The rise and fall of the Chinese economy

by on October 21, 2015 at 11:36 am in Current Affairs, Economics, History | Permalink

In this new video, The Rise and Fall of the Chinese Economy, I discuss problems and prospects for the Chinese economy, given the latest developments.  This is the most recent addition to the Everyday Economics series from MRUniversity, and it also will be part of our forthcoming macroeconomics course.  It is done in a slightly new style, I hope you enjoy it.

The Learn More page features additional resources about this topic.

By the way, here is your China (Africa) fact of the day:

China’s investment into Africa appears to be another casualty of the slowdown in the world’s second-largest economy. Chinese cross-border investment in greenfield projects and in expansion of existing projects in Africa fell by 84 per cent in the first half of this year compared with a year earlier, from $3.54bn to $568m.

The FT article is here.

1 rayward October 21, 2015 at 12:09 pm

The level of income inequality in China is one of the highest in the world, higher than in the U.S. As long as the world was China’s consumer, consuming all those goods produced by China as the result of the enormous investment in China, it didn’t matter much. But with demand in other places in decline, China must rely on domestic consumption to balance the goods China produces. But with inequality so high in China, it can’t. Cowen ascribes part of China’s problem to being overbuilt. My question: overbuilt compared to what? What he means is overbuilt in relation to demand: China is overbuilt in relation to foreign demand and domestic demand, demand that is suppressed because income inequality is so high, high in foreign markets and high domestically. Of course, Cowen never mentions inequality in China, instead using euphemisms like overbuilt. I’m not being critical; indeed, Cowen ends his talk on an optimistic note: China has invested enormous resources in human capital, and human capital will spur China’s future growth and prosperity. Imagine that!

2 Harun October 21, 2015 at 2:12 pm

“China must rely on domestic consumption to balance the goods China produces. But with inequality so high in China, it can’t.”

You really are too myopic.

Incomes and wages have been rising very quickly in China. This means more consumption is possible.

inequality is increasing, despite this, because the rapid growth allows some to grow even more income than the wage earners. A lot of this is huge jumps in land value. You sit on an apartment for six months and it goes up 20%. The superstar effect may also play a role.

its simply ludicrous to say “well, because Eminem made a billion dollars, and the average joe only had a 20% increase in wages, this means we can’t have a increase in consumption.”

3 Pshrnk October 21, 2015 at 4:57 pm

Yea, but if Eminem made a billion dollars and the average joe had 0% increase in wages you will not have much growth.

4 Harun October 21, 2015 at 7:35 pm

Show me that Chinese wages have been at 0% growth then.

http://www.ch-ina.com/wp-content/uploads/2015/02/China-Average-Manufacturing-Wages-2.jpg

http://www.tradingeconomics.com/china/wages

Its almost as if certain commenters want to push everything into inequality because they have a US domestic agenda on that issue.

5 Nathan W October 21, 2015 at 5:42 pm

I agree that inequality is a big deal in China. But consider that inequality is something that’s more of a big deal when people are really aware of it. Yes, there are migrant workers in Chinese cities, and they are generally quite poor, and very aware that other people are wealthy.

But the relevant point is that the poverty is basically concentrated in the west of the country, and the wealthy is basically concentrated on the east coast. So most of China’s poorest people never have to encounter massive displays of wealth that would lead them to be really pissed off about the inequality. Everyone else around them is poor, and they have only heard rumours of vast wealth being created elsewhere.

Meanwhile, in the cities, I think there is very much this Americanesque sort of attitude of “pick yourself up by your bootstraps” kind of mentality, which leads the poor to be somewhat complacent about their lot. Also, since the absolute wealth gains have been so fantastic in recent decades, almost everyone, including the poor, has very personal experience of their rise in wealth, even though inequality is huge.

For these reasons, I think that the potential social problems of inequality are less than the numbers might suggest.

6 Harun October 21, 2015 at 7:42 pm

Exactly. Everyone in China knows this is the golden time to get rich.

Some of the rich are really just lucky. You have the right land and it can go up by 50 times of value in 3 years or something crazy like that. But its a very lotto kind of system. Taiwan had this, too.

I actually think this is why inequality being large is not an issue.
Gee, our country is going through a once in 200 year boom of catch up growth where we export cheap stuff to foreigners…do we know any other country that did that?

Japan, Taiwan, Korea.

China will also have some super star effect like whoever creates their google, etc. because they have 1 billion consumers.

I don’t think average people really feel oppressed by Jack Ma or Bill Gates.

If you go to reddit, you will see a list of richest comedians…no one gives them any hard time and demands “redistribution.”

Its only when its about bankers or big business, and its faceless. (Steve Jobs deserves his money for example.)

I suspect people imagine they could run a company or sell CDO’s or whatever, but are amazed by iPhones and by entertainers. Thus those guys “earned” it whereas Wal-Mart is just greedy…cuz I could manage a store and pay people low wages.

