, and recognizing that this year’s growth rate in wages was much lower than last year’s (will this put pressure on consumption growth?), this still seems like a very healthy growth rate. Funnily enough however the numbers were questioned in, of all places, today’s People’s Daily. In their article they had this to say:
Banter and sarcasm erupted in the wake of a National Bureau of Statistics (NBS) report Wednesday saying the average pre-tax wage per capita for urban employees grew 12.9 percent, year-on-year, to 14,638 yuan (2,142.43 U.S. dollars) in the first half of this year.
The seemingly inspiring and encouraging news did not draw much applause, but a hail of criticism from the public, with many being skeptical of the figures’ credibility. The term: “I’ve been given a raise,” referring to the furor over the NBS’s statistics, has become increasingly popular among China’s mass of Internet users.
On the popular online forum tianya.cn, a commentary read, “The statistics released by the NBS are miraculous, as the increase managed to surpass the GDP growth of 7.9 percent registered in the second quarter against a backdrop of the global financial crisis.” However, the poster noted, most people’s pockets remain shallow.
…A poll on tom.com showed as many as 88 percent of 2,816 respondents believed it is reasonable to doubt the income rise announced by the NBS.
I was impressed by the fact that the article just reported the skepticism and didn’t make much more than a very half-hearted attempt to explain why the public is wrong to be skeptical. As an aside, in recent weeks it seems to me that there has been an increasingly heated, but not always on-the-record, debate about the conflicts and contradictions implied by official Chinese growth numbers and other indirect measures of growth – with Marc Faber last week giving an especially blunt assessment. I have been hearing from a lot of Chinese and foreign colleagues about challenges to the data, and although I am not smart enough to contribute much to this debate, I expect it to become more public – already there have been several articles in the Chinese press referring obliquely to disagreements about the data and defending the quality of the NBS statistics. Perhaps the People’s Daily is now leading the charge for prosecution?
Speaking of prosecution in the Chinese press, Caijing continues to feature a series of excellent articles questioning the impact of the stimulus package. I won’t summarize them all, but I found this article in this week’s issue, by Chen Changhua, interesting:
Through bank lending and money supply, liquidity has been ample in the market. However, nominal GDP growth lagged far behind the growth in lending and money supply, which could raise suspicion that a large portion of the funding has entered asset markets.
In the next one or two years, the global economy won’t be able to recover and, due to overcapacity, consumer price index (CPI) will not be able to rise sharply. Even if the central bank wants to tighten money supply then, various aspects of society won’t support it. It’s no longer a question of whether the central bank should rein in its loose monetary policy, but whether or not it will actually do it.
China’s fiscal and monetary policies in the past few years have placed growth before anything else. It is unlikely that the Chinese government will raise interest rates when economic recovery has not yet been secured.
Chen’s basic argument is that policymakers should be encouraging private enterprises to compete with SOE’s because when the “bubble implosion” occurs (he doesn’t seem to think that the “if” is worth pondering), China will be better served by the productivity-enhancing private sector:
How quickly a country can recover from an economic slump is determined by the productivity of the country. Japan has not been able to recover from the 1990 slump mainly because there are not enough competitive new-generation enterprises to replace old enterprises.
If it is difficult to avert a new round of asset bubbles, then opening domestic markets to private enterprises is a good option. In the past few years, state-owned enterprises have become larger and stronger while playing the role of the offense while private enterprises have been on defense. Maybe it’s just a hope of mine that private enterprises will muster their forces soon as well.
One of the big worries about the stimulus, of course, is that it is forcing a further concentration of credit and economic activity into the SOEs, who are among the least productive players in the Chinese economy – even when you don’t question whether or not their profits are real or simply a function of highly subsidized interest rates.
Meanwhile the debate about the duration of the fiscal stimulus rages on. On the one hand Andy Xie, former chief Asian economist for Morgan Stanley, and someone well plugged into Chinese policymaking circles, said in an interview with Bloomberg:
“The government is worried that this bubble is becoming too big so they’re going to cut credit growth by probably half in the second half,” said Xie, now an independent economist, in a Bloomberg Television interview in Hong Kong today. “I think the property and stock markets will come under pressure probably around October time.”
China’s banking regulator said yesterday it plans to tighten rules on work capital loans, seeking to prevent misuse of funds. New loans in July may be less than 500 billion yuan, the Shanghai Securities News reported on its front page, without saying where it got its information.
It’s “undeniable” that a portion of this year’s new lending entered the nation’s stock and property markets, Cheng Siwei, former vice chairman of the standing committee of the National People’s Congress, China’s parliament, said in June.
