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China as Mother of All Black Swans

The end of Cheap China

There seem to be two schools of thoughts regarding China’s economy. One school says everything is fine, China is different, and we should expect 10% GDP growth for the foreseeable future.Then there are those who say China’s economy is a bubble and a meltdown is coming.

Soon. Some of these people have been saying this for ten years, others for just the last year or so.

I do not have an opinion on where China’s economy is heading because am not an economist and, even if I were, it would take me hundreds, maybe even thousands, of hours of intense study and analysis to be able to formulate my own opinion, as opposed to simply cribbing the opinion of someone I trust who has actually done all that work.

But I always find well a reasoned analysis of China’s economy interesting and this one, by Vitaliy Katsenelson is certainly interesting and thought provoking. Katsenelson, Director of Research/Portfolio Manager at Investment Management Associates, sees China as a bubble and he has a well-reasoned slide show, China – The Mother of All Black Swans, to back it up.

What do you think?

28 responses to “China as Mother of All Black Swans”

  1. When there is one feature that has followed my involvement with China, it is the presence of doomsday scenario’s. I believe the first one was when Deng Xiaoping was on his prolonged deathbed and there was no doubt that China would fall into disarray after his death.
    Since then those doomsday scenario’s were a regular feature. The take-over of Hong Kong, the environmental crisis. Most years had only two of those crises, but you would also have very busy years. Gordon Chang was of course record holder by writing a whole book on China’s collapse.
    Those scenario’s had two things in common. First, they were serious and rather convincing. And second, China did not collapse. Whole provinces, ministries and industries could collapse, but not China as a whole.
    After a while I became a doomsday skeptic. How believable a doomsday scenario might be, it won’t convince me anymore.
    We should turn the assumption around and wonder seriously why China does not collapse.

  2. I think his analysis may be overly pessimistic. However the other side is also almost certainly overly optimistic. The truth will come somewhere in the middle.
    Certainly the Chinese are not hearing enough of this talk.

  3. There is a limit to how much you can predict things. People can change the future, so how much China grows and for how long is going to be influenced by the decisions people make.

  4. Also, people seem to have limited futures. Even if everything goes right, it’s unlikely that China will grow for 10% for more than a decade or so. As China develops and urbanizes the rate of economic growth will go down, and by the end of the 21st century, it’s likely that China’s growth rate will hover around 1-2%.
    When people say “for the forseeable future” I’m sometimes shocked at how short people’s time horizons are. If you can look back 5000 years, it’s not a big deal to look forward 300.

  5. Maybe our recent experiences have left us with the assumption that all thriving economies will collapse. Perhaps we’re a little biased by our fear.

  6. Just some errors in Katsenelson’s slides that show data or are about facts.
    On slide 6 he claims Ordos is an empty city built for 1 million residents on spec. According to Wikipedia, at the end of 2004, Ordos had a population of about 1.36 million inhabitants. Though it has a new district that is not fully utilized, calingl it a “ghost town” is shoddy reporting at best and yellow journalism at worst, and surely an insult to all these 1.36 million inhabitants.
    On slide 7 he showed a shocking graph of “Electric power output.” Closer examination shows the Y axis should be “Implied Electric power growth rate,” the derivative of “Electric power output.” Also he deliberately chose Oct, 2008, the lowest point, as his last data point. Note that usually there is very large fluctuation of similar amplitude due to the Chinese New Year. To support his claim he must show that the decline is a long term trend instead of short term fluctuation. Omitting data after the immediate shock seems very suspicious.
    On slide 8, he claims the GDP figure is a lie because ideologically OMG Chinese government is EVIL! Show some hard evidence please! If he is in a serious economic forum he would be a laughing stock.
    In slide 9, he implied farmers have no health insurance, when in fact basic health insurance was recently extended to farmers. From what I heard due to the elimination of agricultural taxed farmers are the strongest supporters of current government
    In slide 13 he shows a graph from the WSJ showing that the national average property price increased by 20% in 2009. This figure conflicts with what I read in the WSJ. According to the WSJ, “Property prices in 70 of China’s large and mid-size cities rose 7.8% in December from a year earlier.” I suspect nationally the figure might be even lower.
    http://online.wsj.com/article/SB10001424052748704363504575002312349972160.html
    According to the Economist, though bubbles are forming in several cities, nationally, housing prices are “still in the basement.”
    http://www.economist.com/world/asia/displaystory.cfm?story_id=15270708
    An interesting thing is how he notes the similarity between Chinese growth and the dotcom bubble. Please note that dotcom bubble is not without its merits. Sure it sucks to be these dotcom investors, but without the infrastructure laid down by the dotcom bubble there would be no high speed internet, YouTube, web2.0, cloud computing etc. The dotcom investors might be gone, but the infrastructure remains, and today we must all thank them for their sacrifices. Who says greed has no virtue?

