After three decades of torrid growth, China is encountering an unfamiliar problem with its newly struggling economy: a huge buildup of unsold goods that is cluttering shop floors, clogging car dealerships and filling factory warehouses.
…The severity of China’s inventory overhang has been carefully masked by the blocking or adjusting of economic data by the Chinese government — all part of an effort to prop up confidence in the economy among business managers and investors.
…Business owners who manufacture or distribute products as varied as dehumidifiers, plastic tubing for ventilation systems, solar panels, bedsheets and steel beams for false ceilings said that sales had fallen over the last year and showed little sign of recovering.
“Sales are down 50 percent from last year, and inventory is piled high,” said To Liangjian, the owner of a wholesale company distributing picture frames and cups, as he paused while playing online poker in his deserted storefront here in southeastern China.
Wu Weiqing, the manager of a faucet and sink wholesaler, said that his sales had dropped 30 percent in the last year and he has piled up extra merchandise. Yet the factory supplying him is still cranking out shiny kitchen fixtures at a fast pace.
…The Chinese industry’s problems show every sign of growing worse, not better. So many auto factories have opened in China in the last two years that the industry is operating at only about 65 percent of full capacity — far below the 80 percent usually needed for profitability.
Yet so many new factories are being built that, according to the Chinese government’s National Development and Reform Commission, the country’s auto manufacturing capacity is on track to increase again in the next three years by an amount equal to all the auto factories in Japan, or nearly all the auto factories in the United States.
…“Inventory used to flow in and out,” said Mr. Wu, the faucet and sink sales manager. “Now, it just sits there, and there’s more of it.”
Here is more.
Austrians predicted this.
Austrians have got to make up their mind whether their theory predicts production-consumption comovement or not. If you raise the flag of R. Garrison and cry “capital maintenance! Sustainable PPF!” whenever someone points out that the traditional ABCT implies little comovement, as is generally the case, you can’t abandon the Garrisonian ship when the Chinese surge in unsold inventories and claim, with a straight face, that your invocation of the theory has any predictive content whatsoever.
Claim that “Austrians predicted something” is a priori false since Austrians don’t believe anything about economy can be predicted.
Are there really still Austrians who believe that they are deducing self-evident Truths from the ether of Human Action? I thought all those people had fled for the hills when even the neoclassicals gave up on a Grand Unified Economics in the 60s. The Boettke camp are certainly willing to invoke hard data.
The axiom of the self-interested materially-interested individual under scarcity has no aggregate implications, and I daresay the dream of praxeological science died with that discovery.
e: and to my knowledge, the Austrian journals are oft heavily Boettke-influenced, and they have certainly been willing to adopt neoclassical methodologies when convenient. Game theory, new institutionalism, etc. And econometrics with macro aggregate data.
That’s fascinating, because I have a pretty good track record with a lot of my predictions. For example, “GDP will be bigger next year than it is this year” has been right very, very often.
IIRC, The theory just predicts the prices, if you have a surge in unsold inventories or “the Garrisonian ship” depends on what the state does with the extra capital they are pumping into the system, and if that capital pumping accelerates.
Brett further down the page explains it further.
No. The most interesting elements of Austrian capital theory require at least a good reason to believe that there were distorted price signals, upon which private actors made calculations, and when the distortion is finally revealed as plans clash, actors have to re-adjust their plans: and we claim that we are observing the re-adjustment.
Without this element there is nothing distinctively Austrian about the claim that excessively high prices generate excess supply, which show up in the data as surges in inventory stocks; this is indistinguishable from a model with only price rigidity, no foolish investors, no stickiness in ‘plans’, and thus a wholly textbook monetarist/keynesian/new-keynesian dynamic.
Two points, therefore: the NYT article explicitly speculates on the source of the shock and it isn’t due to revealed clashing plans, but the visible hand of the Chinese state; and second, because it is quite possible for any number of non-price-distortion approaches to predict swings in prices over the business cycle, Austrian capital theory has always had to make concrete assertions about real quantities and real wages and rents to lay claim to unique predictions. If you insist it just accounts for prices, then the theory has no predictive content: the real work is being done by whatever just-so story you append on in the part where you speculate on what macroeconomic effects “what the state does with the extra capital” has.
Chinese government buying US Treasurys keeping our taxes lower, spending higher, costs lower, profits and employment higher, and political conflict lower than otherwise. Essentially semi-permanent stimulus. And considering we are debating whether or not it can go on forever that is a priori evidence for miscalculation- someone is wrong.
If China had an economy that wasn’t still mostly made up of state-owned enterprises with incestuous links to the state banking system, this glut would probably become a short-term boon for consumers. When the hammer finally fell and companies were forced to get rid of their inventories at bargain basement prices, they’d reap a windfall until production and supply fell down closer to equilibrium. But since China is that type of economy, who knows. They’ll no doubt try to ramp up exports even more.