On the other hand Vice Premier Li Keqiang (a graduate of Peking University, I am proud to say) wrote recently in Qiushi, according to an article in today’s Bloomberg:
China will maintain its “proactive” fiscal and “moderately loose” monetary policies to help the economy recover from a slump, according to Vice Premier Li Keqiang. The foundations of the recovery aren’t yet solid enough, as evidenced by the continued slide in exports, lower corporate earnings, falling prices and industry overcapacity, Li wrote in the Aug. 1 issue of Qiushi, a twice-monthly Communist Party magazine.
The outlook for the global economy is still uncertain and recovery is being hampered by rising trade and investment protectionism around the world, Li wrote. There’s been no “fundamental change” to the dollar’s dominant position in the international financial system, though the trend of diversifying away from the greenback will continue, he added.
Finally, and on a separate point, like me Nouriel Roubini has been wondering about the impact of recent Chinese commodity stockpiling. According to an article in Reuters today he gave a speech in which he discussed the impact of future commodity prices. Among other things he said:
“In the short term there has been a massive stockpiling of commodities by China,” he said. “My concern is that China might have accumulated an inventory of commodities that is probably excessive to the growth of their own economy.”
I agree. I am pretty sure that a lot of recent purchases represent many quarters and even years of future demand, and so they are distorting the trade numbers by implying the country is importing more than current demand implies. By the way for those interested in my argument as to why China should not be stockpiling commodities quite so quickly, here is today’s version of my bi-weekly column for the South China Morning Post.
As a WordPress user, note that you could use the export/import features to mass-import the sites. I’d advise to get in touch with arun at ebizindia dot com on my behalf, if you’re not familiar with them. He frequently handles this kind of stuff of my customer base.
Prof Pettis,
It seemed to me that Marc is just a big mouth.Just google his name and you will find his predication that Shanghai Index would reach as high as 8,000.Now…
Not that I am defending NBS,I’m just indignated by the fact that someone who don’t even visit China once now start to say this and that about China.And still I wonder why a critical thinker like you would shop them around…
For the statistics issue,I tend to believe 7.9% is right,but it is no use.Private sector is still reeling from the downturn.The only hottie is in public sector.
Paul Krugman said that US is on the road to becoming another Japan.Now you are adding China to the list.I’m confused,again.
[...] Read the rest of this great post here [...]
Moneyillusionist, I don’t necessarily agree with everything Faber says, but his track record isn’t too bad. At any rate my larger point is not that Faber disagrees with the statistics, but rather than an increasing number of people seem to be arguing about the statistics. Not only do I get four or five emails every day about disputes over the numbers, but even the People’s Daily is suggesting something is wrong. You can dismiss Faber for his comment about the Shanghai stock market (and if all of us were to be judged by everything we said about the stock market none of us would be credible) but there is a little more to it than that.
What worries me more about your comment and that of many others, however, is something very different. As recent comments to my posts have suggested, it is getting almost impossible to discuss Chinese policies critically without getting accused sometimes of having an unreasoned hatred of China and at other times of being a total stooge of the Chinese government (and for some reason the fact that I teach at Peking University seems to inflame both camps even more). Too many people try to insist that any discussion about China must necessarily be framed as either
1. The West is wrong and China is right.
2. China is wrong and the West is right.
For example a few days ago a commenter on my blog “refuted” the claim that Chinese banks are misallocating capital with the stunning and triumphant observation that recent events show that it was actually US banks that have misallocated capital. I am always surprised by this absurd forced dichotomy. The fact that US banks misallocated capital during a period of explosive liquidity growth cannot possibly be a refutation of the argument that Chinese banks are doing the same under similar conditions. If anything it supports the argument, unless you are wedded to the above dichotomy, in which case the fact that US banks screwed it up “proves” that therefore Chinese banks didn’t.
Now you seem to be arguing that because Paul Krugman sees worrying similarities between the US and Japan (I believe he is talking mostly about a liquidity trap) you find it confusing for me to say that there are very worrying similarities between China and Japan (I am talking about the credit bubble). But why? First of all we are talking about very different aspects of Japan, and secondly even if we were talking about the same thing, why would the fact that US policymakers have gotten it wrong in any way be used as evidence that Chinese policymakers must be right? Why is this confusing?
Sorry to go on about this for so long, but an open discussion of Chinese policies is in the best interests of everyone. This forced dichotomy is senseless.
I have been noticing an uptick in debate recently. Along with some fairly high level questioning of policy and response. Wang Yang – who i think is a politburo member and Guangdong’s party chief? / chairman / secretary(?) – for some reason (can anyone explain?) known as the “Chinese Arnie”, has been especially interesting with his comments over recent weeks on growth quality, GDP figures and the stimulus in general. I wonder if we will be seeing more from him in an even higher role in the future?