  7. So China’s growth figure is just an illusion from the Stats bureau fudging numbers, and it is also a real result of a steroidal stimulus?
    Stimulus spending was announced in Oct 2008, which apparently came after the crisis (2008Q4 to 2009Q2), as he defines it.
    The alarming Oct 2008 decline of power output: 4% less year-on-year!

  8. I definitely think China’s growth isn’t a bubble. Bubbles are based on speculation, and what China is experiencing isn’t. China’s growth stems from a lot of factual occurences, such as the advantage of their low priced exports, growing population and flexible labor market. Even if China’s yuan appreciates to its correct value, there are a lot of economists who believe that its domestic market consumption is growing and will be the new engine of GDP growth. But, what do I know, I’m not an economist, I’m only an economics major.

  9. @Fons Tunistra,
    Very nice summary. In fact, if one follows these kind of China-collapse theories long enough, one can easily collect these arguments. The slide show to me is just such a dumpster.
    The followings are my personal collection of China-collapse theories/arguments:
    1. Lack of Democracy/freedom
    This school is a bit of out of fashion now, but was very popular right after TAM. The more fashionable theories are “one-party democracy,” “consultative democracy,” “China model” and “Beijing Consensus,” whatever these mean.
    2. Environmental disaster/failure
    We’ve read a lot of those reports and seen a lot of grim pictures in recent years. I think this school was most popular a few years ago. The more fashionable theory is that China leads the green tech.
    3. Financial systems failure/bad loans/bank bailouts
    There were very popular in late ’90s and earlier this decade but had lost momentum after China bailed out its large banks. There have been some fresh talking about it now due to the explosion of bank loans last year though.
    4. Loss-making SOEs (state-owned enterprises)
    This was pretty old-school and was the prevailing theme in late ’90s and had become quiet down after Zhu Rongji reformed the large state enterprises, seemingly successfully.
    5. Overcapacity/mis-investment/real estate bubbles/Dubai X 1000
    This is the current favorite. Evidence usually include the China’s steel output (~ 600 million tons), unoccupied commercial and residential properties in BJ & SH. Lately, this is spilling over to China’s usually highly-acclaimed infrastructure development such as high-speed rails (Michael Pettis et al.). It must be pointed out that this kind of tone is a drastic change from just a year ago when China was believed to be hit the hardest and would come out of the crisis the latest (by some pundits, e.g. Michael Pettis).
    Of course, we’re still not out of the woods yet, so these kind of predictions still have the chance to be correct (but no one is sure about the time-line, so we can be sure that it is probably sooner or later).
    The above are the more popular conventional wisdom (at the time anyway) of why China will fail or collapse in the short to medium term.
    There are also some more notable predictions that the so-called China miracle won’t last in the medium to long term:
    1. Lack of innovation
    The Chinese are more competitive in low-cost manufacturing products. They sometimes churn out copy-cat products by steeling others IP. This argument is reinforced by China’s rote-learning educational system and the government’s information censorship, which – it is believed – turns to make the population out of touch with the latest and greatest outside China.
    2. Demographic trend
    The Chinese are aging; they will get old before they get wealthy. Of course, this is opposite of the fear of population explosion in the ’70s and the result of China’s (human rights-violating) one-child policy. I know a lot of Indians are excited about the prospect that China will get old in 10-20 years and it will be India’s turn to shine given their much younger population.
    3. Next Japan
    Not sure this belongs to here or the short- to medium-term category. Some pundits point out the similarities between Japan in the ’80-90s and China today, what with the export-driven model, the real estate and stock market bubbles etc.. This school of thoughts is quickly gaining popularity these days. There have been other analogies, such as Soviet Union, Nazi Germany (common theme: they all failed). Occasionally, some people point out the similarities of China today and the US in late nineteen century or the early 1920s.
    These are all I have gathered over the years. Did I miss anything?

