New books and notes on China

by on August 13, 2011 at 5:27 pm in Books, Economics, Uncategorized | Permalink

1. Run of the Red Queen: Government, Innovation, Globalization, and Economic Growth in China, by Dan Breznitz and Michael Murphree.  This book argues that China is not on the verge of making major product innovations, but is coming up with a healthy stream of product-cheapening process innovations.  Here is a good interview with one of the authors.  Reading it is not always a thrill, but it is full of substance and an important book.  It provides lots of evidence — from novel corners — for the “China as more decentralized than we think” view.

2. Tom Orlik, Understanding China’s Economic Indicators: Translating the Data into Investment Opportunities.  A very useful book, the title is much more accurate than the last three words of the subtitle.  I wish the book had more on believability, however.

3. Aaron L. Friedberg, A Contest for Supremacy: China, America, and the Struggle for Mastery in Asia.  I have yet to read this one.

Here are some interesting estimates:

Data from UBS show China’s bank-sector credit—a measure that includes bank loans and holdings of bonds—as a share of gross domestic product rising from 121% in 2008 to close to 150% in 2010. Taking account of banks’ off-balance-sheet lending, the number is even higher, closer to 180%, and the rate of increase in the last year sharper.

Such a rapid expansion in credit is risky. UBS points out that a 35 to 40 percentage-point increase in the credit-to-GDP ratio of other economies over a five-year period has often coincided with the arrival of a crisis. In China, fault lines in loans to the property sector and local governments are already starting to emerge.

As important, China is getting less growth bang for its credit buck than it used to. From 2003 to 2008, total social finance—a Chinese government measure that includes on- and off-balance-sheet lending by the banks as well as bond and equity issuance—expanded on average by 18% a year, supporting growth in nominal GDP of 17% a year. In 2009 and 2010, finance exploded 33% a year on average, but GDP growth slowed to 12%.

Frank Youell August 13, 2011 at 5:45 pm

I have no great expertise on this subject. However, I have observed some number of Chinese “process” innovations. China appears to be the world leader in coal gasification using current technology. Coal gasification has been the subject of significant R&D around the world for years (definitely including the U.S.). China appears to be the only place where gasification is widely used.

China has also developed a new technology for smelting nickel using electric furnaces. The traditional process produced a very high quality nickel product. The Chinese process produces a much lower quality nickel matte. That’s OK because the primary market for nickel is alloying where the other component of the matte (iron) is valuable anyway.

The new Chinese process has significantly expanded the range of laterite ores that can be used to produce nickel.

Overall you wouldn’t expect a country at China’s level to be a major innovator. Japan wasn’t at the same stage in its industrialization (nor was the U.S.). As China moves up the food change, things will change.

Firat Uenlue August 13, 2011 at 6:11 pm

If it’s alright with you Tyler I’d like to use this opportunity to present my book as well. It’s called ‘Beyond Chimerica’ and deals with the interdependent relationship between China and the United States in the realms of international relations, politics and, of course, economics. I personally love the econ section as I used an approach which draws heavily from Steve Keen’s work and takes the influence of credit into account. If people are interested they can get a pretty good idea here: http://seekingalpha.com/instablog/315374-firat-nl/197789-why-consumption-wont-come-back

The Fresh Prince of Darkness August 13, 2011 at 10:19 pm

I’m pretty sure your book sucks out the ass.

E. Barandiaran August 13, 2011 at 6:36 pm

Tyler, this is part of a comment that I wrote yesterday on a S. Sumner’s post:

Before discussing China, I suggest to read at least the latest IMF and WB reports. They are free:

http://www.imf.org/external/pubs/cat/longres.aspx?sk=25066.0

http://www.worldbank.org/research/2011/04/14123985/china-quarterly-update-april-2011

Maybe they are not good, but likely they are much better than most reports published this year.

Bradley Calder August 13, 2011 at 9:08 pm

A better way to understand China is to learn Chinese.

Richard Davis August 13, 2011 at 9:23 pm

marginalrevolution.com is no longer blocked by the PRC firewall. Until yesterday my daily was from Shenzhen through an inconvenient proxy server. Similar for some *.typepad.com, e.g. delong, worthwhile.

Kitten August 13, 2011 at 9:38 pm

So the MR bloggers can visit China without worrying about the firewall now!!

The Fresh Prince of Darkness August 13, 2011 at 10:21 pm

This is further proof that MR is harmless bullshit, threatening to no one.

ElamBend August 13, 2011 at 10:41 pm

It’s hardly a hard data point, but I always think of the guy who built his own sub:
http://www.youtube.com/watch?v=CGu6tpYpXLE

tinkerers go far

ElamBend August 13, 2011 at 10:43 pm

I also remember the mantra: China is not immune to the business cycle

steve August 14, 2011 at 2:11 am

“It provides lots of evidence — from novel corners — for the “China as more decentralized than we think” view.”

I visited both Russia and China in the 90′s.

The Russians all said they loved capitalism but didn’t seem to understand it. It bothered them to no end that Americans would pay a dollar for a soda from some guy standing in front of a store rather then waiting in a long queue for a 25 cent soda inside the store.

On the other hand, the Chinese all said they were socialists but were very careful to steer us tourists to the fancy high priced shops rather then anywhere the locals might go. I would say they understood capitalism just fine.

Mike in shenzhen August 14, 2011 at 11:27 am

I live in Shenzhen. The Chinese do not understand capitalism (by which I take you to mean free and competitive markets), but they understand theft, bribery, rent seeking, and coersion very well..

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