7 Ricardo October 22, 2015 at 4:03 am

Angus Deaton’s comments on inequality go double for a place like China given its high levels of corruption. A situation where more and more wealth is concentrated among an oligarchy leads to a situation where the rules get bent or rewritten entirely for the benefit of those oligarchs and at the expense of everyone else.

If you look at the list of Chinese billionaires, a few are involved in real estate. If you are a middle class person without influential friends and your home is on a coveted plot of land, what do you think the chances are that you will be able to keep your home or even be fairly compensated for it when you find yourself up against a developer who has the local police and judicial officials in his pocket? Corruption and inequality tend to reinforce each other in a vicious circle.

8 Nathan W October 22, 2015 at 12:31 pm

Agreed. This is an important counterpoint to the depiction I suggested above. The current president is on a massive anti-corruption drive, but a lot of the stuff I’ve read about seems to suggest that he’s more in the business of using anti-corruption to get rid of anyone he doesn’t like, rather than combating the problem more seriously.

9 E. Harding October 21, 2015 at 9:04 pm

It’s not “demand” that runs the economy, rayward. “Demand” is NGDP. There is no way it can somehow be magically suppressed because “income inequality is so high”. No matter how much “demand” there is for Congolese manufactured exports, none will be supplied. Yes, riding on the manufactured goods cost differential will be more difficult now, and that will slow economic growth, but that has nothing to do with some ridiculous conception of “demand”. Formerly, I thought you smart, but you truly are an idiot.

10 Nathan W October 22, 2015 at 4:08 am

It depends on the composition of demand across the income distribution.

If the wealthy prefer to consume luxury cars, foreign luxury handbags, watches and phones, foreign made designer clothes, overseas holidays, etc., and moreover have a strong preference to get a non-negligible share of their wealth out of the country … while the poor consume 100% local made goods, then the impacts on AD can be significant. How big is the impact? I would pull a number out of the air in the range of 2-5% of annual GDP.

Also, high inequality implies poor ability of many people to make basic personal investments in education and health care, presumably having strong negative effects on long term economic potential of the economy.

Also, you’re reverting to norm in insulting people. No one is an expert on everything and everyone says something silly sometimes. And what he said isn’t even that silly. “demand that is suppressed because income inequality is so high”. It is a stated objective of the CPC to increase the earning capacity of the poor, for the explicit purpose of increasing domestic demand. The Chinese are not stupid, and neither is rayward.

11 E. Harding October 22, 2015 at 8:11 am

If the economy can’t produce luxury cars, luxury handbags, watches, phones, designer clothes, and good resorts, that’s its problem. Also,
Investments in education and healthcare are much less relevant today than they were even ten or twenty years ago. Now, Lebanon has a life expectancy just two years lower than that of Israel. And the Internet has made access to education much less expensive.

“It is a stated objective of the CPC to increase the earning capacity of the poor, for the explicit purpose of increasing domestic demand.”

-With what, magic? And if they wanted to increase domestic demand, they could just announce a sudden devaluation in the Yuan. Would be good for their economy, too, and orders of magnitude easier and more effective than doing anything to the income distribution.

Sorry, man, but I can’t stand aside with people expecting their nonsense to be taken seriously.

12 Nathan W October 22, 2015 at 12:36 pm

“With what, magic?” – haha, yeah, I’ve never been 100% clear on this.

I used to surmise that they might turn to a strong RMB policy to increase the buying power of the working class, but now I have a better understanding of trade stuff and see that this wouldn’t work out. A lot of cities have seen minimum wages double or triple in recent years, and I understand this to be linked to the desire to increase consumer demand of lower income earners (and also stave off unrest).

13 E. Harding October 22, 2015 at 5:03 pm

Do the minimum wage increases actually have any effect on anything? Given what you said about business codes in China, why would anyone obey minimum wage laws when they didn’t feel like it?

Belarus’ does devaluations all the time, yet, its real exchange rate still manages to appreciate (it did so in 2012 and 2013). Changes to the nominal exchange rate are only good for NGDP stimulus/contraction. They have no long-run effect on trade.

14 Nathan W October 23, 2015 at 3:05 am

Good point. I think the export-oriented firms in Guangdong, Shenzhen area, would have nearly 100% compliance, but perhaps it’s not as significant at the macro level as I might have assumed.

15 T. Shaw October 21, 2015 at 9:54 pm

I have no confidence in the numbers and no respect for the economics.

Economic growth and development is about amassing developing (simplification) land, labor, and capital. It’s culture, process, property protections, etc. Equality of outcomes is not productive to the process.