  10. Being another non-economist, i am still not convinced that GDP stats tell even half the story of how a country is doing, and how a country’s less- advantaged population is feeling about how their country is doing.
    From what i have been reading, the workers actually making all them cars in China are feeling pretty good on both counts, whereas USA auto workers, in general, are not feeling so hot about either their, or their country’s current position, or future.
    Yes, it is not “scientific” to project from a small sampling to a general thesis, but: my local barber from Anhui, a penniless migrant to Shanghai, with a 7th grade education, 10 years ago (he is now 30), just sold his Pudong apartment for USD $ 600,000. He is sitting with these funds, in his bank account, trying to figure out what to do with the rest of his life.
    I am jealous!!!!
    The couple he sold his apartment to, bought three apartments (including his) in the beginning of November, with small downpayments and huge mortgages, by putting one in the wife’s name, one in the husband’s name and one in the wife’s brother’s name. They are both I.T. professionals.
    Yes, whatever goes up (the real estate bubble) will sometime, eventually, come down, but when is a very dangerous question to try to predict in China. No, from what I am told, the banks have NOT stopped lending for real estate purchases, as has been ordered. They, of course, have figured out how to get around this diktat.
    We do need to try to remember that for China, history (of other countries) is not the best predicator of the future of China.
    China is a whole new ballgame. USA/European rules will not necessarily apply.
    My ex-Chinese gf once asked me if the government of India was a “good” government. After thinking about how to answer her for 30 seconds, I responded with: “What is your definition of a good government?” And of course, her answer was: “A good government is an efficient government.”
    Yes, she has an MBA from Fudong/MIT, and I have one from Harvard, but I never would have answered her in a similar way.

  11. Lets keep it simple: Y=C+I+G+(Ex-Im); gdp=consumption+private investment + govt +net exports. In 2009 something like 92% of gdp came from G. In Jan 2010 G spent 1.35 TRILLION rmb. They can (1) continue to spend (loan) or slow; if they slow, gdp slows, unless you believe: 1. consumption will grow in a slowing economy or 2. exports will resume;people usually choose exports; my question is: export to whom?

  12. The other mistake is to look at something like real estate and stock market bubbles and assume that the entire economy will collapse when the bubble does. In reality, the Chinese government has done a pretty good job at managing bubbles. The reason that bubbles are manageable is that China has a high savings rate, which means that when a bubble pops, you have a large savings reserve that very quickly and efficiently absorbs the losses before going to the rest of the economy.
    The other thing about the China is the next Japan or China is the next Soviet Union is that both Japan and the Soviet Union had income levels and standards of level far, far higher than China does, so even if China were to stall out at Japan or Soviet levels, it wouldn’t happen for another two decades, which gives plenty of time to do things to make sure that doesn’t happen.
    One thing that these models of Chinese collapse don’t take into account is human agency. People see that there is a problem, and they *do* something about it before it blows up the system. The other problem with these sorts of models is “ideological certainty”. They assume that we understand human economies perfectly so you can take the past and get future outcomes.

  13. I agree with Qingdao that the question to ask is how the government can maintain its current growth rate if China’s export volumes keep falling in the future.

  14. In China, G and I are intertangled… This may not have been such a bad thing.
    Net exports have been decreasing throughout the crunch, and consumption has been increasing. One thing that I find curious is the fatalism involved here. China needs to increase consumption, it can’t so it’s ***DOOOOOOOMMMEEEDDD***.
    What actually happens is that people in China sit down and say, OK we need to increase consumption, any ideas??? Appliance rebates? Increase social safety net. OK there seem to be limits on how we increase consumption, and so we have to pour money into investment, what would be useful places to put that money in. Railroads? Middle income housing? We have lots of overcapacity, empty steel plants and vacant commercial real estate. We are ****DDOOOOMMMEEEDDD****. *GAME OVER* Well, aren’t there economically useful things you can do with empty steel plants and vacant commercial real estate?
    O.K. things are bad, how can we make them slightly less bad.
    The thing that I find annoying about the DOOM-sayers, is that they seem more interesting in proving their pet economic theories and winning arguments, than in actually thinking about solving problems.
    Also there is a lack of imagination. Let’s suppose hypothetically that China needed 90% permanent government spending to avoid economic collapse, well then spend 90% permanently.

