So how is the economy of Chengdu doing anyway?

by on May 15, 2014 at 6:30 am in Current Affairs, Economics, Travel | Permalink

If you ask people here in Chengdu they will say it is doing fine, even professional economists will say that.  In fact they are surprised and unprepared to respond if you raise concerns.  Yet their answers do not fully convince me.  One said after a pause:

The economy is fine, the government said it will grow over seven percent this year.

Another said:

The economy here is great, last year we held an international congress in Chengdu.

When I raised the typical worries, they were more or less shrugged off.  There is an attitude out here – in China’s “west” – that of course these problems exist, the people from Beijing and Shanghai have been screwed up for a long time, but we fine folk of Chengdu have known about that pretty much forever don’t let it bother you now.  As a point of comparison, I spoke to a number of highly informed people in Shanghai and they were much more pessimistic about the Chinese economy.

Could it be Chengdu’s rise to prosperity is so recent — considerably postdating that of Shanghai or Beijing or the South — that such a growth experience is still the dominant emotional memory and thus it cannot be dislodged from people’s minds?  If that were the case, people out here are truly unprepared for the Chinese economic squeeze in progress and that will make it much worse.

I have seen quite a good number of empty apartment buildings along various roads and the most common sight in town is the sign “Louis Vuitton — coming soon.”

Or shall we side with the simple null hypothesis that the residents of Chengdu are right and this foreigner — and much of the foreign press along with him — is simply misguided altogether?

In any case, this visit has increased the variance of my estimate for how China will do over the next few years.

1 andao May 15, 2014 at 6:43 am

check out investment as a percentage of GDP. before Bo Xilai got sacked in Chongqing, i think investment was over 80% of city GDP. Shanghai and Beijing are certainly not at those levels, so growth will be more dependent on consumption (more variable). That’s obviously not sustainable in the long term.

Or it could be just bad media or education. i show colleagues photos of Detroit and they ask “why does the government let that happen?” i reply with “does the Chinese government have unlimited money?” and they usually shrug or say yes.

2 So Much for Subtlety May 15, 2014 at 5:01 pm

It may just be me, but how do you go from media and education to Detroit? How do you go from Detroit’s problems to unlimited money? Surely Detroit is a lesson in how unlimited money does not actually help a city if everything else is wrong? Because they got a lot of money.

3 Andao May 16, 2014 at 12:04 pm

My meaning was that many Chinese seem to think that any problem can be solved by lots of government money, and I attribute this to the media and education system. They also assume government money is unlimited, or close. If there’s a blighted neighborhood in Shanghai…the government will just wave its wand, jobs will be created, homes will be built, and people will be rich. The connection to Detroit is that they expect the US government to have this same power and limitless cash flow.

My perspective in China is that leaders have very, very rarely had to make tough decisions that involve spending less. Almost every problem has been solved by pouring money into it. Clearly in Detroit some sacrifices have been made that involve routing money from one use to another, and the result has been generally bad. In China they don’t have to sacrifice.

4 ThomasH May 15, 2014 at 6:45 am

“I spoke to a number of highly informed people in Shanghai and they were much more pessimistic about the Chinese economy.” Could these be the Very Serious People that Prof. Krugman is always warning us about? 🙂

5 Ken Rhodes May 15, 2014 at 7:13 am

I think the last line is the best: “In any case, this visit has increased the variance of my estimate for how China will do over the next few years.”

The farther you are from a question, the sharper is your focus on your estimate of the answer. Then you get closer to the question, and you recognize more variance in your estimate.

6 Rahul May 15, 2014 at 7:39 am

Is this a version of The most uninformed people are usually the most certain on an issue?

7 Curt F. May 15, 2014 at 10:01 am

Ken Rhodes: The last line sounds the smartest, sure, but when you think about it, it seems meaningless, at least without a lot more context. Where has Tyler told us his predictions for (the expectation of) how China will do over the next few years? The second moment of a distribution doesn’t tell you a whole lot if you don’t know the first.