The words “income inequality” tell me the speaker/writer has nothing worth hearing/reading. It screams emotions: class envy and hatred. It’s a du jour liberal swear word. Politicians’, central planners’ and academics’ belief in it will doom their efforts. Not to worry. They will blame the tea party and obstructionism. Hey, it worked for Lenin, Mao, and Stalin.

16 Nathan W October 22, 2015 at 4:20 am

Income inequality is both real and important. Among other things, it can signal distortions in the economy which mute incentives for the working class or reflect an elite class which is abusing its power to extract rents, it can signal potential loci of frustrations which may contribute to future conflict, and in a more airhead-like sort of note, it informs us about the extent of one of the most natural things in humanity (contrasted by greed, which is also natural) – sharing the benefits of one’s luck and success with those who are less fortunate.

Essentially all philosophical/religious systems which have stood the test of time have a special place for concern for the poor, and inequality is simply a more advanced way to discuss poverty.

Anyways, while data on the 1% might make for good headlines, I think most people are more concerned about equality of opportunity than equality of outcome.

Your sort of statement like “anyone who uses the word X is not worth reading” reflects willful ignorance, nothing more, nothing less. There’s a reason that this stuff is important to people.

17 T. Shaw October 22, 2015 at 8:35 am

Milton Friedman, “A society that places equality before freedom will get neither. A society that puts liberty before equality will get a high degree of both.”

I stopped reading your reply after the words, “income inequality.” It’s simply one more lie of left-wing demagogues’ bag of bullshit. I don’t waste my a second of the limited time I have left on the planet when I see known calumnies from persons with no real life experience.

18 Nathan W October 22, 2015 at 12:43 pm

Huh. What an enlightened approach. Don’t waste your time reading anything that you don’t like, but waste your time writing comments about how you think they’re a waste of time.

What’s the value of liberty with such a closed mind?

19 msgkings October 22, 2015 at 12:50 pm

Yes, you use all those precious finite seconds posting your one-note drivel here. Pro tip: you’re not convincing anyone of anything the way you do it. Some of the posters that agree with your world view at least take the time to have an honest debate.

Income inequality is a notion like so many others, one that probably doesn’t matter much unless it gets very extreme. Like most things, too much of it can be a problem. Whether we are near that point of dangerous extremity is what the debate is about.

20 jdm October 21, 2015 at 12:30 pm

Nicely done.

21 Thomas October 21, 2015 at 12:35 pm

I am not the first.

22 msgkings October 21, 2015 at 2:42 pm

I am Groot.

23 MM October 21, 2015 at 12:49 pm

Can real estate pick up as prices come down and fuel the economy once more?

24 Ralph e October 21, 2015 at 1:07 pm

Nice motion graphics and great summary. As far as being cheery: China may have invested a lot in human capital but it’s very nationalistic human capital. Combine that with a prolonged recession and a wary Japan and US, and the future may not be so cheery.

25 Harun October 21, 2015 at 2:19 pm

I think there is a significant increase in risk of war with Taiwan after their election in January.

1) Election will go against Beijing unification
2) Bad economy in China may create a situation where “wag the dog” looks good for the communist party
3) Obama has been fairly supine in Ukraine, Syria etc. This is not a criticism of Obama, per se, but he’s trying to withdraw from a lot of entanglements which gives a perception of allowing ground to be taken. Maybe there is a better word than supine…”unagressive?” I should also note we backed down from crossing near China’s man-made island…or at least back-pedaled from a plan to do that.

Anyways, the key is perception from China. If they feel they could use some domestic support, feel they are losing Taiwan, and feel Obama will most likely do very little…perhaps some sanctions, then now is the time to act.

Additional factor:

Iran deal: Obama specifically said that one reason we have to agree to the Iran deal is that if we don’t, China may stop lending to us. This implies a very strong lever for China. I think Obama just used this as an excuse, and it was a dangerous excuse to say, as who knows what Chinese readers think when they read that! They may buy this argument.

26 Harun October 21, 2015 at 2:23 pm

“significant increase” = bump of maybe 5% from normal chance…not 95% chance of war.

27 Mark Thorson October 21, 2015 at 5:12 pm

They could seize the Quemoy and Matsu islands. They are so close to the mainland and so far from Taiwan that they are essentially indefensible. Whatcha going to do about that, Obama?

28 Nathan W October 21, 2015 at 5:45 pm

I think they would rather get them by diplomacy over 50 or 100 years than by might tomorrow.

29 Harun October 21, 2015 at 7:43 pm

That would be a good lower risk option. Just enough to please the people, not enough to cause Obama to do much, and Taiwan might even just accept it.

Very Crimea like. Those islands are already very much linked to China, too.

30 Harun October 21, 2015 at 7:46 pm

And a signal to Taiwan, to boot.

31 E. Harding October 21, 2015 at 9:05 pm

Not at all Krim-like. Krim had a majority Russian-speaking population and the reunification was agreed to by popular referendum.