  15. Fons: We should turn the assumption around and wonder seriously why China does not collapse.
    One reason is that the doomsayers take internal Party memos that say “bad things are happening, if we don’t do something about then we are sunk” and then show that this is proof positive that China is doomed. Whereas what the memo really said was “bad things are happening, if we don’t do something about then we are sunk, here are some ideas on what we can do.”
    What killed the Soviet Union was that starting in the 1970’s, it was impossible to suggest fixes for the problems, or even admit that there were problems, and even then it took 20 years or so for the Soviet Union to collapse. One reason the collapse of the Soviet Union took everyone by surprise is that the internal memos of the SU in the 1970’s were all bright and cheery and talked about how strong and powerful the Soviet Union was. You had the same situation with Japan in the 1980’s.

  16. Lots of good responses here, lucidus’ comments especially resonate with me. Vitaliy’s use of facts and figures are, selective, to put it gently. A few more observations:
    I’ve been to Erdos, while it’s not as packed as Beijing, it’s no ghost town. I have no idea how he got that picture of a major road being completely empty, maybe on the last days of construction? I’d rather not imply that he was involved in photoshopping it, maybe he just found it like that on the web.
    Yes, the Chinese gov’t lies, but so does every government. Anyone that has ever set foot in China can visually see and confirm that there is solid growth in any of the cities. Similarly, anyone in America can see it’s not all sunshine and peaches, I’m sure both governments manipulated data as far as possible without being caught in an outright lie, in order to advance their respective political agendas. I agree that they tweak and exaggerate the numbers, but there’s a certain level of truth behind it.
    He has a good point about false axioms, but then two pages later strongly implies one of his own: that because he was right about Japan back in 89, that he will be right about China today. China is not the next Japan, or Russia, or anyone. China’s situation is unique and will play out uniquely. Really, it was a bit insulting to the intelligence of his audience. It’s like summing up US immigration by saying the White “natives” will be displaced like the American Indians were displaced “back in the day”. It’s craptacular logic at its best.
    He does have good points, and they are challenging. The reason China is not going to go bust is that the government knows it cannot hold on to power if it does. The Chinese government is pretty smart and ruthless, and they have the money and power to make sure things go their way. Those challenges will probably slow China down, but will not sink it.

  17. Hello 2fish; long time no see; and thank you GFW; 2fish writes: “. . .well then spend 90% permanently.” If I recall you work on Wall Street and know perfectly well that’s absurd. How large is Chinese govt debt? Officially, 20% of gdp (Yu Yongding). Victor Shih guesses closer to 50% BEFORE this TRILLION rmb a month loan spree; Japanese debt is something like 200% of gdp so obviously China has time, but permanently? Debt and sovereign default is not something economists have thought about much for the last generation, which is why Rogoff and Reinhard (sp? )are sounding the alarm. Finally, stop attacking straw arguments. “collapse, crisis!!” grab people’s attention; then to argue that China will not “collapse” seems just as silly.

  18. Put me under the group of people who think China is (unfortunately) going to implode. My reasons are as follows, critique them as you wish.
    1) Underemployment. Too many jobs exist solely for the purpose of creating a job, rather than performing a value-added service. This pointed at, for example, the crossing guards, subway flag-men, street cleaners, and security guards.
    So much of the rest of the country’s employment is wrapped up in construction or manufacturing. The massive construction boom going on is a one time deal – the Chinese do not need to rebuild highways twice (insert jokes about quality). Whenever the RMB does increase in value, other countries will assuredly rise to the occasion to become the low-cost manufacturer. Even small losses in business and thus employment resonate heavily in China due to heavy dependence of whole families on one working couple.
    2) Population. The population level is clearly unnatural when looking at historical levels. Thanks to Mao’s idea to promote Chinese people to have more babies, there was a population explosion within the past 50 years. Worse yet many of these people are nearly fully uneducated thanks to the Cultural Revolution and are completely dependent upon their one child. This of course leads to the 4-2-1 problem which is why even small increases in unemployment can quickly resonate throughout the entire country (one job loss will directly affect 7 people).
    I sometimes feel that the government is just trying to wait for these ~50 year olds to die out.
    3) Property bubble. There is a disgusting property bubble in China that is out of control. This bubble has occurred because of a lack of alternative investments and the Chinese cultural necessity to own a house. Regardless, price levels do not at all reflect what is attainable by anyone but the wealthiest of Chinese (purchasing a putrid apartment in Shanghai would require approximately 40+ years of an average Shanghai man’s salary).
    When the property market falters the wealthy middle class who purchased 5 houses purely for capital appreciation and not rental yield will sell immediately. The downward pressure will cause prices to plummet and decades of salary will be wiped out.
    Just as in any other country, when people get wiped out they stop spending. This will then put pressure on retail stores and restaurants, further hurting business and employment. Maybe this will be contained to Shanghai but I would not be surprised if it causes simultaneous collapses throughout the country.
    4) The GDP growth of the past is from huge one time investments. Hundreds of millions moving from farms to cities. Highways being constructed. Empty sky scrapers being built. Factories going into action. Roads, sewers, electricity, and all other utilities being put into place. These won’t happen again, and the question is now what will replace these previous GDP growth movers?

