What is going on in China right now?

Given all of the recent publicity, I thought I would re-up on my China video, The Rise and Fall of the Chinese Economy.  This is a recent addition to our Everyday Economics series from MRUniversity, and it also will be part of our in-progress macroeconomics course.

The Learn More page features additional resources about this topic.  As I say in the video, the key variable to track for whether things get really bad is capital flight.  In other words, recent developments have indeed been unsettling.

What we’ve seen is the central government spending down reserves at a much higher pace than virtually anyone had expected…except perhaps the central government.  The response to falling stock prices has been to make it legally harder and harder to sell — what do the prices even mean at this point?  A barometer of which kind of PR hit the government feels like taking on a given day?  And perhaps most importantly of all, more and more people, both in and outside of China, are questioning whether the government really has matters under control.  It seems not.

By the way, here is your China fact of the day, Larry Summers informs us:

Over the past year, about 20 per cent of China’s growth as reported in its official statistics has come from its financial services sector, which is now about as large relative to gross domestic product as in Britain, and Chinese debt levels are extraordinarily high. This is hardly a case of healthy or sustainable growth.

That said, China will do everything possible to prevent a financial crisis.

On the (somewhat) cheerier side: “Film market analysts have pointed out that the biggest films have performed similarly in China and the US in recent years.”  Star Wars: The Force Awakens had the biggest single-day opener in Chinese history (FT link), let’s see how well the future installments do.

Comments

Interesting video except...

While mentioning China has been growing on average 10% a year and is now around 7% a year, it doesn't mention that China has been growing at under 8% for three years:

2013 7.8%
2014 7.7%
2015 7.3%

In a recent post, Tyler said he thought the real growth rate was around 4% and that the government is lying - in a big way. If so, does the evidence show that that is just for 2015? For 2014 and 2015? Or for the past three years? .

I actually agree with Tyler on this. I have this fear that when China "falls" it will be worst than the Greek crisis... Why? Just think about it, it is a huge bureaucracy, there is no freedom of press, therefore curruption is very likely rampant and underestimated. There are huge incentives to push "the problem" to the next bureaucrat (which also exist under democracy), but in this case its even worse, without freedom of press, and external checks....

So maybe my 2001 prediction that China will have a fledgling democracy by 2015 - that is,l at least two parties with universal voting - won't be too far off after the fall.

My prediction went against all of the American China history and poli sci grad students I talked to then who said either "maybe 2050" or "never." My point was that like with the Soviet Union's fall, (which I called in 1985 that it would happen by 1995) far more people were about to be able to communicate with computers that would quickly sweep over China and that enough would demand a pluralistic system even if still corrupt. The prediction assumed continued rapid growth and didn't include some implosion -- but I'll take it!

I think that 2001 prediction looks closer to being correct than 2050, 2100 or "never"

By the way, there may not be freedom of the press, but social media helps with that a lot, which was my entire point even though no one used the term social media.

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When wealth (capital) is concentrated in a few, volatility and price movements (up and down) are exaggerated. And that applies to China, too. [Yes, I am being ironic.] I agree with Cowen, that the key is capital flight. In our own financial crisis, capital was drawn to safety, and that meant the U.S. because owners of capital were confident that the central bank and government would successfully intervene and stop the fall and right the ship. What's increasingly concerning about China is that observers ranging from Summers to Krugman to Cowen are expressing a lack of confidence in China's central bank and government to stop the fall and right the ship. The paradox is that our central bank and government were strong enough to intervene and prevent markets from correcting the excesses (or at the least to mitigate the correction), while the central bank and government in China may be too weak (or not competent) to prevent markets from correcting the excesses.

The inscrutable Asians that have brought China from a devastated post-war Communist peasant disaster to what's arguably the world's most dynamic economy while supplying western educational institutions with the majority of those on the dean's list, aren't as intelligent as people like William Dudley http://nailheadtom.blogspot.com/2014/01/fed-big-wig-admits-ignorance.html and Janet Yellen. Markets without central government supervision always create excesses. Without control America's consumer society would be submerged in cheap beer, distressed blue jeans and flip phones.

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I think it is fair to ask whether the growth is "real" growth if it is funded by debt. What would growth be if debt-funded growth were to stop?

I am very supportive of the notion that there are times and contexts where governments can do much good for both short- and long-term growth by various forms of investment. But the proof is always in the pudding. What happens when the deficit financing stops? Has the economy actually achieved higher than baseline potential, or was it just a waste of money? I don't think ideological perspectives (the most common ones) are very useful, since it very much depends on the nature and timing of the spending.

I applaud TC for taking a strong position on this one. People have been naysaying the Chinese for a very long time now, and the Chinese have proved them all wrong, but this miracle cannot continue for eternity. The folks who have been beating the China pessimist drum for a decade or longer can hardly look smart when the eventuality of a recession finally comes to pass, but this is a new prediction, and not apparently driven by ideological disposition to doubt the use of anything related to government management within an economy. Anyways, we will soon see who is right this time as well.