32 Harun October 21, 2015 at 10:09 pm

You are aware that those islands speak both Mandarin and the dialect of the province they used to be a part of, and both islands have majorities who support unification with China. I suspect you think they are Taiwanese-leaning, but they really are not.

They are exactly like Crimea, except they have less strategic importance.

In fact, I’ll add to the scenario: Taiwan votes DPP but those islands vote KMT could be the pretext needed.

That said, I think the actual chance is low to zero unless there are domestic issues in China that need to be bottled up.

33 Mark Thorson October 21, 2015 at 10:43 pm

Sends a message to Japan, Vietnam, and Philippines, too.

34 E. Harding October 21, 2015 at 11:55 pm

Communist China? Are you sure, Harun? ‘Cause I seriously doubt it.

35 msgkings October 22, 2015 at 12:53 pm

@ E Harding: China is about as ‘communist’ as Russia these days.

36 E. Harding October 22, 2015 at 4:59 pm

I see why people in Communist China would want to re-unify with Nationalist China. I can’t see why islanders would want to join themselves to Communist China.

37 cleanliness October 21, 2015 at 7:36 pm

Taiwan is the least of China’s ambitions. All that “over built” housing and infrastructure stock will come in handy when they decide to conquer us. We might manage to inflict a little damage if we don’t roll over immediately so it will be nice for them to have readily available resettlement quarters. Tyler’s A+ is most deserved for their military upgrade, especially in development of disruptive new technologies that will catch us with our pants down. We are goading them to act with foolishness like the F-35 unilateral-disarmament-at-the-highest-possible-cost and our soon-to-be-if-not-already defenseless carrier groups. Not that it will be a bad thing, necessarily. Chinese rule couldn’t be any more rapacious than our blood-sucking bureaucrats and would be at least as competent no matter how bad they are.

38 E. Harding October 21, 2015 at 9:06 pm

cleanliness, you’re nuts. China has been quite averse to expressing strong territorial ambitions. Japan did more at a small fraction of the GDP per capita.

39 Harun October 21, 2015 at 10:10 pm

You mean recently, right?

Because in the last century they fought several wars with their neighbors, seizing territory.

40 E. Harding October 21, 2015 at 11:56 pm

Yes, post-1979, and compared with potential territorial aggression and expansion.

41 Nathan W October 22, 2015 at 4:25 am

Indeed. They have been 100% consistent about their territorial claims since 1949.

I always argue that this fact should be emphasized, but be willing to turn on a dime the moment they express an interest in going a single inch further.

42 Paul October 21, 2015 at 1:10 pm

Very well done. The animation is at a new higher level. Could spur a good class discussion.

43 Euripides October 21, 2015 at 1:22 pm

Nice video, Tyler, I learned a few things. You helped me connect some issues I had heard about, so the whole picture makes a little bit more sense.

44 charlie October 21, 2015 at 2:05 pm

Off topic, but newsly…

http://sirf-online.org/2015/10/19/hidden-in-plain-sight-valeants-big-crazy-sort-of-secret-story/

“(A brief aside: Francois-Andre Philidor was an 18th century French Chess master, writing a book about it, The Analysis of Chess. BQ6 Media is named after the chess shorthand for Bobby Fisher’s legendary move against Russian chess master Boris Spassky in 1972. Another popular chess move is the King’s Gambit Accepted, or as it’s often referred to in chess notation, KGA.)”

Most expensive ($34B) chess fraud ever?

In china they just shoot you.

45 Ray Lopez October 21, 2015 at 2:24 pm

As you know, I’m a TC fan, but I find this video not convincing. Here is my postmortem analysis.

@5:14 mark–why is the ‘China is coupled to the world economy’ thesis not explained more clearly? TC is making the argument that when the Great Recession of 2008 struck, China should have slowed down their investments. Why? This is an elephant in the room. It’s not enough to assume (as TC does) that not slowing down investment will simply delay the inevitable. You have to explain, clearly, why China is coupled to the ROW (Rest of the World), and that the ROW slowing down requires China also slow down. But is this thesis provable?

@6:40 – the “China data is wrong” thesis. Just asserted, not proved, again not provable. Tin foil hat stuff.

@7:30 – the “China ghost cities” thesis. Id. It’s a fact that in developing countries people invest in real estate and DO NOT LIVE IN IT, since they don’t trust banks. True in Greece. True in the Philippines. Should be mentioned.

@8:30 – the “municipal governments borrow money illegally, when they’re supposed to run a balanced budget” – Id, unsourced, unprovable. Tin foil hat stuff.

@9:45 – the “capital flight” meme. Same thing was said about Asian financial crisis of 1998 (and did not materialize), Id for Japan (and has not materialized), Id for Cyprus, Greece. Capital controls work, since people are afraid of prison. Sad but true.