Furthermore Prof Huang at MIT has been making some good points about growth quality vis a vis China across its reform period. Did you see his videos on the FT website or the articles from Foreignpolicy magazine? I realise he is more interested in a political perspective of the economy, but he still says some interesting things about growth quality and Chinese economics.
Prof Pettis I sympathize with your worrying about debating and discussion tactics / methods. It can be quite infuriating having a discussion on some of the boards which focus on China. “Moral Equivalency” was very popular from the Soviet Union during the cold war, and it seems that it hasn’t died out. When people react to any (even constructive) criticism (even when they are not even repsonsible for the policies under discussion) with anger, it normally paints a worrying picture of an education system rather than providing anything useful to the debate.
Another problem i have is when people (deliberately?) misinterpret / misread the major point in an argument then launch into a counter-offensive based on the “mistake.” Ad hominum, ad populum, appealing to force, disingenuously changing one’s argument half way through and plain logical failures are very common and very tiring…
The only medicine is calm, logical debate, time consuming though it may be (and i fully sympathize if you can’t always be bothered). I always enjoy reading Plato’s Gorgias. On this subject, may i enquire, when your students at Beida are discussing or debating matters, how does it go?
[...] Read the original post: More debate about the validity of economic data [...]
[...] more here: More debate about the validity of economic data Tags: bloomberg, steven-giang, Today [...]
If the top 5-10% earners, whose average income is already several times more than the average of the lower 90-95% wage earners, and the top earners get a disproportionally higher percentage increase in their wages, then the majority 90-95% wage earner will not feel much, despite an almost 13% increase on average. Worsening inequality? Yes. Fake wage statistics? Probably not.
[...] BofAGM cuts hourly workforce by 6,000 – BBC News65% took early retirement. 30% took buyouts.More debate about the validity of economic data – Michael PettisMore in-depth China analysis from Pettis, now also on validity of China’s stats.Krawcheck [...]
Prof Pettis,
I would not say you are attacking China,but you are attacking China’s policies.
I’m confused because if China is experiencing a credit bubble and asset bubble,it is probabaly on the onset of this cycle.Any comparison between China and Japan is questonable at the least.
US property price has been on the rise since late 2002,but have you heard anyone talking about an imminent collapse?
More on stats. This from todays SCMP. I have copied in the whole article since i think they have subscription / charges:
Parts greater than the GDP sum
Jane Cai
Aug 04, 2009
The total value of gross domestic product announced by the mainland’s 31 provinces and municipalities is significantly higher than the national figure announced by the central government, putting the statistics’ credibility in doubt.
According to the figures provided by local governments in the past few days, the world’s third-largest economy had an output of 15.38 trillion yuan (HK$17.45 trillion) in the first half of this year, significantly more than the figure of 13.99 trillion yuan released by the National Bureau of Statistics. All but seven governments reported a higher percentage increase in GDP than the national one.
Click here to find out more!
The inconsistencies once more raised concerns about the accuracy of mainland statistics; economists recently questioned mismatches in figures for power generation and economic growth and for personal income and fiscal revenue.
Economists say flaws in data collection and calculation might exist but the greatest cause of inconsistency is the inflation of GDP figures at a time when the central government puts great emphasis on them in cadres’ performance appraisals.
“We gave up trying to figure out the GDP difference five or six years ago, after we decided local GDP figures are not important,” said Tao Dong, an economist with Credit Suisse. To get a better picture of local economies, economists look at local exports and imports, power generation and other departmental figures, and visit the provinces, he said.
Sun Mingchun, an economist with brokerage Nomura International, said: “The GDP figure is processed. First-hand figures are more convincing.”
Mr Sun said the latest local GDP figures seemed more reliable than in the past. “In 2004, all 31 provinces and municipalities reported faster GDP growth than the national rate,” he said.
Liu Fuyuan, an economist with the National Development and Reform Commission, said local officials had been left with no choice but to fake figures to please higher-level authorities. A legal amendment passed in June punishes officials for forging or falsifying statistics.
Ma Jiantang , director of the National Bureau of Statistics, last week told his staff they faced enormous challenges. The figures they produced still did not meet the needs of the Communist Party, the government and the public, and lacked credibility. “Our mission is very important, and the challenge is huge,” Mr Ma said.
He also pointed to the wide availability of data on the internet and the fact people were now more willing to challenge data. “How to respond to the challenges brought about by the internet and globalisation will be a test for all of us,” he said.