Most China bears (aside from the anti-communists and anti-CCP expats from China) point to the 2008 stimulus and at least Li Keqiang agrees. Articles out this weekend blamed the 2008 stimulus again, comparing that debt fueled Keynesian effort to the more Austrian market clearing approach taken in 1998 when they literally took factories apart and scrapped them to deal with overcapacity.

China has been in trouble since 2011, when the stimulus boost ran out. A stimulus that was about 10% of GDP. Chinese state-owned companies in every industry set up real estate divisions and used their cheap access to credit for real estate development or shadow banking (borrow from Big 4 bank for 6% lend to real estate developer at 10% to 20% or more). In 2011, housing stopped going up and the offshore yuan first depreciated. Steel traders went bust a year to 18 months later, the copper financing deals start showing up, massive fake invoicing to funnel hot money into the high yield shadow banking products. Right now, the northeast is in a recession if you go by nominal GDP.

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All growth is funded by debt. Deficit financing cannot stop, unless we want to change how the worlds current system of money works.

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"re-up on": Jesu, what's does that mean in English? Is it some sort of "down with the kids" rubbish.

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In his op/ed in today's WP, Summers, without the slightest hint of irony, informs readers that markets are telling us something and that policy makers need to prepare for the worst. https://www.washingtonpost.com/opinions/why-the-fed-needs-to-prepare-for-the-worst-right-now/2016/01/10/b754a962-b7a3-11e5-99f3-184bc379b12d_story.html?hpid=hp_no. Of course, by prepare for the worst what Summers means is for central banks and governments to intervene in markets to prevent markets from correcting the excesses (i.e., to prevent markets from being markets). I may not worship at the alter of markets as do some of Cowen's colleagues at the Mercatus Center, but at least I appreciate the irony of those who don't.

I read about a year ago that Summers, via his public pronouncements, is vying for a job with the Hilary Clinton White House. All his statements should be viewed under that lens.

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Rise and Fall? That's how you describe a pimple on the butt of a mind-boggling 40 years of growth? OK.

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Read this interview of Hyun Song Shin, economic adviser and head of research at BIS: http://www.bis.org/speeches/sp160106.htm I got the link from Thoma's blog, who links to Antonio Fatas's (incredulous) reaction to the interview. Heterodoxy in economics may be the new normal. Along with low (or no inflation).

That interview seemed pretty reasonable to me. It is pretty much the place I found my way to in 2015. Global forces.?

Yes, it is a reasonable view. What's understood is the enormous increase in productive capacity which resulted from globalization; what's misunderstood is that much of the global wealth that resulted has been captured by a very few, the level of inequality in developing countries surpassing that in developed countries. In other words, the capacity to produce much more has not been offset by the capacity to consume much more, resulting in a savings glut and stagnant if not falling commodity prices and financial instability. That's the bad news. The good news is the exponential growth in productive capacity and the potential for economic well-being that would have been unimaginable ten or twenty years ago. Unfortunately, it could also be that periods of shared prosperity and relative stability are short-lived, that concentration of wealth and instability are the natural order of things. What we know from experience is that markets will correct concentration of wealth and instability; what we also know is that the correction can be very painful.

This is plausible and terrifying. Can someone here please cheer me up a bit by finding fault with this? Not being sarcastic, help me get past it.

Inequality is a red herring. The problem here on Earth has always, always, always been that the lives of almost all humans have been marked by deprivation and poverty.

Not true so much in the West in the second half of the 20th century. And now, in the past 40 years, something like 500 million people have lifted themselves from this condition.

In the process, some people have become very rich.

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I'm just worried that with falling populations worldwide, especially in the part of the world that actually consumes per capita (pretty much everywhere but Africa, and even they are joining the trend), we may have indeed reached a point where production outstrips demand/consumption. Sure there's still a few more people to lift out of poverty, but what keeps growth going as the population of the world plateaus and declines eventually (this will happen there is no doubt). Maybe we have to get past 'growth' and 'GDP' but that is a scary prospect to me, sometimes things really are different this time.

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I'm not sure what to make of the twin concerns of "What will we do with all these people?" and "Where will we find the people?".

Fundamentally, every human being born is a locus of mind-boggling potential and winner of an unbelievable 4 billion year lottery. Smart people decide that they have to rig the world just so to make it habitable for their lessers, but, for the most part, people shift for themselves, always have.

We've got a long way to go. There are still literally billions of poor people out there.

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Nice video, some observations:

1) Does TC use a teleprompter? It seems not, since he referred to the "Asian Crisis of the 1990s" rather than "1997" which would be the case if he was using a Teleprompter.

2) The Chinese high-speed rail train NOT being derailed was a 'soft touch' akin to appeasing the Sinophiles in movies (like the last Transformers movie, with China to the rescue). I expected this, but if I was doing the video the train would go off the tracks (as it has in real life).