@11:00 – ‘My personal view is…” yet the entire video was TC’s personal view! But a Hollywood Happy Ending is offered about “long term” or “medium” prospects, citing “human capital”? What human capital? Factory workers? You must be kidding. These people are like obsolete robots.

Sorry TC, but your video was a patzer blunder, much as I hate China (I once had a Chinese girlfriend who rejected me, if that matters, and I’m in the Philippines and resent Chinese bulling over supposed oil-rich off-shore regions around the Philippines).

46 Moreno Klaus October 21, 2015 at 2:54 pm

A chinese girl rejected you? Thats a really bad sign IMO. Chinese girls are usually a bit “desperate” to get married, and therefore have a whole lot of patience, and they dont demand that much from a guy, compared to lets say western europe / north american girls

47 Ray Lopez October 21, 2015 at 3:50 pm

@MK -I agree with what you say. But this girl was really exceptional. Besides being tall and really beautiful, she was featured in the NY Times. She ended up with an even older guy than me, and richer (remember, I’m in the 1%, but it’s an expectation of an inheritance; my net worth now is only about 0.4M, by contrast, this guy was in the 1% right now and even bought her a house in her name as a wedding gift). I’m not bitter though. Really. A little bitter but not much, and it doesn’t affect my judgement about China.

48 MOFO. October 21, 2015 at 3:34 pm

@6:40 – the “China data is wrong” thesis. Just asserted, not proved, again not provable. Tin foil hat stuff

Havent seen the video, but my understanding is that even Xi says that the official Chinese economic data is false. Maybe that isnt ‘proof’ but id say it belies your claim that its tin foil hat stuff.

49 JasonL October 21, 2015 at 4:08 pm

I don’t think anyone anywhere believes Chinese official GDP. Why in the world would you believe official numbers generated with so little transparency?

50 mulp October 21, 2015 at 4:28 pm

I gather you don’t trust the economic statistics of the US economy either?

51 Nathan W October 21, 2015 at 5:48 pm

China slowdown – I thought this was also supposed to be for diplomatic reasons. Not only for its own economy, but part of an international effort to stave off economic depression.

municipal borrowing – I thought everyone knew they were massively in debt. But yeah, sources are good.

capital flight – agree. It’s very hard to get (much) money out of China unless you’re connected.

52 Axa October 22, 2015 at 5:48 am

Ray: Argentina published inflation data since 2007 that no person believed. The IMF complained formally on 2013. During 6 years, the pundits (i.e. Tyler) pointed at the cooked numbers without proving anything. Would you say all the pundits where wrong just because the IMF took 6 years to make a statement?

If you missed the title of the video it’s “The rise and fall of the Chinese economy”. Since the fall has not happened yet, it’s a prediction. In meteorology you can estimate the probability distribution of predictions, then choose among the most probable predictions. Economics is not developed at that level, so……predictions are more difficult to asses. In any case, the level of proof you demand is available 5-10 years after a crisis, you are evaluating a prediction with the same severity of an after-event analysis.

53 rayward October 21, 2015 at 3:09 pm

What Cowen omitted in this talk (besides inequality) is the political economy in China. China made the investment necessary for China to become an industrial giant and created the billionaires who dominate the economy and influence the political class, now China is “overbuilt” and has the capacity to produce far more goods than can be consumed (internationally and domestically). How will China respond to the imbalance? Thus far it has chosen primarily a capitalist response, clumsy perhaps, but a capitalist response. But given the level of inequality in China today and China’s Maoist history, how will China respond to billionaires amidst continuing poverty, in the event of a deep and prolonged recession? The risk is not well. Will China’s billionaires be blamed for the Great Recession Cowen predicts? In the U.S., the government gets the blame, not billionaires, or even business, but I wouldn’t count on the same response in China.

54 mulp October 21, 2015 at 4:27 pm

If the Chinese government is the billionaires, then not having a job with a future that allows you to buy the stuff China exports, the blame is the government billionaires who won’t redistribute the wealth by giving everyone good paying jobs.

If the billionaires are not the government, the the government will blame the greedy billionaires for failing to give everyone a good paying job, and grab a few without good connections to execute, to motivate the billionaires to pay another 50-100 million people to work.

55 E. Harding October 21, 2015 at 9:08 pm

“If the Chinese government is the billionaires, then not having a job with a future that allows you to buy the stuff China exports, the blame is the government billionaires who won’t redistribute the wealth by giving everyone good paying jobs.”

-No, mulp. That’s nonsense.

56 Nathan W October 21, 2015 at 5:53 pm

I’m not convinced by the “China is “overbuilt”” theory.