MoneyIllusionist, I am afraid that for too many Chinese, especially older ones, there may be too little distinction between “attacking” and “critiquing.” To disagree or question or explore the risks of a set of policies is not an attack. One of the jobs of academics is to explore policies and discuss how they can go wrong.
Whether we are at the onset of a credit bubble or not is only something we will know after that fact, but hoping that we are at the beginning and so should do nothing is probably not a good idea. As for the onset of the US real estate bubble, I though we had already collapsed.
Houhui, this isn’t a problem with my Beida students, who are for the most part far too smart to be flummoxed by criticism. Sometimes some of the freshman from the outer provinces may be mildly shocked by critical lectures, and Beida as you probably know has some very strong critics of government policy, especially among younger, popular faculty, but that changes quickly. For some reason, according to my students, it is foreign professors more than Chinese professors who are likely uncritically to support government polices – almost no good Chinese professor does.
This may have to do with some residual Western Orientalism that we haven’t fully extinguished that requires us to patronize others. Not surprisingly the students are often impatient with the succession of gushing foreign speakers. Like smart kids everywhere they like intellectual challenge.
In fact by the time the Beida students I know are seniors sometimes during seminars their criticism is so excessive that I find myself very often intervening to support the government. This is especially true of the smartest and most confident ones, although given the delight smart kids always have in overturning the rules, this isn’t a surprise, I guess. Part of it is simply growing up.
As usual with China, beware the stereotypes. One of my favorite Tsinghua students, who graduated four years ago, has turned into a real rebel and free thinker and a bit of a wild man (he became a gambler and bond trader). What is perhaps more of a surprise, and really defeats the stereotype, is that his high-school teacher, who I know, teases him for having been such a model student, constantly exhorting other students to work hard and sacrifice. The teacher seems to delight in his transition from brilliant good boy to equally brilliant bad boy.
On a separate note two students once told me they never watch CCTV. I asked why, and they said because there are only three stories and they already know them.
1. The government is working very hard.
2. Things are getting better in China.
3. Things are getting worse abroad.
They were joking, of course, but the way they said it suggested that this was a pretty common joke among the students, and also showed that the stereotype of uncritical thinking is not true, at least not in the elite schools.
A different and, I think, revealing story: I am often asked to speak at universities around the country. Three years ago the student union at a very good Beijing university asked me to give a lecture on banking. One day before the lecture a slightly embarrassed young man, the head of the student union, came to my office and after some hemming and hawing finally came out said his piece. He asked if I would be very careful not to be too critical of banking policies. I assured him that after 4 years teaching at Tsinghua and Beida I was pretty aware of what I could say, and that he shouldn’t worry, I wouldn’t embarrass him or cause him trouble.
His next comment surprised me. He said, “Oh no, professor, it is different. There are many things you can say to Beida and Tsinghua students but you cannot say them in our school.” I asked why, and he replied without any hesitation, “They are much smarter than us and so they should know these things.” That floored me.
Having said that, I think even in this short time this kind of thinking is changing. Because of my work in music I meet smart kids from all over China, not all of them elite students, and at least some of them are pretty fearless in their thinking (probably the same proportion as in the West). Also there is an increasing awareness, especially among the younger faculty, that lack of critical thinking is not a plus, but a minus for China.
As you might have guessed I am really taken by the young Chinese I have met – it’s the main reason I have been here so many years instead of the two I originally planned. I have a lot of faith in them, and often the younger they are, the more impressive. Even thought the educational system represses critical thinking, thanks to alternate sources of education and discussion this is changing, and many of the stereotypes, if they were ever true, have become rubbish.
By the way, as long as we are talking about the validity of statistics, here is a funny piece that appeared on saturday in the WSJ China Journal. You can find it at http://blogs.wsj.com/chinajournal/2009/07/31/songs-of-statistics-odes-to-the-motherland-from-an-unlikely-source/?mod=rss_WSJBlog?mod=chinablog
Song of Statistics
July 31, 2009,
Who says statistics aren’t fun?
As part of the myriad activities planned to commemorate the 60th anniversary of the founding of the People’s Republic of China on Oct. 1, the normally staid National Bureau of Statistics is letting its hair down a bit.
The NBS has launched a call for submissions of writings celebrating the PRC’s big birthday as part of campaign called “Statistical Feelings: Together We Go – Celebrating the 60th Anniversary of the Founding of New China.” The campaign is intended to boost the patriotic feelings and confidence of statisticians in their work, according to the bureau’s Web site.
Submissions should reflect on the development of the nation over the past six decades, discuss the role of statistics in national development and express the feelings of statistics workers towards this period in history in 3000 characters or less.
All of China’s current and former statistics workers are invited to submit entries by email. As an added incentive, contributors whose work is selected for publication on the NBS Web site will receive an unspecified amount of “generous compensation.”
