Shout it from the rooftops

by on January 8, 2016 at 3:11 pm in Current Affairs, Economics, Uncategorized | Permalink

…the idea that China services, which are already a large share of output, can and will just take up the slack as industry shrinks overlooks that most services are directly tied to the weakening sectors of property and industry. As George Magnus notes, the tertiary sector is concentrated in finance, property, and wholesale and transport distribution, not in business, IT, professional, health and education services. Despite its large services sector, China is much less diversified than the
Bull-narrative surmises.

And this:

Furthermore, absent new forex controls, if the PBOC broadly holds the band and runs down reserves without sterilizing, any PBOC interest rate cuts would be China-demand-contractionary. So alongside interest rate cuts, the PBOC would have to fully sterilize just to maintain the demand status quo, let alone to stimulate. Alternatively, if it lets the Yuan really float (down), it will be disorderly for lack of a policy framework to back a float, and it will set off major global currency shocks.

That is from Peter Doyle (pdf), with further points of interest, via Dani Rodrik.

1 rayward January 8, 2016 at 3:35 pm

China’s potential is on the demand side, not the supply side. I know that is a sacrilege for those who worship at the alter of the supply side, but that’s the reality.

2 8 January 8, 2016 at 3:59 pm

They have to supply what the demand side wants, but there’s a mismatch because capital is misallocated in the wrong supply. Demand is always there; they need to get the supply right, but involves shifting economic power from the state to the private economy. Xi Jinping has’t put enough people in jail and they didn’t get the message. The new slogan should be Reform or Die.

3 mulp January 8, 2016 at 4:41 pm

Demand is for security which is met with thrift and gambling in real estate until that produces a bubble, then gambling in the stock market until that creates a bubble and they are burned, at which point they just save money and maybe put it in the banks.

Clearly, China needs to solve the security problem with a better social safety net welfare state, like in the US.

After all, most workers in America spend spend spend and never exhibit any thrift so they reach a point in life when they are totally dependent on the US welfare state.

4 rayward January 8, 2016 at 5:42 pm

China’s savings rate is 50% of GDP. The US? 18%. Stupid?

5 Alex from Germany January 8, 2016 at 9:19 pm

Would you mind Sharing what exactly you mean by supply side? Healthy Economy or not, I doubt the progress China has made in the last decades will be undone in the blink of an eye. Let’s not forget that 99% of all the stuff we have was produced there (they just didn’t figure out yet the upselling Part of putting brandings on their goods and sell them to us with higher revenue) so not all of China’s accumulated wealth is propped up. To me, the bubbles and volatilities of China’s capital markets may be caused by many things, but there is one pattern in western Media reception about China’s economy that I see too often: too much judgementalism (“we knew this would happen to These immoral cronies “) and too few words about the sparse alternatives for Chinese Savers to invest.

6 rayward January 9, 2016 at 1:46 pm

China’s savings rate (about 50% of GDP) fueled the production juggernaut, which was great in a world economy consuming what China produced. If China’s economy is to continue to grow at anything comparable to the past, China consumption will have to take up the slack for the fall in world demand for what China produces.

7 Aaron J January 8, 2016 at 4:01 pm

I expect both rate cuts and exchange control from the central bank. The second paragraph makes it seem as if the forex controls are an additional and unexpected step the PBOC must take. I think it’s pretty par for the course.

8 Jer January 8, 2016 at 5:36 pm

China claims of malaise/ non-resiliency/ poor prosects is nonsense (we know so little of their economic system/ variables):
what of?
Real Personal Income
Nonfarm Employment
Real Retail Sales

and then healthiness indicators:
Inventory Levels
Housing Market
Business Startups

Utter drivel to apply Western-style economic judgment upon Chinese here, now and 4 years hence.

9 Bob January 8, 2016 at 6:56 pm

The fact that industry is contracting doesn’t mean that rent-seeking services should pick up the slack. Saddling the economy with more rent-seeking services seems like a bad idea that will contract its industrial output further and contract the long run potential of its industrial output.

10 T. Sahw January 8, 2016 at 7:47 pm

I didn’t realize – “sterilize” – this website was about hygiene or medicine.

11 Tom Warner January 8, 2016 at 9:08 pm

His general sentiment I agree with and that first par is good. But the second is garbled nonsense. He seems to be trying to say something about how the potential stimulus of interest rate cuts would probably be countered by CB FX sales to support the Yuan, but his lingo is confused (one doesn’t sterilize an FX sale – an FX sale is in an of itself a form of sterilization). Anyway, this is China where the financial system works through direct state industrial policy lending by state commercial banks, not through CB stimulus of private lending.

12 Ray Lopez January 8, 2016 at 9:53 pm

Services are in theory 66% of an economy, but in Asia this figure is flawed: it’s closer to below 50%. As the article implies the service sector in Asia, say China, is not developed. In the Philippines where I’m at now you cannot get “US style” services–they don’t exist. These countries are geared towards “hard copy” output, producing things, not services. China therefore is in for a ‘hard landing’.

13 TallDave January 8, 2016 at 10:52 pm

Yes. I’ve been making that point for about six months now, since it became clear there is downward pressure on the yen — they can only inflate if they support the peg, otherwise it will be very obvious RGDP isn’t growing at anything near 6% (did anyone really buy that deflator?).

The really interesting thing is that the ChiComs feel they have to do so. Honestly, they are sitting on top of the greatest economic and humanitarian miracle of our times, perhaps of all time — why not just de-peg, accept the consequences and say “we did the best we could?”

And the only reasonable answer seems to be their fear of democracy, of losing their power.

But what cannot continue indefinitely will not. Reserves are finite.

China could collapse into another despotic middle-income banana republic, or take some lumps on the road to South Korean style rich liberal democracy.

History is highly contingent.

14 mahmet January 10, 2016 at 8:56 pm

>History is highly contingent.

Some aspects of history are contingent, but the rise of China is destiny. China has everything going for it this time, and they don’t need to change into a “liberal democracy” to maintain a solid rate of growth sufficient to become a high-income country.

Does anyone really doubt China will reach Western Europe level of wealth within 25 years?

15 Ben Brophy January 8, 2016 at 11:39 pm

Good stuff here.

16 Benjamin Cole January 9, 2016 at 7:32 am

The PBoC can ease monetary policy. not credit. And they probably are. They can also print money to fund infrastructure, which they have been doing all along. They still have huge build-outs to do.

As for unoccupied cities, that turns out to be a myth.

I sure hope China does not get infected by the Western tight-money crowd. Market reforms are fine, but tight-money has failed everywhere it has been tried. You cannot monetarily suffocate a modern economy into prosperity.

Putting central bankers in charge of monetary policy is like having spinster schoolmarms run a nightclub.

The PBoC is lucky in that aside from carriage trade money, it can pay down debts by printing money. The nation is well below the 3.5% inflation target. Moreover, they prospered when they ran with higher inflation (as did the U.S., for that matter). If they are indebted, why not run 4% or 5% inflation for a while?

Meanwhile check out the Monetary Authority of Singapore. They may be turning in Singapore into the new Japan.

17 Daniel in VA January 9, 2016 at 12:09 pm

How do we know that looser monetary policy won’t just inflate housing, education and heath care, and nothing else?

18 charlie January 9, 2016 at 12:55 pm

Very good stuff, but way overstates the fear of US politics to a Chinese reaction.

I don’t think anyone expects a 40% chinese tariff. There is a zone of uncertainly but not that large. I am not going to pay $1400 for my iPhone 7.

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