Some will cite some airports that don’t have a lot of business. But isn’t this true everywhere? Others will cite that not all the trains are full – I’ve been on a handful of trains without too much business, but most of them are near capacity – trains are on average far emptier in Canada or Europe. Sitting on real estate? When someone has so much money that they sit on a third condo because they can’t invest elsewhere, does it really affect aggregate demand it their property value falls? Go back to step one: they already have so much money that they don’t know where to put it, so presumably falling property value doesn’t affect their spending much.

The rate of infrastructure investment will presumably slow down, but I remain thoroughly unconvinced by the “overbuilt” theory. There remain hundreds of millions of peasants living in the backwaters who can still enter into the modern economy, as labourers, low-skill workers, etc., and offer more demand for “overbuilt” China.

57 carlolspln October 21, 2015 at 8:49 pm

“I’m not convinced by the “China is “overbuilt”” theory”

Really?

Let’s take just one industrial sector, steel:

In 2009, CHI brought on more new steelmaking capacity than was the cumulative steelmaking capacity ACROSS ALL OF THE EU [from memory, this was ~ 140M tons per annum]

And that was just one year.

The money shot: “The real winter for the sector, and the period where overcapacity will really be the most serious, will come after 2018.”

http://www.scmp.com/news/china/article/1749918/china-plans-slash-steel-making-capacity-80m-tonnes

UPSHOT: overbuilt much?

58 E. Harding October 21, 2015 at 9:10 pm

Last time I heard, the E.U. had too high labor costs to be a major steel producer. Sure, there is some malinvestment, but, given strong Chinese growth, it’s not as huge an issue as malunderinvesment in the rest of the world.

59 carlolspln October 22, 2015 at 2:35 am

Labour is even less of a cost driver in steelmaking than it is in modern manufacturing. Energy, raw materials, depreciation are each greater/larger.

I suspect the biggest reason for ‘EU high costs’ is compliance to clean air & water regulation.

60 E. Harding October 21, 2015 at 9:07 pm

“now China is “overbuilt” and has the capacity to produce far more goods than can be consumed (internationally and domestically).”

-What the fuck does that even mean? Do the Chinese consume as much as Americans? If not, what’s preventing them from doing so? Certainly not an overabundance of capacity.

61 mulp October 21, 2015 at 4:21 pm

When did not growing exponentially become “bankruptcy”, “fall”, etc?

And why isn’t Oprah going back to Weight Watchers met with doom and gloom because Oprah is trying to reverse her exponential growth in mass?

If growth is so great, why isn’t the growing collective mass of Americans seen as fantastic?

After all, for McDs and Yum Yum to grow exponentially, their customers need to grow in mass exponentially. Which is needed by Weight Watchers and Jenny Craig, too.

62 E. Harding October 21, 2015 at 8:55 pm

Holy crap! Mulp is right! A bear just died in the woods!

63 WG October 21, 2015 at 6:06 pm

An amazing well-done video. Great use of graphics that play nicely with the narrator. And for people who know nothing about economics or China, not at all intimidating.

64 JC October 21, 2015 at 8:42 pm

Wonderful quality of video. Well done.

65 E. Harding October 21, 2015 at 8:59 pm

There is no “fall” in the Chinese economy. There has only been a rise. Any rational American would kill for even 4% growth.

66 Dots October 21, 2015 at 9:25 pm

their printers (and wombs) have room to run, and the West seems to be in a long, slow upcycle

they claim that they’re building a ton of nuclear power. if they achieve cost improvements similar to what humans have achieved in learning by doing other complex manufacturing, maybe they will be able to build a lot and achieve better health outcomes thru infrastructure than they would in improving the quantity of healthcare demanded

67 John October 21, 2015 at 11:14 pm

Beautiful presentation and really well done, especially how he managed to criticize so gently.

It would have been great to hear a bit more about how the “human capital” will necessarily improve the situation in the medium term.

Japan has both great human capital AND institutional capital, something that China lacks, however instead of doing the adjustments they should have many years ago, they chose the long way down — eventually they will probably still implode. It’s not over yet.

If the capital structure of the country is faulty, the “human capital” cannot save it. It just postpones the inevitable.

I think if he is really optimistic, he should change from “medium term” to “long term”.

68 Nathan W October 22, 2015 at 4:35 am

Comparing Japan and China – simply put, much of China is still quite far from the technological frontier (interpreting this as technologies already developed somewhere on the planet) and has much room for “easy” gains, whereas Japan is very much at the technological frontier, implying breaking new frontiers in human technologies and/or organizational strategies to obtain new growth.

Agree that if the structure of the economy is faulty ergo “….”, but I would emphasize IF. They have proven naysayers very wrong for a very long time already, and we shouldn’t be surprised if they continue to do so for some time yet.

69 John October 22, 2015 at 8:37 am

You have expressed a very common misconception about developing countries. It is in fact the opposite, it is rich developed countries that can benefit from those advancements due to higher productivity. As is clearly, and correctly, stated in the video, China already passed the stage of “low hanging fruits”, long ago. He then very wisely say what should be done and the difficulty in achieving that. It is in fact extremely difficult and not many countries in history have managed this transition.