So far, about a dozen entries have been posted, encompassing the genres of prose, poetry and song. One essay, submitted by an employee of the NBS industrial division, is titled “I Am Proud to Be a Brick in the Statistics Building of the PRC,” and reads like a prose poem, each paragraph leading with the title’s refrain.
A poem, “Love the Homeland, Love Statistics,” includes the following stanza:
Life
Some mock me for doing statistics
Some loathe me and statistics
Some don’t understand what statistics are
Why is it that statistics
Put a calm smile on my face?
Because of statistics
I can solve the deepest mysteries
Because of statistics
I will not be lonely again, playing in the data
Because of statistics
I can rearrange the stars in the skies above
Because of statistics
My life is different, more meaningful
I love my life, my statistics
Our favorite submission (so far) is the amusingly titled, “Celebration – Statistics Carol,” which inevitably brings to mind a troupe of buttoned down statisticians, going from door to door on the evening of Sept. 30, singing their praises to numbers and the motherland.
To be fair to the statisticians at NBS, the problem is not as much whether their measurements are accurate as it is what they are actually measuring. In some areas, they are a decent guide to what is happening in the state sector. But the samples and methods don’t include much from the private sector. The NBS knows this, but iin a climate where operational data about a few steel mills is a state secret, you can imagine the obstacles that well intentioned people face. Overall, we should admit that in the face of exponential growth in the flow of information througout the Chinese economy and society in general, that the authorities still have the vast majority eating from a trough that they control. It is one thing to say the data are unreliable, and they clearly are. But we still rely on them at the end of the day, and our collective actions – including those of foreigners and locals – are more important than a mountain of editorial wit. One hopes that the senior leaders have better numbers to rely on when they make policy decisions, but think about the magnitude of systemic flattery and deception, and who knows what actually reaches their desks. In the 1960s Xinhua was publishing figures about record grain harvests while tens of millions of people (in some of the regions purported to be producing the grain) starved to death. The risks of systemically inadequate information and data have changed, but the magnitude of potential waste(measured in terms of economic value, rather than lives, fortunately) is enormous. Look at what happened in the US when the informational content and value of interest rates (risk) fell significantly (despite what looks in retrospect to have been adequate information to market participants to know and ACT differently – those who shorted won big). Trillions of dollars in wealth losses. The problem for China is that the risks are in the real economy, and the stimulus program is encouraging bad decision making based on bad (manipulated) or insufficient information. Aside from building infrastructure, which has the potential to return economic benefits) where is there any need for more investment in China right now in terms of manufacturing capacity? Look at employment and wage data coming from Japan, Korea and other countries that produce data with real information value, and the story that Beijing is peddling looks worthy of satire from the People’s Daily. When the People’s Daily makes fun of you for cooking the numbers, you must have hit the bottom.
Dear Prof. Pettis
Can you be so kind to briefly summarize, again, why China is forced to buy US States Bonds?
Thank you
Thank you for those thoughts Prof Pettis. I by no means expected you to say anything else. I think the internet (as everywhere) tends to reflect more polarized points of view rather than the true spread, and was the point i was trying to make.
Perhaps people feel safer with the separation that the internet provides and become more argumentative. Someone i know once said of Youtube: “The only people who comment on a music video are those who really hate it or those who really love it.” (i suppose also those who just enjoy annoying people!) I guess this leads to the heated debates, and not just for music!!! Hyper-sensitivity to criticism / discussion is not conducive to progress however, so i prefer it when it stays on youtube – especially as your blog is a discussion in which you spend a lot of time and effort to both write and reply.
I often find a big difference between people i meet in “real life”, and opinions held by those in internet, although admittedly i never attended an “anti-cnn” rally!!!
Back to the finance:
Do we have any rumours for July lending yet? I am hearing that things are going to be much lower than June. Estimates from 350billion —> 800 billion… As a question to you, what levels of lending would you say represent “tightening / slight tightening / etc”?
This from today’s bloomberg (although only a rumour so far):
“The China Banking Regulatory Commission may order banks to deduct their holdings of subordinated debt sold by counterparts from supplementary capital, the Wall Street Journal reported today, citing a person it didn’t identify. The banking regulator estimates about half the subordinated bonds in circulation are held by other banks.”
Keep teaching in China. The lack of critical thinking in the US – not just in academic institutions – would get you down.
