China pessimists are China optimists, and vice versa

by on January 6, 2016 at 8:57 am in Current Affairs, Economics, Uncategorized | Permalink

If you think a lot of China’s growth slowdown already has come, the rest should prove manageable, albeit painful.  That is true for both the global economy and for China.  And that is in fact my view.

But if you think China has been growing at six to seven percent over the last year…egads!  The roof will be falling in all at once, and what a long and steep way it has to tumble.  The previous China optimists, provided they are not asleep, should be really worried now.

If you take Australian prices as a kind of bellwether, arguably the Chinese slowdown started about four to five years ago.  (Five years ago, the Australian government was forecasting Australian growth rates of seven percent, now the growth rates are at about two percent.)

I call it the Soft Hard Landing.


1 Benjamin Cole January 6, 2016 at 9:05 am

I don’t understand this post. China’s GDP appears to be growing at about 6% to 7% annually, and the People’s Bank of China is preparing to rev up growth.

Happily for the PBoC, China is far below its inflation target of 3.5%.

China Southern Airlines just placed orders for $12 billion of Boeings and Airbuses…

Singapore looks a little green around the gills…

2 Brian Donohue January 6, 2016 at 9:12 am

Translation: Tyler, in his inimitable way, has just pushed a few more coins into the pot with respect to his “Interpretation of China” debate with the likes of Scott Sumner.

3 Brian Donohue January 6, 2016 at 12:18 pm
4 Bob from Ohio January 6, 2016 at 10:14 am

“China’s GDP appears to be growing at about 6% to 7% annually”

He is saying that if the official stats are wrong, a mild recession will seem horrible even if it is actually manageable.

5 rayward January 6, 2016 at 9:12 am

China’s income inequality gap is even larger than in the U.S. The question, then, is who, not how much, will bear the decline in China’s output (growth). Will additional market reforms increase inequality even more, imposing most of the cost of the slow-down on the poor, or will stepped-up fiscal stimulus result in a more broad-based distribution of the benefits of economic growth. Of course, these are questions that to some are non-sense, at least to those who believe rising inequality raises all boats while declining inequality lowers all boats.

6 dan1111 January 6, 2016 at 9:14 am

“Will additional market reforms increase inequality even more, imposing most of the cost of the slow-down on the poor”

“All boats” aside, are you suggesting that market reforms have made China’s poor poorer?

7 Thiago Ribeiro January 6, 2016 at 10:31 am

Not intending to answer for him, but, until now, those reforms and other measures delivered staggering growth. If, reforms notwithstanding, the growth falters, it is possible that further reforms may increase inequality and leave the poor with less (they may be more vulnerable to unemployment and loss of their livehoods for instance) or at least with a stagnated situation.

8 Harun January 6, 2016 at 11:35 am

Here’s a plausible alternative:

The lower and middle class in China have a lot of savings in banks, which will be much safer than the real estate and stocks of the rich, so a bust in China will reduce inequality, not increase it, as the well-off will lose more, comparatively.

Also, unemployment in China has been very low – so low that wages have gone up a lot, and employers sometimes are desperate to maintain staff. Sure, a recession might cause some unemployment, but more likely it will just cause employees to have less change to job hop so often.

I’m reminded of when hiring back during Taiwan’s high growth days, prospective employees would have job histories showing job changes every 6 months and that was normal. Once growth settled down, they would stay in place longer – less churn but still employed.

For some industries it might be different, of course.

9 Thiago Ribeiro January 6, 2016 at 2:30 pm

“Sure, a recession might cause some unemployment, but more likely it will just cause employees to have less change to job hop so often.”
It is possible of course, but it really depends on how the economy behaves after the “new normal” of declining expectations asserts itself.

10 rayward January 6, 2016 at 10:33 am

7% or higher growth rates can support both increasing inequality and rising boats. Can zero or even negative growth rates? The widening gap between rich and poor in China (it’s the gap that makes the poor feel poor) will eventually put stress on social cohesion and political stability.

11 Harun January 6, 2016 at 11:37 am

Renters don’t lose money when real estate collapses. The rich do.

Negative growth can cause firms to fail, making the rich worse off. Employees just switch to a new job.

I suspect we’d get a case of the less well off having less income growth for a while, while the rich actually lose money. That reduces inequality.

12 Ray Lopez January 6, 2016 at 9:18 am

What is the new news for this post? Is there a link to today’s news that somehow informs us about China’s growth?

13 Gochujang January 6, 2016 at 9:22 am

Per the Efficient Market Hypothesis any new mood based on old facts is “new news” that may move markets made up of unemotional and rational investors.