For example, the high speed rail lines would have far better economic benefit in Tokyo, due to much higher productivity compared to China. (not stating that it would have real positive economic impact in either circumstances)

Anyhow, again, it would be great to hear why he thinks the human capital would allow China to complete the transition and get out of the recession, and not in the very long term.

70 Nathan W October 22, 2015 at 12:55 pm

“You have expressed a very common misconception about developing countries.”

For a simplistic view of the counterargument, check https://en.wikipedia.org/wiki/Solow%E2%80%93Swan_model. The implicit suggestion is that poorer economies should be able to catch up to richer economies if they can grow their capital. But this may not presently be very relevant for China, due to all its capital investment.

My point is this. It is a lot easier to adopt a technology that’s already invented (which China does all the time) than to invent completely new technologies. Ergo, it’s easier for China to catch up than for Japan to stay particularly far ahead.

71 E. Harding October 22, 2015 at 12:00 am

Every complaint about Chinese economic growth comes down to this:

either,

a) “China is not growing 16% per year!! What are we going to do?!?”

or

b) “China is growing too fast!! OMG we have to put a stop to all this investment-led growth!”

Most are a combination of both.

Note, this comment might contain some exaggeration.

72 Gulzar October 22, 2015 at 12:27 am

I’ll tend to agree with most of what Tyler Cowen says. The risks from real estate and equity market bubbles, large municipal debt, excess manufacturing capacity, and capital flows are indeed very high and atleast some of them are certain to materialize. But I am more optimistic than Tyler and not only because the Chinese have invested heavily and very well on human capital development. While 48% investment rate is simply unsustainable, 35% consumption share of GDP can only go up significantly. If that starts to happen the excess capacity in many areas will start to look less a problem. The balance sheets of the central and provincial governments and consumers are healthy enough to sustain policies that can enable such structural transformation.

The challenge is not so much the economic strategy but the political willingness to loosen control over the polity and society, so essential to transition to the next stage in the country’s development trajectory. It is here that my concerns are greater. In this context, a government in Beijing that feels most secure about itself is more likely to have the stomach and political capital required to deregulate and liberalize, if only gradually, the political and social order. It is this transition that is likely to be of the greatest relevance for the prospects of the Chinese economy and the biggest test yet of the Chinese strategy of “crossing the river by feeling the stones”. I have written about this at http://gulzar05.blogspot.in/2015/08/limits-to-growth-with-chinese.html

73 Alain October 22, 2015 at 1:13 am

I wish someone would explain to me why China can’t keep on growing by investing in the western areas. It looks,like the GDP/capita is quite low on that side of the country, which should make investments quite easy.

74 Nathan W October 22, 2015 at 4:42 am

Lower returns to capital investment. The regions are more sparsely populated and further from markets (especially global markets, via the sea).

But it seems sensible to think that further investments in the west might still generate good returns.

75 jynxbox tore October 22, 2015 at 1:59 am

China can’t keep on growing by investing in the western areas. It looks,like the GDP/capita is quite low on that side of the country, which should make investments quite easy.

76 JVOC October 22, 2015 at 6:08 am

It sounds persuasive – until it’s upbeat message about their investment in the next generation. There just aren’t enough of them.

The One-Child policy has been revoked. but it’s had it’s effect and, once a nation has got used to small families, they stick with small families, and even 2 won’t solve the problem. The USA and Europe have immigration (with all the problems that brings), but monocultures like Japan, Korea and Han China are in a hole.

Within 30 years the Chinese economy could implode more impressively than Japan’s has stagnated. The article below gives some forecast of their future.

http://www.bloomberg.com/news/articles/2015-03-24/no-country-for-kids-these-towns-show-what-china-will-become-i7nsvv1y

77 Gochujang October 22, 2015 at 10:28 am

This is really a parable about Apple, isn’t it?

78 E. Harding October 22, 2015 at 5:04 pm

+1

79 Econchic October 22, 2015 at 10:29 am

Loved the video. The explanation was very on point.
The only comment is at the beginning of the video there were some ‘ping’ noises that were rather loud and took away from Tyler’s calm voice. I think the music towards the end end of the video was a much better match for his voice.
But overall excellent!

80 Steven Kopits October 22, 2015 at 1:16 pm

TC: I think we have to be careful about the phrase “a recession in China.” For some people, a “recession” is 3% growth. In my book, a recession is two quarters of negative GDP growth, and a bad recession or financial crises would imply at least two quarters of -2 to -4% GDP, and annual GDP change of -2%, or perhaps worse.

When you speak of a recession, what does that mean in quantitative terms, ie, is the Chinese economy in recession now, is it growing 3% now, or will it be heading to negative growth in the near future?

