China facts of the day

Greece is small, China is large:

The Shanghai Composite has now fallen 12.1 per cent since Monday, its third consecutive week of double-digit losses since hitting a seven-year high on June 12.

The Shanghai index is firmly in bear market territory, down 28.6 per cent since the June peak, while the tech-heavy Shenzhen Composite has fallen 33.2 per cent.

There were also signs on Friday that the stock market turmoil is beginning to reverberate beyond China. The Australian dollar, often traded as a proxy for China growth, is down 1.2 per cent to a six-year low of US$0.7539.

The 21st Century Business Herald, a Chinese daily newspaper, on Friday quoted multiple futures traders as saying they had received phone calls from the China Financial Futures Exchange instructing them not to short the market.

That is from Gabriel Wildau at the FT.  China’s brokerages have pledged over $19 billion to help “stabilize” the market, not usually a good sign.

That said, flights into Greece for July-September seem to be down by up to fifty percent.


Shanghai Composite is at the level it was in March. The drop is significant but more so is the rise up to this point.

The Chinese market has been overvalued for some time, even if you assume 10% real growth foreverandever.

We have been moving people from subsistence agriculture to relatively modern factories. There's explosive real growth with that. How much more of that type of growth can occur?

We can still capture gains from increases in education - and the Chinese are aggressively pursuing this. But we are facing a declining labor pool, corruption, and the diminishing marginal returns to capital implied by the Solow growth model. Because of state-driven cultural factors, I do not see China as a center of any kind of innovation for a long time, but perhaps I am mistaken.

China is already on the cutting edge or close to it in biotech and genetic engineering, thus the recent controversy over using CRISPR/Cas9 for gene editing in human embryos.

There's still I think a fair bit of room for manufacturing growth in China. The wealthy coast has kind of run its course in manufacturing (though their high-skilled manufacturing is not terrible these days thanks to the extensive infrastructure). If they allow greater freedom of movement (by reforming and eventually abolishing the hukou system) they can open up a second wave of very low labour cost manufacturing (and the infrastructure is already there) inland.

But in terms of innovation, I mean, of course it's not first world levels but let's not pretend nothing happens in China on that front: biotech, stem cells, machine learning, environmentally focused construction and engineering, they're pretty close to the forefront on a bunch of fields. Even in some retail products, where we usually associate China with imitation goods, there's more innovation than we give them credit for. Wechat is still the best messaging program I've ever used by a long shot, and Xiaomi phones (the infamous i-phone knock-off) is surprisingly great for its price.

But yeah, whether it was the 14% growth years ago or the 7% growth now, I'm still generally a cautious China optimist.

Here here. The "crisis" is that some people who bought into the Chinese stock market in the last 3 months have the opportunity to lose 28% of their money by choosing to sell now.

No tears for short-term or undiversified investors, please!

I think the point is that something has caused the market's estimate of the present value of future Chinese corporate cash flows to drop by 30%. What is that thing?

regression to the mean combined with the usual "everyone panic!" ?

China too suffers from excessive inequality and the financial instability that goes with it (as the result of speculation, mainly in financial assets but also in real estate). But unlike the west, China is implementing fiscal stimulus on an historic scale to complement monetary stimulus. Yesterday, the NYT included a guest op/ed, titled Billionaires to the Barricades, in which the author pointed out that the billionaires who express concern about excessive inequality aren't actually proposing anything significant to mitigate inequality. Billionaires aren't billionaires because they are stupid, but denial is the strongest of human defense mechanisms. Sure, these billionaires may sense that excessive inequality is unsustainable but self-denial and self-deception are obstacles to reason. Piketty is harshly criticized from the right, yet it is Piketty in his book who says that governments and central banks will always adopt counter-measures in the event of financial crises, upsetting the natural law of capitalism to self-correct excesses. It's an odd shifting of roles, the defenders of capitalism on the right promoting policies that upset capitalism's natural laws. But there are heretics on the right who would let capitalism's natural law correct excesses, including excessive inequality. Of course, they aren't billionaires and don't have cause for self-denial and self-deception. That's especially the case if they have tenure! I suspect what those Billionaires to the Barricades fear most is capitalism, that contrary to Piketty, they aren't confident that governments and central banks will always adopt counter-measures in the event of financial crises, and that capitalism's natural law will be allowed to correct excessive inequality.

Although overstated, I think this is partly correct.

Some of the exacerbation in inequality that has occurred since 1980 has to do with real economic trends; there are two trends here that are worth mentioning: factor price equalization and changes in technology. Changes in equality attributable to these factors are not terribly objectionable, adapt or die.