Or, without the EMH, attention turns, and in turn, moves markets.

14 Ray Lopez January 6, 2016 at 10:33 am

I don’t think that’s EMH, but rather irrational markets. In any event, no new news, and supposedly Monday’s drop, and perhaps today’s (NYSE market down at the moment) is due to China worries…

In other news: I’m beating my PC in chess at the moment. It made the classic computer mistake of capturing a wing pawn with a bishop and having the bishop trapped with a pawn move. B. Fischer made the same ‘mistake’ vs Spassky, but what’s interesting is sometimes this move, despite the bishop being temporarily trapped, is OK for the side with the bishop. It all depends on the placement of the pieces.

15 joe January 6, 2016 at 9:39 am

I guess all he’s saying is: China is going to finally produce some real numbers that can no longer mask reality, so it will look like a precipitous fall, but things have actually been slowing down for a while now. Had the real numbers been put out all along it would have looked more like a long, slow softish landing; instead it looks on paper like a hard landing.

16 Gochujang January 6, 2016 at 9:19 am

Headline today: Apple sees lower iPhone sales, Foxconn lays off workers

17 KDV January 6, 2016 at 9:59 am

Tyler’s view seems spot on. The slowdown has been evident for anyone who has a real link to the Chinese economy, and the Australia link is as good of an indicator The question now is how they elegantly wean themselves off of investment driven GDP towards a more consumption driven GDP.

18 o. nate January 6, 2016 at 1:57 pm

Actually using the AUD-USD exchange rate as an indicator of the strength of the Chinese economy seems like an odd choice to me. The change in this rate over the past few years has been mostly driven by USD appreciation. Not sure what this shows about China.

19 KDV January 6, 2016 at 3:36 pm

sorry, should have been more clear. Looking at the share price of ASX companies tied to China’s health (e.g. Rio Tinto, BHP, etc) will tell you a lot. Agree that Tyler’s link is confusing

20 Brett January 6, 2016 at 10:36 am

It’s mostly just anecdotal, but parts of the big Chinese “political bargain” (strong growth for low political demands) seem to be unraveling as well with both the ramp-up in wildcat strikes as well as the increasing political repression.

21 E. H@rding January 6, 2016 at 2:24 pm

“The previous China optimists, provided they are not asleep, should be really worried now.”

-Why should China be having a 97 crisis now? It didn’t have one when it was as rich as Indonesia, the country worst hit by that crisis.

22 Alec January 6, 2016 at 7:48 pm

Well, FRBSF may have answered why China GDP growth number is decoupled what Australia and other countries exporting commodities to China see:

“As shown in Figure 1, the growth in China’s service sector has been much higher than its growth in either the agricultural or industrial sectors, and has moderated the recent overall GDP slowdown to 6.9% growth (black dashed line). Over the past four quarters, the agricultural sector grew 4.8% and the industrial sector grew a mere 0.2%, while the service sector grew a remarkable 11.9%.

While strong service sector growth should mitigate the adverse implications of the steep decline in the industrial sector, it is unlikely to provide much support for China’s imports. The service sector relies much less on imported intermediate inputs than other sectors. The agricultural and industrial sectors use a larger share of these imports than they contribute to total output; by contrast, the service sector accounts for very little international trade, with its share of imports only 0.3 times the size of its share in output.”

23 Alec January 6, 2016 at 7:49 pm

So what falls into recession is the industrial growth of China.

24 Alec January 6, 2016 at 7:54 pm

Yet even when FRBSF tells so, if new debts are considered, given the absolute gdp growth number, people may find that the GDP growth of China has been eclipsed by new debts in 2015. It literally means if Chinese companies/government stopped to borrow in 2015, there would be likely no GDP growth at all.

25 Tom Warner January 7, 2016 at 3:22 am

This is about right, but I’m somewhere in the middle, seeing a large slowdown only about half-way swallowed, still plenty of possibility of a choking fit.

26 Axa January 7, 2016 at 10:58 am

Also look at rubber. China is the world’s largest consumer of rubber. China grows at 7% and rubber price is 70% less than the peak in early 2011. Very nice.

27 TallDave January 9, 2016 at 11:01 pm

This period is a great example of why Sumner says “never reason from a price change.” Is Chinese production benefiting from lower commodities prices, or is China’s reduced production causing lower commodities prices?

China’s been liberalizing, but they’re not nimble yet, and there are limits to how much economic liberalization can happen without significant political liberalization. Will they de-peg? Can they without a civil war?

Watch the reserves.

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