81 Sam Roggeveen October 22, 2015 at 8:29 pm

Steven, the Lowy Institute economist Stephen Grenville has made a similar point about Tyler’s reference to a ‘deep recession’. In fact, he has challenged Tyler to a small wager on this point:

http://www.lowyinterpreter.org/post/2015/10/23/Tyler-Cowen-China-deep-recession-Want-bet.aspx

82 E. Harding October 22, 2015 at 11:22 pm

If China is ever going to have a real recession, it will be of the style of the 1997 crisis, which China managed to largely avoid via deflation and lower energy consumption.

83 V October 23, 2015 at 3:29 pm

Do 3%, 0% and -3% really mean anything? What about if China’s official numbers only existed because they know economists would rather use a completely incorrect number than have no number at all? The real question is “what does economic growth actually look like and is it happening in China?” If you can answer that question, you are going to get more understanding of what is going on than from those stats you have been relying on.

84 Rafael G October 22, 2015 at 10:13 pm

And the “Wicksell-Mises-Hayek business cycle theory” strikes again. Well at least there is plenty of unsustainable growth in there.

*2nd largest economy? By most measures China is the largest:

– biggest trader
– biggest manufactured
– biggest consumer of any physical commodity
– biggest PPP GDP

US’s GDP is now only larger if you include all those overpriced haircuts and financial services.

Bu well, with the size of the current recession I guess US’s GDP might become first again.

85 E. Harding October 22, 2015 at 11:23 pm

What current recession? China is still growing at least twice as fast as the U.S.! China is #1, and will stay that way for the rest of time.

86 Sean October 23, 2015 at 4:41 am

I think that another indicator that I think would be worth checking out is the rent/own ratio of housing. Living in china I have noticed that many of these million dollar apartments are only fetching $400 or so rents. This seems incredible to me and I think def worthy of investigation.

87 v October 23, 2015 at 3:08 pm

Rents in Shanghai have been rising, particularly in the past year. In some second tier cities, they are less today than they were in the 1990s. For instance in city X, the average apartment price was Y2000 per month then and Y12,000 now with rent for 100m2 at Y3500 in the 1990s, Y3000 today. Maybe rent is your valuation of property today, property price is your valuation of it’s future value.

88 MikeP October 23, 2015 at 12:09 pm

Jam packed, but very clearly presented.

Gordon Chang believes the Chinese communist party is in great peril due to the downturn which is worse than even most pessimists think.

89 v October 23, 2015 at 3:01 pm

A good talk.
Stock market crash. A lot of talk about this but it is small compared to 2008. There were also crashes in the early 1990s which seemed to have a bigger psychological impact on people’s willingness to invest in shares but did little to harm the economy.
Also the collapses of companies is nothing new, the pace of collapse is about the same as always (always been pure survival of the fittest), but what is different is the lack of replacement companies. Note that almost nothing exists of the 1980s or 1990s in terms of infrastructure, companies or anything really, they were completely replace by what came later. The reasons that there are no replacement companies now are 1. cost 2. lack of export markets rather than debt. The world has grown too small, too poor for the China model to work. Debt would disappear immediately if this was not the case, China has always been a bubble that solidifies over time but now there’s nothing filling the new bubble. My suggestion for China: Japan. Move to quality.
Infrastructure is good in some ways but note 1. Housing>need. It was successful because everyone was hungry for it for many years and gorged on it when it came. It wasn’t about getting what was necessary, it was about a cultural desire for multiple houses and homes that were multiple sizes of what people lived in before. Now both people and real estate are stuffed and can’t consume any more. 2. In order for most infrastructure to be successful, the old infrastructure has to be destroyed. To make high speed trains successful, slow trains were removed. Great for university lecturer, not great for migrant worker going on annual leave. Would be interesting to see from an economic perspective if getting rid of slow trains is good. Now we may be seeing some real estate going and not being replaced, eg shopping streets having all their shops removed, but hard to tell yet. The housing market could easily be fixed by destroying buildings and converting to low rise, but not for a couple of years.

90 V. Anantha Nageswaran October 25, 2015 at 1:42 am

A very very good 12 minute video on the Chinese economy. Your conclusions on the immediate recession (next 1-5 year or ten, may be?) and the medium-term (10 years and longer) are both apt. A minor quibble:

You mentioned that ‘At 10% economic growth, lots of investments are profitable’. In theory, it is possible. In China, investments were not made with a view to making profits. At 10% growth, the ponzi scheme remains liquid. Perhaps, loans are serviced and bad debts do not rise. Hence, more loans are made. Perhaps, that is closer to truth.

In terms of investments being profitable, MSCI China has had a US dollar return of 0.4% per annum in the twenty+ years since May 1994 and up to September 2015. Given that the CNY appreciated against the US dollar in nominal terms during this period, think of the returns in local currency!

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