If I told you, “this post has increased the variance of my estimate of how good MR posts are,” does it really mean anything unless I tell you (a) how good I think the average MR post is in the first place, and (b) how good I think this post is?

8 Bill May 15, 2014 at 11:58 am

For a few Bitcoins, wanna bet who made this prediction in 2009:

“PRESIDENT OBAMA’S recent trip to China reflects a symbiotic relationship at the heart of the global economy: China uses American spending power to enlarge its private sector, while America uses Chinese lending power to expand its public sector. Yet this arrangement may unravel in a dangerous way, and if it does, the most likely culprit will be Chinese economic overcapacity.”

You can read the full article here :

If you say it often enough, sometime it will happen.

I predict rain, sometime soon.

9 Bill May 15, 2014 at 12:01 pm

My definition of soon may be different than yours, however, but no matter, I will claim that I predicted rain.

10 Chops May 15, 2014 at 7:24 am

Tyler, the real question is whether the cold noodles are as good as advertized!

11 JasonL May 15, 2014 at 9:30 am

Seconded. Talk noodles here Tyler.

12 8 May 15, 2014 at 7:34 am

The Chinese press is far more pessimistic, judging by the headlines and commentary I read. They are just as sensationalist as the West, if not more so. Chinese real estate prices haven’t really budged when you look at the overall market (this is not to say the bubble hasn’t burst, but in late 2011 and into early 2012 the numbers were much worse year on year, yet the market rebounded and surged higher in 2013). If you just read the headlines you’d think all hell was breaking loose in the real estate sector.

That was actually part of the political message the PBOC delivered to the banks earlier this week: you need to confront the negative press reports on mortgage lending. The media is running headlines such as: City X stops all mortgage lending. Banks think homes are not worth their price. Banks don’t want to lose money.The PBOC told them to monitor public opinion and media and respond to them.

13 Cahokia May 15, 2014 at 8:27 am

“I have seen quite a good number of empty apartment buildings along various roads and the most common sight in town is the sign “Louis Vuitton — coming soon.”

Tyler’s looking at China through Western eyes. From a Chinese perspective, those empty apartments and luxury store signs aren’t such a bad thing. Despite publicly expressing their intention to boost the domestic consumer market, by Western standards the Chinese government is still resolutely in favor of suppressed consumption and high savings rate. The corollary to those empty apartment blocks is that China’s West still has extremely high investment rates.

14 JWatts May 15, 2014 at 9:19 am

Blocks of empty apartment buildings are a worst mal-investment than Detroit. The warn out and abandoned factories in Detroit experienced decades of use and productive return. The empty apartment buildings he’s referring to have never provided any benefit.

15 dan1111 May 15, 2014 at 9:52 am

Who is paying really matters. If this centrally funded pork-barrel spending, then Chengdu benefits even if it is deeply wasteful for China as a whole. Even perpetually empty apartments would provide construction jobs in the region. But surely they will be filled eventually. Dumping lots of free extra housing capacity into the region will also benefit the local residents.

16 Andao May 16, 2014 at 12:10 pm

Assuming the apartment buildings stay standing for long enough. My building is less than 10 years old and already showing some serious age.

Or maybe that’s part of the stimulus plan? Rebuild every 15 years?

17 Cahokia May 15, 2014 at 9:55 am

China’s housing market is nothing like America’s. In China people are much more likely to pay cash to buy property than in the U.S. For this reason alone it’s naive to make analogies between America’s recent housing bubble and China’s.

18 8 May 15, 2014 at 11:15 am

The marginal Chinese buyer is paying zero down now. In some recent cases, the developer is giving them a grace period of one to two years. There’s also credit guarantee that give high interest loans to buyers who don’t have the cash for a down payment. House prices always go up, so you can’t lose. And the credit guarantee got a low interest loan backed by rehypothecated copper, and they make multiples of that loaning at high interest.