3) The "cheery ending" was rather absurd. "Human capital", we are to believe, is long-lasting in China and will survive any recession. In fact, in all of Asia 'rote learning' is encouraged. Once the students are outside their book, they are rather helpless. You sometimes see this with opening book smart but not very positional chess players too.

4) Let's face it: Schadenfreude is the only reason most of us are interested in China now. China = Japan of yesteryear. Puff them up, then blow them down. It's fun to watch a 'reversal of fortune' with some puffed up new money newcomer.

5) I'm going to Hong Kong for the first time. I've been to China but not HK. Any ideas? Macao, Kowloon, Disneyland are already on my list, maybe the 'racetrack' if it's not too snobbish. I don't know what else is available there.

Your teen-age girlfriend will enjoy the shopping there.

I imagine Ray will hire a different girlfriend while he's there.

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@ 3). The Chinese are smart. Even if we accept that their "rote-learning-ness" (an annoying exaggeration repeated by nervous racial supremacists) is a thing, or even if we accept that their best chess players aren't as magical as whatever Jewish/Brahmin group your imagining, his point is that their risk of becoming Brazil is low in the long term.

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"...the only reason most of us are interested..."

Truer I think to say that the vast majority of us regard this view this as retrograde and offensive, Mr. Lopez.

Of course, the accuracy of each statement depends on the referent of "us." You perhaps speak for a racist cabal and are too casual to make this clear.

@Dzhaughn -says the man with a Chinese surname...playing PC with an anonymous nym. What a joker. I live here, date Asians, while you are either a yellow man promoting your image and likeness or lily white with a guilt complex.

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I have heard the Disneyland is not that good in Hong Kong.

I would recommend seeing what is left of the walled city of kowloon and Victoria peak at night.

https://en.wikipedia.org/wiki/Kowloon_Walled_City

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Capital flight from China...not sure it matters. That means people fleeing will place claims on assets, goods and services in other nations,
boosting demand in those nations.

But China has its own central bank. They can print money. They can create demand for their own assets, goods and services and replace that lost by capital flight.

The People's Bank of China just needs to be aggressive and sustained in promoting growth.

It would help if the globe's other major central banks did the same.

What the PBOC really needs is the ability to print the eurodollars that are the actual basis of its financial arrangements inside and outside of China. The problem is that those dollars can't be printed, really, by anyone in a central bank on either side of the oceans.

Almost everything China has tried so far only increases their short against that dollar. Personally, I think they are out of options already. That "big" reserve pile everyone puts faith in already has claims against it. I think PBOC has done everything it can literally do at this point to stem the tide.

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Looks like Monday Night Football with that neutral stare in that still - "Tyler Cowen . . . THE George Mason University"

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Excellent. I lack advanced education or a direct interest but appreciate an understandable interpretation what may be happening outside our borders. Thanks.

Jim

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Inveigling reasoning.

However I would be very interested in seeing how this story stakes up against another major country in a relatively similar position, like India.

Surely if it was just a straight forward (dare I say it "Washington Consensus"-style) approach many countries would be much better off than they currently are.

So I am wondering: are we underplaying a factor here? Perhaps Chinese culture (I am really not informed enough to even guess!)?

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What's going on in China? They misallocated a bunch of capital to real estate investments and now the economy is collapsing. Sound familiar?

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Unless the person acquires something of value outside of China and does not have any further payment obligations, this might work. But, I have seen situations where foreign nationals invest, say, in the US, in property with a continuing mortgage obligation. At some point, when currency really devalues, they are unable to maintain payments and the property is foreclosed upon.

So, if you are going to give some of your capital a flight, make sure that you do not have obligations in the next jurisdiction you will not be able to meet if your currency continues to devalue.

The Chinese with capital buying real estate in places like Boston, New York, San Francisco, LA, Vancouver, etc., pay cash for their real estate. Many of my friends in the Boston area trying to buy houses have lost out to Chinese or other foreign buyers who show up with cash and pay over asking prices. It's a global real estate market fueled by capital flight in desirable locations.

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nicely done

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I enjoyed the video and I think it's accurate. I learned something.

But you omitted demographic factors. Surely population growth is slowing, and labor force growth is slowing even faster. Further, everybody that can be has been put to work in the urban workforce. Unlike the past 40 years, there is no large growth in L - labor.

Finally, as in America, the investment in human capital is not wisely spent. Too many people have college degrees that are not very marketable in the modern economy. There is too much money spent on academics and too little spent on marketable skills.

"Unlike the past 40 years, there is no large growth in L – labor."

Oh, you don't know about the coming rise of the machines? You know, the power of Watson on the iphone by 2020? Be sure to read Tyler's next book where he back-peddles from The Great Stagnation. It will all be explained there.

Machines lower prices. They don't raise gdp. Only inputs from labor and capital will raise gdp. So substituting machines for labor will be deflationary and lower gdp. At least in the long run after the capital investment has been amortized.

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