  19. Even if you include everything under government debt, you still get about 70% GDP, which is not particularly high as numbers go.
    The fact that there is so much underemployment is precisely why I’m rather optimistic about the Chinese economy. The basic pattern of Chinese economic growth is you take a farmer and turn them into a factory or service worker and when that worker gets old, you replace them with a machine. This *is* a one time GDP boost, but it’s enough to keep the economy growing for the next decade.
    There is a property bubble. The bubble will pop. This has happened five or six times already in the last thirty years, and whenever you have a property bubble pop, the government goes in and spends money on some public works project and then recovers the money when you go into another bubble. This is standard business cycle management. The fact that there is a stock and property bubble which will pop is no more alarming than the fact that you will probably have a typhoon hit southern China in the next few years. If you want me to believe that this property bubble will completely destroy the economy, you have to explain why this is different than the last five or six property bubbles which have popped in China.
    One thing that makes China different from the US is that when property bubbles pop in China, people are left with zero. What made the last property bubble in the US nasty is that when it pops, people are left with much, much less than zero.
    Also, people cite Japan and the Soviet Union without thinking through the consequences of that comparison. Both Japan and the Soviet Union (or for that matter Mexico and Brazil) were far more wealthy than China when they stalled out, so I take it as given that China will do no worse than Mexico as far as economic growth goes, and probably better since people at least avoid the same mistakes. Personally, I don’t see China reaching Japanese levels of industrialization in my lifetime, and if China does become the “next Japan” that would be cause for enormous celebration.
    Anyhow saying that the Chinese economy will collapse, is a useless statement. The Chinese economy will collapse eventually. It may be when the sun swallows the earth or because aliens invade. Saying that the Chinese economy will collapse is useless. It’s like saying that I will die someday. I already know that. The question is when and how. As far as when, I don’t see it happening in the next ten. As far as how, it’s probably going to be because of something that no one is talking about right now. If it happens in the next ten years, it will be because of some issue no one sees right now. If it happens after the next ten, it will likely be because of decisions that haven’t been made yet.
    The Chinese economy is seriously messed up which is why I’m optimistic about it’s future. It’s messed up, but it’s messed up in fixable ways, so it’s easy to see ways of creating wealth. If it were the case that the Chinese economy was perfect, then where is the growth going to come from.

  20. I guess I should have been more specific in my statement about underemployment. What I mean to say is that I feel that the true level of unemployment in China is very high and the government is scrambling to create nonsense jobs to fill this gap (hence leading to underemployment). If it was just that the workforce was being used inefficiently than underemployment would be a sign of growth potential. But in this scenario it shows an unsustainable solution to the massive population problem.
    One day wages will reach a level where these silly jobs are unaffordable for anyone to pay. Are the workers supposed to move on up to the service industry? What service industry is China providing, or does it have tingles of potential in providing? Or are we assuming a bloated government run service industry will be created – a very possible outcome. Whatever it is, hopefully the service is not more foot cleaning and massages.
    The real reason I feel that the economy will implode is the one thing I did not even mention in my last post (woops). There are a lot of social problems in China that are only forgiven by the citizens because every day they see their lives improving. Whenever the growth stops and tomorrow looks the same as today – I think the social problems will not be so lightly forgiven. Fire and brimstone, bad things, DOOOMED as you like to say.

  21. It’s funny that Camilla lists a whole series of doom scenarios to show how wrong the doomsters are, and yet nearly every one turned out to be correct, and she just didn’t see how. Pettis says that foreigners only call it a problem when foreigners lose a lot of money, but the fact that there was huge unemployment (as many as 50 million workers fired in the late 1990s), raging inflation, government panic in 93-94, a banking crisis that cost China 55% of GDP according to the World Bank, etc. doesn’t seem to show up as a problem mainly I guess because Camilla’s stocks weren’t hit and her relatives in the US or Europe weren’t fired from their jobs. I would propose that had more to do with China’s relatively small size in the 1990s then because economic problems and losses among the Chinese simply don’t count to the same extent as losses among “real” people.
    I also think the rose-tinted crowd like Camilla create a really false dichotomy. The only two options are for China to grow happily and forever, or for it to collapse in complete civil war. Since the latter hasn’t happened, clearly the former has happened and the doomsayers are wrong. But this is a pretty dumb way to think about it.