19 William D. Markle May 15, 2014 at 9:55 am

You have opened several different cans of worms with the question and observations. The growth experience is still a dominant emotional memory. But Chinese will not usually – certainly not in a group, and not with people they do not know – complain about conditions. Nor will they necessarily give you information just because you ask. Information is power. What point is there in giving it to you? People do expect the government to take care of them, or at least take care of the economy – so if the government says GDP will grow by 7%, who am I to quarrel with that? What advantage in disagreeing? Not to mention the lack of validity in macroeconomic measurements. I have taught in Hangzhou for five years, and taught Chinese government officials in Chicago for six years before that. Information is available, but it is not free and the lack of desire to disagree with official data is more than common. This is a different system, in all the cultural ways that take a long time to understand.

20 Benny Lava May 15, 2014 at 11:13 am

There are many things I know, and many things I do not. One thing I know I don’t know is the inner workings of the Chinese economy. Seems kinda foolish for an outsider to speculate on so little reliable information.

21 msmd May 15, 2014 at 1:37 pm

It could just be that Shanghai and Beijing people always appear more pessimistic than the fine Chengdu people, whether the economy is good or bad. You know, Shanghai and Beijing people want to look “sophisticated,” and being pessimistic about one’s own country is a popular way of doing so in China.

22 msgkings May 15, 2014 at 4:14 pm

Actually that’s been a popular way to look sophisticated everywhere, and throughout history. Never any shortage or people predicting doom, and calling the optimists rubes. And yet the world keeps getting better and better by any reasonable metric.

23 Bradley Gardner May 15, 2014 at 5:51 pm

Chengdu is seeing very very strong manufacturing growth. There is no situation in which Southeast Asia does well but Chengdu does poorly.

Tyler also seems to pick and choose parts of the foreign press that are more negative on China than the parts of the foreign press with reputable track records (The Economist for instance is quite positive on China, and has consistently been right).

Housing is a real issue, but its one that isn’t appropriately discussed in terms of blanket “bull or bear” statements. Foreigners have a really hard time wrapping their head around how China’s fiscal system and its financial system works, and its very important to understand if you’re going to start making predictions.

24 Ray Lopez May 16, 2014 at 1:50 am

TC sez: “In any case, this visit has increased the variance of my estimate for how China will do over the next few years.” – increased the variance means you think China may do better or worse than previously expected. Mood affiliation, since nothing you will learn from anecdotal evidence should lead to this conclusion.

Anecdote: in Greece, around 2008 just after the crash, I heard from the “man in the street” that the Great Recession was a Western phenomena and would not affect Greece. It was an ignorant comment at the time and I knew it, so how is the Chendu response any different?

25 Yan Wang May 16, 2014 at 10:01 am

1. This is at least partly because a common Chinese ppl just doesn’t want to or dare admit to any foreigners that he doesn’t have confidence in Chinese economy. That is the effect of more than 60 years’ mass propaganda and brain washing. So when you just ask a Chinese guy in Chengdu this kind of questions, you need to bear in mind what you observed may only be the effect of brain washing.

2. It is not exactly they actually “know” the economy is bad but don’t want to tell you. For a professional local economist, that may be the case. But for a guy you randomly pick on a street of Chengdu, he may well have experienced some consequence of the slowdown, but he does not believe his personal experience is anything reliable for answering a question regarding the economy in general, so he may just tell you something he saw from the Chinese TV news — the standard propaganda machine: 7% growth, great economy, international congress, etc.

3. Another problem is that, when a Chinese tell you the economy is great, you and him may have different definitions about the word “great”. To you if there is a slowdown to, say, 5% growth rate, it is definitely not great for Chinese economy. But a local Chinese may argue even 5% is great, compared to other parts of the world. Isn’t the US growth rate much lower than that?