+1
If the state weren’t calling all the shots, “excess” inventory could easily be absorbed by the Chinese consumer. Instead, the government is terrified of allowing price fluctuations, which is not so different from any other government, really, except that the People’s Republic has more economic control.
We had excess inventory in the United States in 2008. Tons of articles about cars piling up on lots, or sitting in containers unopened because there was no demand for them. That was because the United States was undergoing the sharpest monetary contraction since the great depression. I hear it was because the FOMC was “terrified of allowing price fluctuations” (aka nonzero inflation).
I can’t tell whether or not you’re being sarcastic, and if so, in which way.
Personally, I don’t think there is a lot of comparability between Chinese institutions and American ones. When you have a top-down economy like China’s, in which the central planners fear that they will set off economic catastrophes if prices fluctuate too much, then it’s a very different situation than America’s credit problems.
But I do agree that America could have recovered more quickly if we were more open to price level fluctuations. Historically, price levels have decreased in the wake of recessions.
The NYT article notes the price rigidity – the manufacturers are holding wholesalers to their earlier purchase agreements. And it also notes the exogenous shock – the government is deliberately setting out to strangle housing and car consumption for assorted reasons.
The straightforward consequence is the surge in inventories. I mean really, why wouldn’t one expect that to happen.
“The straightforward consequence is the surge in inventories. I mean really, why wouldn’t one expect that to happen.”
+1
Did “price rigidity” and “exogenous shock” not tip you off? This is an account wholly consistent with, well, virtually any orthodox position. Like a New Keynesian one. There is nothing distinctively Austrian about the observation.
If Austrian theory is consistent with everything it predicts nothing.
All of the various details about the Chinese economy have been there, what changed are the debt levels after the 2008 stimulus. The whole country went on a credit binge. The real estate bubble reinflated (it had basically popped in 2008) and the government promoted auto sales (shocker: it led to monster traffic jams, corruption by government officials blowing cash on cars, and bad pollution) and solar power. This really wasn’t a big change from previous policies favoring specific industries. The difference over the past 4 years was the credit. Credit fueled the massive buildout of production capacity in steel, solar, autos, real estate, etc. The financial bubble here is extensive, manufacturers are even selling cement trucks on credit here and buyers are taking the credit to buy lots of unneeded cement trucks. Then they use the cement trucks as collateral for bank loans, at least some of it funding real estate speculation. Oh, and the private market is starved for capital, because the banks lend to state owned companies and local governments, but now the banks don’t even want to lend to local governments because the stimulus loans from 4 years ago are going bad.
Excellent article by Andy Xie on caixin
http://english.caixin.com/2012-08-13/100423159.html
“There is another testing point ahead. If local governments want to sustain production levels, they have to arrange bank loans to support loss-making production. The central government has loosened up liquidity control. Bank lending conditions have been eased. Approvals for corporate bonds have been accelerated. It is possible that production levels would be sustained into the fourth quarter despite falling commodity prices. Of course, the financial system will suffer bad assets from propping up loss-making production.
Inventory levels are still high. The coal, steel and auto industries are prominent examples. The liquidation of such inventories requires sales prices to drop much more and reduced production. If the system sustains production despite falling prices, it will prolong the vicious cycle. Unfortunately, the liquidity easing in the past few months makes this scenario more likely.”
In a way it is similar to Germany with the difference that Germany incurs losses via the Target2-system and on other exposure to EZ-periphery loans. Both China and Germany think that an economy needs a “hard” core to be sustainable and neglect finance, if not disregard and look down upon it. Funnily enough, it is finance that supports export growth/manufacturing growth but the various finance channels will eventually blow up that their economies will suffer huge losses.
David: “Austrians have got to make up their mind whether their theory predicts production-consumption comovement or not” . I think before that the Austrian school economists should make up their mind whether ideas can be tested against empirical data or not. The Austrian position in this methodological point is pretty confusing with Mises saying no and Hayek saying both yes and no
Now that the workers are finished digging holes in the ground, it’s time for them to fill them back up.
So the problem is AD not AS? Then why do you keep suggesting it is an AS problem?
Cut prices?
So this seems to me like a very basic stuff we learned in Intro to Macro.
So when producers have tons of inventory, they tend to (unless being told not to) cut production. Market equilibrium can be achieved here if they just lower prices to meet demand.
I don’t see why people are debating Austrian vs Monetarist/Keynesian/New-Keynesian here. This seems (to me) to be very basic stuff. Couple that with price controls/production controls in, say the housing market will obviously create bad consequences and I can demonstrate that with a simple S/D graph.
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