  22. “Also, people cite Japan and the Soviet Union without thinking through the consequences of that comparison. Both Japan and the Soviet Union (or for that matter Mexico and Brazil) were far more wealthy than China when they stalled out, so I take it as given that China will do no worse than Mexico as far as economic growth goes, and probably better since people at least avoid the same mistakes. Personally, I don’t see China reaching Japanese levels of industrialization in my lifetime, and if China does become the “next Japan” that would be cause for enormous celebration.”
    Something else that people forget is that in the case of both Japan and the USSR, individual entrepreneurial activity was pretty much squashed both by the state and by the culture. This is something we don’t see in China, BYD, Tencent and other successful companies and factories were started by individuals. This has played a major factor, and one that shouldn’t be underestimated.

  23. @Totem
    You’re absolutely right to point out that many foreign observers suffer from a binary view of China’s economic prospect: it either booms forever or it will collapse completely. But I think the more important reasons that these doomsayers missed the mark terribly are not so much that they did not see the right problems – Chinese economy’s larger problems throughout the years have been obvious to everyone who cares to know – they are almost invariably due to the following:
    1) They only look at the problems (sometimes to the point of exaggerating them), ignoring or minimizing the overwhelming strong fundamentals that China has;
    2) They assume the problems are incorrect-able or the Chinese government can not or will not deal with them.
    Take the huge unemployment in the late ’90s that you mentioned. It was the Chinese government determination to deal with the “loss-making SOEs” that the doomsayers said would collapse the economy. The 50 million workers, mostly state-owned enterprise employees, were not exactly fired to the streets; they were bought-out, retired earlier, started their own businesses, or found jobs in the private sectors. To be sure, there had been painful human sufferings, to the point that the former premier Zhu Rongji is still hated by certain segment of the population.
    Today, China’s largest state-owned corporations have all been publicly-listed, and are among the world’s most profitable.
    Can any other government in the world engineer such a large-scale restructuring effort?
    The so-called bank crisis, costing China’s whatever % of GDP, is not an ordinary bank crisis. It was the necessarily the cost that China paid to reform its bank sector to transition the large state banks into modern commercial banks. Up to the late ’90s, the Chinese banks were not real commercial banks; they were really the Ministry of Treasury’s cashiers and branch offices. It is therefore necessary for the government to socialize the loss resulting from the government policy loans. All the state banks have since been publicly-listed and operated as modern commercial banks. They’re now among the world’s largest banks in terms of market cap and profits.
    I would call these “bail-out” among the world’s best records.
    Like any capitalist society and market economy, China will experience ups-and-downs, bumps, growing pains and, from time to time, various bubbles. Every time China’s economy grows to a new stage, it will face new problems that it has to solve in order to move to the next stage. That is to be expected. It so far has an excellent track-record.
    Pettis asserts that this time it’s different because China is simply too large to export its way out of recession, or what I call his “US saves, China collapses” theory (my exaggeration). But he forgets that part of the reason his assertion that “China’s best growth is behind us” is wrong is precisely in his assertion. That is, China’s economy is much larger and richer today than in the ’90s. To the point that China had to export to sustain high growth and bootstrap itself, today China either has already among the largest markets in many industries or has the potential to grow to. We’ve witnessed this in automobile, PC, LCD TV, luxury goods, tourism and much more. This transition to more domestic demand driven economy won’t complete in one day, but it is happening more quickly than many people assume. And when the transition is completed, China will have the world’s largest markets in pretty everything.
    China’s economic growth story is unique, unprecedented and it badly stretches Pettis’s “emerging market experiences.” It is still at a very early stage of its growth, with a per capita GDP still under $4,000. China has a stable political system, a pragmatic and highly competent government, a large population that are hard-working and entrepreneurial. It has all the capital it needs for its further industrialization; it competes in nearly every industry or has the market potential to attract and sustain pretty much any industry. I would not cast my vote with these self-styled China-pessimists.
    In short, the best growth of China is still ahead of us.