But I do not think most of the growth in inequality since 1980 and especially since 2001 are attributable to these factors. There are major public choice issues with intellectual property policy, health care and drug regulation, defense and prison spending, government procurement practices, and especially in monetary policy under Bernanke. Policy in all of these areas is robustly benefiting the 1% at the expense of pretty much everyone else. And, we need tax breaks.

If US policy is the cause, and I am not saying it isn't, then why is inequality rising at much the same rate in Sweden, which has very different policies, and also in Australia which has policy settings halfway between Sweden and the US.
Obviously the absolute rate of inequality is not the same in these 3 countries.

The Soviet Union was built on equality. How are they doing?

" But there are heretics on the right who would let capitalism’s natural law correct excesses, including excessive inequality. "

Where is it written in capitalism's natural law that excessive inequality will be corrected? And where is the line between ordinary inequality and excessive inequality?

oh good lord inequity (as you define it) isn't causing the problems ... why is it the hammer than MUST be the problem for ALL financial ills ? of course there will be rich people getting rich as China moves into a modern economic world ... when everyone was basically equal everyone was basically impoverished ... Is that what you want to return ?

Is Tyrone still a BUY on China 'cause I'm getting nervous??

Would Tyrone visit Greece between July-September?

But Scott Sumner says there's no such thing as bubbles....

The Scott Sumner bubble has likely started to deflate.

A free market cannot have bubbles, only preferences changes. There's no way to know how preferences will change until they do. That's a major reason why central planning fails.

China, otoh, has a lot of central planning and a lot of what they're doing is unsustainable, especially the catastrophic environmental conditions in some of the industrial areas.

Re: Greece, somebody posted a poll of voting intentions by age group on Reddit, which I find sad. I guess I was under an illusion thinking the pro-European vote was coming from the liberal right. It's coming mainly from the 55+ age group, who obviously don't believe that Tsipras is fighting for their sake and don't want their pensions in bigger numbers of pseudo-euros or drachmas. And some three quarters of youth are ready to defy Europe, supposedly for the sake of their eiders' pensions, but really because they themselves don't have any savings anyway.

Re: Tourism to Greece, last year 44% of international tourism revenues were in July and August.

Another point about defying austerity: the non-payments of budgeted expenditures aka arrears were north of 4% of GDP for the core central government in Feb-May and perhaps as high as 7% of GDP in Feb-June for the whole public sector.

That's period GDP not annual.

"three quarters of youth are ready to defy Europe"

Youth unemployment is 50%. More austerity means that gets worse in the medium term. It is no surprise that youth will vote no.

pro-European ? what is that ? vote to continue the EU ? thats the ticket, continue to support a failed experiment and hope nobody notices just how much liberty you give up everytime you support the EU ...

From China's recent "Document 9", a Communiqué on the Current State of the Ideological Sphere
A Notice from the Central Committee of the Communist Party of China’s General Office:

Noteworthy Problems Related to the Current State of the Ideological Sphere


4. Promoting Neoliberalism, attempting to change China’s Basic Economic System.

Neoliberalism advocates unrestrained economic liberalization, complete privatization, and total marketization and it opposes any kind of interference or regulation by the state. Western countries, led by the United States, carry out their Neoliberal agendas under the guise of “globalization,” visiting catastrophic consequences upon Latin America, the Soviet Union, and Eastern Europe, and have also dragged themselves into the international financial crisis from they have yet to recover.

This is mainly expressed in the following ways:

[Neoliberalism’s advocates] actively promote the “market omnipotence theory.” They claim our country’s macroeconomic control is strangling the market’s efficiency and vitality and they oppose public ownership, arguing that China’s state-owned enterprises are “national monopolies,” inefficient, and disruptive of the market economy, and should undergo “comprehensive privatization.” These arguments aim to change our country’s basic economic infrastructure and weaken the government’s control of the national economy.

It's too soon to call the end of the China boom, though it is certainly coming, either now or later, given their failure to liberalize the political system. China has a lot of volatility but a lot of compelling value propositions too.

Check back in a month.

Of course the 1% accumulate most of the free money dispensed by central banks when central banks determine free money is somehow ever a solution. Since free money is essentially the only work product of central banks it's kind of the hammer and nail syndrome and they deliver it in wheelbarrows right to the billionaires' banks.
What's sad is that the left manages to successfully attribute to the free market the expansion of income inequality from government supplied free money.

On China, as someone upthread noted, the internal migration of the rural poor to the urban wealth centers and the vast size of that pool is working in tension with the vast market distortions the Chinese government is building into their economy.
Because of that vast pool it's entirely possible China may be able to sustain the unsustainable longer than Greece, Europe, Japan or the US did. Unfortunately the longer they stave it off, likely the larger the catastrophe when it comes. And if the Party manages to stay in power through it the more likely the far side of the catastrophe will see a much less free China than even now.

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