The truth about Chinese rebalancing toward services

by on January 17, 2016 at 3:27 pm in Current Affairs, Data Source, Economics | Permalink

The optimists point to the rise in the share of services in nominal GDP, and the corresponding decline in industrial sectors, as shown in the above left graph. Measured in current prices, the rebalancing appears to be well underway, with the share of industrial sectors falling from 47 per cent in 2011 to 40 per cent now.

However, almost the whole of this rebalancing in nominal terms has occurred because of a large drop in the relative price of industrial products compared to services. In real, inflation adjusted terms (above right graph), there has been no rebalancing whatsoever in the past decade taken as a whole (though there has been a percent or two in 2014-15). The needed shift in real resources – labour and capital – out of the moribund sectors has therefore barely started.

That is from the excellent Gavyn Davies, file under “Ouch.”

Addendum: Scott Sumner comments.

1 Philo January 17, 2016 at 5:44 pm

What E.H. said. I don’t see that “correcting” for price changes gives a more *realistic* picture of the economy.

2 Alex Weiner January 17, 2016 at 6:24 pm

So are you arguing that prices don’t matter now? Love to see you teach that in Macro 101.

3 Tom Warner January 17, 2016 at 8:02 pm

I’m not just throwing water on this story. I think it’s true there’s been as yet no real resource allocation away from industry. But it is absolutely normal for most of the rise in the services sectors’ weight in GDP to occur through relative price increases of services versus industrial goods. It’s really all about labor rising in value relative to goods as industrial productivity rises.

China was until recently rapidly growing its manufacturing exports, so the incentives were there to continue to pour real resources into industry.

4 Ben January 17, 2016 at 10:39 pm

The real structure of the Chinese economy is that they’re got a massive segment of the economy with no skills – zero. They can’t pivot because most can’t read.

The end result is that manufacturing gets really, and I mean really cheap.

5 Cliff January 18, 2016 at 12:36 am

Then why is manufacturing getting so much more expensive

6 Ben January 17, 2016 at 10:36 pm

The Chinese economy can’t really fully rebalance to a service sector along the lines of those seen in the west due to factor endowment. First reason is most of the labor force is completely uneducated. Second reason is that they lack the culutral capital for honesty in exchanges to do business at speeds that make the transaction worthwhile.

7 Nathan W January 19, 2016 at 11:31 am

Your belief that China is uneducated is completely wrong. Lots and lots of information about this can be found online.

8 Ray Lopez January 18, 2016 at 2:08 am

I am in Manila Intl airport heading to HKK and will report on any China collapse through here…

9 Benny Lava January 18, 2016 at 10:54 am

we look forward to reading about it

10 rayward January 18, 2016 at 6:40 am

See Scott Kennedy’s op/ed in today’s NYT chastising China for its interventions in markets, especially the currency markets (to maintain an overvalued renminbi), and chastising the Obama administration for not chastising China. http://www.nytimes.com/2016/01/18/opinion/stop-chinas-market-manipulations.html?ref=opinion Am I the only person to read the op/ed as an indirect slam on U.S. interventions in markets.

11 Fyodor January 18, 2016 at 4:56 pm

Leaving to one side the usual caveats around Chinese data, Davies’ argument would have been more conclusive if he had also provided a chart of China PPI over the same period. This would show the collapse in producer prices, which is the primary driver of the slump in the growth rate of the VALUE of industrial production affecting the relative shares of nominal GDP.

Summer looks at Davies’ charts and assumes that it’s “probably” industrial productivity growth driving the outcome. However, look at the extreme moves in PPI deflation and industrial nominal production since 2012. Productivity doesn’t spike like that, particularly not for a large economy, and there are other good intuitive reasons to reject the hypothesis of a sudden acceleration in productivity (i.e. the economy has been slowing, wages rising and the marginal returns to investment falling).

The best, most likely, explanation aligns with Davies’: a combination of excess capacity, the zombification of industrial companies (which continue to produce at a loss, dumping their product at sub-economic prices) and the plunge in commodity prices (China is a major producer, as well as consumer, of industrial commodities) have all contributed to a deflationary crunch in industry.

As Davies suggests, this is not “rebalancing” – there has been no major reallocation of resources within the economy.

What has happened is that one of the legs of China’s economy has stalled and is now sinking. That’s the opposite of “balance”.

12 Andao January 18, 2016 at 6:58 pm

Was thinking exactly the same thing. Sumner seems to ignore the fall in cost of inputs, and assumes that industry suddenly became massively productive.

Has there ever been historical precedent for this rapid of a shift to services? If no, then its probably not real

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