Dear Pettis:
Any new idea about the situation in the chinese “shadow banking” sector. Are they getting recovery due to the new hot money trend?
best
litz
Mr Pettis
Have always and am increasingly finding the “solution” to the credit crisis (prompted in part by lax credit policies , excess liquidity which prompted a all for profit regardless of risk malaise) which seems (by consensus of central banks round the world) to be basically centred around flooding the world markets with liquidity ,well, tronic to say the least. Of course it is logical to help along the credit process when it froze up but what is the result? The bubbles have started foaming again when the lessons from the last round have yet to be learnt. Mr Xie seems a tad optimistic considering that the Shanghai bourse has gone up by more than 70%. Could September be the real turning point?
The latest estimates of loans made under the loosened credit policies seem to be rather alarming and at least for the present overshadow worries about excess capacity. What do you think?
In reference to your interesting SCMP column… I don’t think China’s foreign exchange reserves are being managed for greatest reward/lowest risk. The utility function here is different from the typical “rational” investor.
I suspect China’s primary motivation for stockpiling is the world-wide political pressures that follow soaring commodity prices, when that rise is perceived to come as a result of China’s economic growth.
From the WSJ:
Mr. Liu, the Renmin University economist, said official income wage figures don’t include commissions or bonuses, which are likely to be down sharply this year. “Many people feel their incomes are declining, and their expectations for future income are not so great, so they are cutting back on their daily consumption,” he said.
http://online.wsj.com/article/SB124937312326704093.html
Dear Prof. Pettis:
Have you read a recent article by John Makin of American Enterprise Institute titled “China – Bogus Boom”? http://www.aei.org/outlook/100061
It challenges the way GDP is calculated in China: “Once China had announced its 8 percent growth target, it began to disburse funds directed at a sharp increase in public works spending. It is important to understand that the disbursal of funds is recorded as GDP growth. So the government can easily control the pace of growth by the pace at which it releases funds that have already been allocated in the stimulus package to the creation of higher production or growth numbers. Funds disbursed for fixed-asset investment by state-owned enterprises or provincial governments are counted as having been spent when they are disbursed. In fact, the funds go out to the state-owned enterprises and provincial governments and may be held until actual projects are identified and undertaken.
The same convention, counting production and shipments as de facto outlays by end-users, is employed with respect to retail sales data in China. Shipments to retailers are counted as retail sales on the apparent assumption that ultimately all goods shipped will be sold at some point in the future. China’s nominal retail sales have been rising at a rate of about 15 percent year-over-year during the first half of 2009 because that is the rate at which shipments to retailers have been occurring. There is very little direct data available to measure actual sales by recipients of the retail shipments to ultimate consumers.”
What do you think of this analysis? Thanks.
This is something I found on a Chinese site which was attributed to Andy Xie. Hard to tell if it is authentic, but I have read enough of his stuff to get a feel that it is likely his stuff.
http://www.my1510.cn/article.php?id=e3fc777cdd24720a
In any case, what I read in this article is that China used a weak dollar to expand its own game and that the Chinese didn’t fear bubbles as they should. He also indicated that there was a huge real estate bubble in China and that there wasn’t the market for additional real estate as was being advertised, but instead China wasn’t but a few years away from being built to potential. He said their capacity for building was around 1.5 billion square meters and that 2 billion was under construction right. Based on the average percapita usage, he said that the total demand for the people likely to migrate to the cities was around 8.4 billion square meters, meaning it was only about 6 years at current pace before China residential would be built out. Then the one child problem begins to hit and there is no follow up demand.
To understand how much building 1.5 billion square meters is, I am estimating a square meter is about 10.5 square feet. If the typical US home is 2100 square feet, then that is 200 square meters per house meaning construction in China amounts to roughly 7.5 million US units per year, 350% of the bubble peak in the US. How much of a shock would it be if this just flat stopped all at once? If it went on, it would collapse the existing loan system, so the paradox is you can’t continue what you can’t stop.
I think the real game that Michael keeps bringing up is that the game can’t go on the way it has gone one and being a money guy, I think he realizes that the Chinese or the US just can’t make money to have a reasonable impact and at the same time, keep the debt system in order.
I don’t believe people realize that the world can’t do without the US credit machine. The whole game is either the US keeps importing and sending $ to China or China shuts down. I believe that China was a result of the US bubble and that what caused this mess caused modern China as well. It is the excess of credit over income that creates imports, not the sending of money from countries that don’t have money to finance imports. In part, this feature of finance is what I understood to cause the last Great Depression, the expansion of credit from a rich US to finance exports, due to the advent of the Federal Reserve in 1913. The one problem present then was the gold standard, which made the balancing act almost impossible once trouble started.