4. Partly related to 2., one thing westerners often fail to appreciate is that, when being asked about a question like that, Chinese guys tend to think such a question has a “correct” answer, and they just begin guessing what the “correct” answer is. So what you get is actually their guesses about the “correct” answer instead of their personal experience about the economy.

5. There is an interesting story of a professor of political science ( of Duke university) doing a poll in China, where two questions are raised: 1) Do you think China has good democracy?
2) Do you have concerns speaking out your mind on sensitive issues?
The result, those who declared China does have democracy also said, overwhelmingly, they have no concern speaking out on sensitive issues, but those who say China does not have democracy (only a minority part of the surveyed do) overwhelmingly admitted that they do have concerns. If you understand what’s going on here behind the seemingly contradictory results, you understand China.

26 Andao May 16, 2014 at 12:13 pm

“one thing westerners often fail to appreciate is that, when being asked about a question like that, Chinese guys tend to think such a question has a “correct” answer, and they just begin guessing what the “correct” answer is”

+10, i see this every day. also explains a lot of poll results out of China

27 Tim VH May 16, 2014 at 11:13 pm

Consider the profile of the three key Central & Western provinces, Hubei, Chongqing, and Sichuan (capital of which is Chengdu):
– population 170mm, @ half US, would be world’s 6th largest economy
– urbanization low but accelerating, with CQ for example being only half urbanized
– GDP per capita half of East Coast of China
– highest consumption growth rate on China, @ 17%
– measures of investment effeciency / marginal productivity two times that of East Coast
– lowest penetration of consumer durables, only 60% of national average
– neither export dependent nor FDI dependent, like key East Coast provinces like Jiangsu
– much more balanced and more diversified industry composition than East Coast: major energy development, military hub, agriculture, local durables manufacturing, logistics, minerals, plus the on-going already funded infrastructure build out (see Sumner’s piece on how China is “pathetically poor” in infrastructure, per capita per area)
– real estate prices have decoupled with the rest of China and especially the sexy high end areas of Chapyang in BJG, Shanghai, Hainan Island etc.

There is a long, long, long way to go in organically increasing productivity from the center and west of China. Urbanization and the upgrade in human capital productivity alone will carry it very far. Add to this the new policy of liberalization of rural agriculture.

It is the biggest macro story which is completely missed by academic research and financial media

28 Sbard May 17, 2014 at 12:43 pm

On the other hand, the municipal government of Wuhan, the provincial capital of Hubei, is one of the most indebted in China as it continues on its project of building a comprehensive subway system. Don’t forget the 8-year inventory of unoccupied housing either. The cost of living is lower than on the coast, but not enough to make up for the wage differential while inflation is eating away at people’s purchasing power (a bowl of noodles that would have cost less then one yuan at the beginning of the 00’s is now 4-5 yuan.)

29 Tim VH May 17, 2014 at 1:42 pm

The stand-alone relative “indebtedness,” or surplus, of any provincial or municipal entity in China isn’t isn’t the same as in the West: (a) local governments are titularly prohibited from raising their own debt (LGFV’s have been an exception, and their use is being reviewed and will be constrained); and (b) the central government in Beijing routinely “tips off,” or balances provincial finances on a rolling basis. Everyone who understands the financial system of China knows that (apparently not including most readers of this blog), and it has been going on for years.

The broader questions are whether the local developmental and infrastructure spends across the heartland are NPV positive, and whether the timing of financing and initiating them all (’09 – ’11 roughly) make sense both for China and in the global macro environment. See Coase, Sumner, Lardy and Yasheng Huang on these questions.

The related question is overall level of leverage; after backing out LGFV leverage and large SOE corporate leverage, China (for its relative stage of development and it’s relative supply of productive human and non-human capital) is one of the least leveraged, and most under-banked and under financed economies in recent history. Half of all Private non-SOE corporates have no debt; of those which do, total liabilities / assets = 31%. And this is by far the most productive sector with high test growth. See Roderick on their exports and Huang on measures of their relative marginal productivity.

Do your own research and read the academic journals.

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