  24. Outcast, it seems to me that you are saying that there weren’t really crises because they were the result of needed adjustments. But all crises are caused by adjusting earlier imbalances. I suppose we can say the US didn’t experience a crisis in 2007-08 because it was the result of a necessary rise in the excessively low houshold savings rate, or that Japan hasn’t had a crisis because it was a necessary adjustment of its development model. In that case we can breathe a sigh of relief — economic crises almost never happen, in China or anywhere else, except by famine or war.
    By the way I don’t see how the fact that China has a large manufacturing base, much bigger than its share of GDP, as Martin Wolf says, undermines the Pettis claim that they can no longer export their way out. That, I would think, is part of the reason why Pettis might be right. If they were small, they could pull it off. Now they can’t.

  25. The sixth comment made by “Joe” On Feb 8, saying that “In slide 9, he implied farmers have no health insurance, when in fact basic health insurance was recently extended to farmers. ”
    I would like to offer, through family member’s experiences, some understanding of the so-called “basic health insurance”.
    My mom is a retiree (退休干部) covered by this sort of basic health insurance. Without being hospitalized, her monthly coverage is 30 Yuan RMB (yes, RMB, not dollar). When hospitalized, there is some additional coverage but not exceeding 20,000 Yuan RMB (life time). Since my mom was not hospitalized in the past five years (she is 75 now), 360 Yuan RMB is all this “basic health insurance” provided her annually. The same deal applies to the retired workers (退休工人), for example, my aunt.
    For farmers, the national government supposedly provides 50 Yuan every month, and the national government also instructs the provincial and local governments to match, supposedly, with 30 Yuan and 20 Yuan, respectively. Suppose that a farmer indeed receives everything planned for him/her (a big question mark if this would actually happen, especially regarding the amount coming from the provincial and local governments), he/she would have 100 Yuan RMB as the health care coverage. On the surface, it sounds even better than those retirees in the urban area. The catch is that farmers do not have hospitalization protection. When they are given 100 Yuan per month, that is 100 Yuan, period. Nothing else. I have three uncles who are farmers. This is the deal they have.
    Are you surprised that I feel that the original claim (or implication) that “farmers have no health insurance” is a truer statement?

  26. The goal of China’s economy development and modernization is to turn China from a largely agrarian country into an industrialized and urbanized country by creating more industrial and service jobs.
    The challenge is China’s size: how do you change an economy that was 80% rural into one that that will be 70-80% urban? The export boom in the last twenty years provides such an opportunity when China’s economy and domestic market were relatively small. The argument now is that since the rest of the world, especially the developed economies, are slowing down while China’s economy is no longer small, can China still sustain its close to double-digit growth of the last two decades?
    There are good reasons to be optimistic:
    1. The domestic market has become large enough with growing middle-class and wealth. To be sure, there are still structural impediments. The government is now addressing them given the slow-down in export. China’s consumption has been growing at a very healthy clip.
    2. The relentless pressure to provide jobs to the rural population at any cost is easing gradually. Right now, the hottest topic post Chinese New Year is the shortage of labor in the coastal area. Guangdong Province, the export center of China, is reporting a labor shortage of 10 million. In fact, labor shortages are also experienced by some interior provinces. The reasons are simple: the interior provinces are booming with a lot of job opportunities; the work age population is stagnating due to the one-child policy in the last third years; the wages in the coastal areas are no longer attractive.
    3. The capital that China has accumulated in the last two decades allows it to invest heavily in the infrastructure of the interior provinces much as China did in the coastal region to support export industry. There have been a steady increase in investments in the hinterland from coastal area and aboard. We’re seeing large investments in Chongqing, Chengdu and Xian that are either migrating from the coastal regions or leveraging the comparative advantage of local labor force.
    4. China has built a formidable competitive advantage in manufacturing; China will continue to lead the world in export while upgrading its various industries. So we’re not going to see a decline of export or manufacturing. The upgrading of many industries will create higher-paying jobs, which in turn will generate more service jobs.
    In short, China will continue to expand its export industry while growing its domestic market more rapidly. With proper adjustments, it should be able to sustain its rapid pace in economic growth.

  27. I read this report from WSJ after I posted the previous comment. It’s very interesting read:
    The Mystery of China’s Labor Shortage
    If the labor shortage trend turns out to be true, I think it’s a positive development for China and the world. China can always depend on developing its economy by relying on cheap labor forever.
    Read the article and the comments as well.

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