There is another thing I read recently, that James Galbraith at UT was part of a study that said the China surplus was not anywhere near as big as it was stated, but that companies in China masked foreign capital as exports to evade laws. This would be an interesting idea. In any case, the Chinese monetary system rests on its supply of US bonds as its domestic currency has no worth outside of its link to the dollar.
http://english.caijing.com.cn/2009-08-05/110220584.html
Thought i would bring this article on bubbles by Andy Xie to attention. He is predicting the return of inflation in the US as the factor that could eventually land China in a malaise. Pretty nice piece, and fairly bearish.
I dont understand how Andy Xie links dollar strength with Chinese liquidity.
I think the low loan deposit ratio he is referring to is not a consequence of dollar valuation but comes from structure of the Chinese economy. The main reason being is that companies in China save way too much. This was even picked up in the latest issue of The Economist.
Sorry Mannfm, i think i posted the same article as you (although i couldn’t see your comment when i did.) The Andy Xie article appeared on caijing (i gave the link above)
Forgive me for injecting perhaps a stupid question but I am struggling understand the income side of Chinese consumption; in essence the relationship between individual income and GDP. Individual income taxes in the MOF 2008 budget were projected to be 226 billion RMB. The China IIT system is graduated with a quick deduction. Assuming the average tax payer has an income of 10,000 RMB, the tax paid after the deduction would be 1,675RMB which works out to a 16% bracket. If you assume just a 10% average effective tax individual tax rate, then the 226 billion RMB tax revenue suggests the individual’s share of income is 2.26 trillion RMB, less than 10% of GDP.
Even at a per capita household income of 10,000 RMB, that still means less than 50% of the approximately 30 trillion RMB GDP is attributed to individual income for 1.3 billion. So where does the rest of the money go? The tax based receipts of the government are no more than 6-7 trillion RMB. Corporate income tax (25%) was to be 643 billion RMB in 2008, meaning a corporate income of 2.5 trillion RMB.
Am I omitting provincial and municipal government revenues? SOE wealth creation?
While I don’t mean to suggest a fudging of the numbers or that tax cheating is going on, I am truly trying to figure out where the roughly 30 trillion RMB GDP really goes. If someone could point me to a website or study, I would appreciate it.
FYI: Our kids just returned to Shanghai (to their teaching jobs in an American run international elementary school) and say that several sites, including Facebook and this site (mpettis.com) have been blocked.
I am afraid Michael Pettis confuses domestic demand (which is the sum of domestic consumption plus investment) with domestic consumption – which is not the same thing. He therefore writes things which are not economically correct with the result that he comes to wrong conclusions. Specifically he writes above.
1. ‘the trade surplus reflects the gap between what a country produces and what it consumes’. This is not true. The trade surplus (more correctly the balance of payments surplus but that is a side issue) reflects the gap between what a country produces and what it consumes plus what it invests – that is Professor Pettis leaves out investment (which in China accounts for over 40% of GDP). Similarly the statement ‘as the leading trade deficit country, policies in the US that affect the gap between consumption and production will also determine the size of the US trade deficit’ is also not true. It is the gap between consumption plus investment, that is domestic demand, and production that will determine the size of the US trade deficit.
2.Michael Pettis writes: ‘Rising savings in one part of the world, even assuming no change in global investment, requires declining savings somewhere else.’ This is not true – and is confused. It is entirely possible for world saving as a whole to rise – in which case world investment will also rise. What I think Michael Pettis may be attempting to say is that an increase in the positive international transfer of savings (that is a balance of payments surplus) which occurs in one country must be met by an equivalent balance of payments deficit in the rest of the world – which is certainly true. But this is not at all the same as an assertion that world saving as a whole cannot rise.
3. It is asserted on Michael Pettis last post, in line with the present one and in greater detail, referring to the second quarter US GDP figures that: ‘ my main concern – no big surprise – was US consumption, which declined by more than GDP. ’ This makes two confusions.
First it confuses personal consumption with total consumption. They are not the same. Total US consumption is comprised by personal consumption plus government consumption. Consumption in the US is not declining more than GDP , contrary to the post of Professor Pettis – on the contrary it is rising as a percentage of GDP.
Between the first and second quarters of 2009, the period Professor Pettis refers to, US total consumption rose from 87.2% to 87.6% of GDP. Between the last quarter of 2007, that is before the financial crisis began to strike, and the second quarter of 2009 US consumption rose from 85.8% of GDP to 87.6%. Between the second quarter of 2008, the last before the opening of the entirely open financial crisis with the collapse of Lehman’s, and the second quarter of 2009 US consumption rose from 87.0% to 87.6% of GDP. The trend of rising US consumption under the impact of the financial crisis is therefore clear.
Second he fails to note that shifts in relative prices mean that although in volume terms US personal consumption fell more rapidly than GDP in the second quarter of 2009 (a decline of 1.2% compared to 1.0% for GDP) it increased as a percentage of GDP. From the point of view of global imbalances, that is the US balance of payments deficit, it is the proportion of GDP devoted to consumption which is determining and not movements in volume.
A much more detailed analysis of shifts in US consumption , and the breakdown of the rise in consumption between personal consumption and government consumption, may be foundhere.
If the HTML works properly readers should be able to see the trend of rising consumption in the US in the graph that follows.
4. Michael Pettis writes: ‘the imbalances have to be worked out one way or the other’. What is meant by this is that the US balance of payments deficit must decline and China’s balance of payments surplus must shrink. Indeed this is occurring. But it is happening not via US saving rising, as Micheal Pettis suggests, but by US investment falling even more rapidly than US saving, and by China’s investment rising towards its savings level.
Michael Pettis is attempting to deal systematically with absolutely key issues of the world economy as well as China, and his open and frank framework for discussing these is admirable, and greatly to be supported. But his continued confusion of economic demand (which is the sum of consumption and investment) with consumption (which is only one component of demand) leads to key errors in economics and therefore prognosis.
In particular it is not true that US consumption is falling as a percentage of GDP – on the contraryit has been rising.In parallel US saving has been declining – the US balance of payments deficit has shrunk simply because US savings have fallen even more rapidly than US investment.
ha ha ross you really are stalking pettis, even on the pages of the FT (although i see you can only get in a letter). do you really think he’s ging to make you credible?
Ross, I am afraid you will never get past your fairly rigid and conventional model to understand balance sheets. And you confuse accounting identities with prescriptive models, a very common mistake, but a mistake nonetheless. Also I think Pettis is right to focus on private US consumption. A temporary jump in fiscal consumption to counteract the effect of the crisis cannot be a growth generator for China. This seems very obvious to me.
John Ross is trying to discredit the “Saving Glut Theory” that was put forward by Ben Bernanke http://www.federalreserve.gov/boarddocs/speeches/2005/200503102/
That excess saving in Asia lead to excess purchase of American debt…
In other word, the entire crisis was caused by the Asian countries for buying excess American debt that lead to lower interest rate in the USA. The lower interest translated into cheaper borrowing in which people borrowed greatly to massively speculate in the dot.com, housing boom and natural resources (Barrel of oil peak price $150) and every bubble inflated by cheap money would eventually blow and that is what had just happened in the last several years!
Solution would be that Asian economy stop purchasing American debt and use it to purchase other thing or invest in their respective countries! China, Japan and the oil producing nations are moving into short term debt that has one or two year maturity, thus, the Fed need to massively purchase the long term debt to keep their interest lower and at the same time, China and other countries that held long term debt start to sell their long term debt to the fed and in turn use it to purchase short term debt. The way I see that China and other countries are moving away from long term debt into short term asset for better liquidity.
Here is the link:http://blogs.cfr.org/setser/2009/07/17/may-tic-data-still-buying-us-assets-but-just-the-liquid-ones/
The entire “Saving Glut Theory” and their supporter is to exonerate the Federal reserve responsibility of the current crisis! It was a crisis created by Alan Greenspan for his loose monetary policy in which he lower the interest rate to 1% for an entire year after the 9/11 attack in order to stimulate the falling economy that was caused by the dot.com bust and of course the terrorist attack! These easy money were used to inflated the real state bubble and now everyone is suffering for it!!!
The next bubble would the Dollar bubble if the Federal reserve keep printing money and buying the long term treasury bills!
Whilst I agree with Michael’s view in general, there are however many instances where I found him to have made this assumption that there is a linear relationship between trade balances between China and the USA. Why would and why should it be this linear if and when the US consumption drops, the Chinese trade surplus would have to drop correspondingly?
Surely there is a difference in terms of degree and scale between the drop in one and the drop in the other?
China’s trade surplus is a sum result of her trades with many and not just one partner (USA). Other equally large trading partner such as EU matters just as much, and in this regard, unless the EU and the USA and the rest of the trading partners are working in concert and are acting-reacting with the same policy response, the conclusion based on this linear, one-on-one, static relationship in my view is questionable.
In my view, the sum net difference between China and her various trading partner is what matter most to China in the trade surplus/deficit bottom line, and it’s a relationship between China vs many and not just USA alone.
1fine day
I think Pettis has made the point that this is a simplification before (sorry i cant give you the exact date of posting). I think he takes the US as a hyper deficit country, and China as a hyper surplus example to make the theory easier to understand. Of course there are other surplus countries / deficit countries. Generally deficit countries will be consuming less though, so i think that the argument can stand.