Why China’s Economy Will Be Hard to Fix | Hacker News Reader

Why China’s Economy Will Be Hard to Fix

bloomberg.com

67 pointsadventured78 comments

One theory here is that it is easy to predict basic needs for a population, and thus let the government control the production of those - food, shelter, medicine, etc. For an extremely simplified example, you have 1 billion people in China, so you need to build 1 billion housing units. That is going to keep a lot of people very busy for 20+ years.

Once the general population's needs move beyond basic necessities, it becomes much harder for a central authority to predict what will be needed by it's citizens. Services, entertainment, and consumer goods are all highly dependent on many more variables than shelter and food are.

>> Services, entertainment, and consumer goods are all highly dependent on many more variables than shelter and food are.

I'd agree with that for the most developed economies. The US government is in no place to predict consumer wants 5/10/15 years out. But china is far behind. They can look to the more liberal/advanced economies for guidance. They seem to be doing this in their allowance of some international culture (hollywood) and communication (internet). And I think the population is following the pattern. They haven't demanded anything radically different than more advanced economies have.

> The US government is in no place to predict consumer wants 5/10/15 years out.

It doesn't have to. It just need to provide the framework for US businesses to be successful and allow the entrepreur class to handle future demand. China, Russia, etc have so much state owned industry that the government itself needs to predict this stuff, which is the problem.

You vastly overestimate the abilities of any central planner. Coordination through market prices is the only way to provide the goods you describe. If houses were a simple cube of bricks built in the same location every time, what you descibe might be feasible (though it would still be a challenge to design the bricks, select materials, and an assembly technique). Market pricing allows for relative valuation of different options, such as making waterfront homes in Manhattan more expensive than homes in Boise tend to be, or deciding how many strawberries should be grown off season in greenhouses, and how many factories should be dedicated to producing insulin (as well as which techniques should be used, as modern insulin techniques were created by a startup you may have heard of).

You make the production of basic necessities sound simple, while ignoring the great amount of evidence to the contrary, i.e. Kruschev's famous tour of the grocery store.

Coordination through the market is far from perfect.

The market has myopia and rarely makes huge long-term investments, and sometimes it leads people off a cliff like a band of lemmings.

For example, it's given the United States a plethora of entertainment but decaying infrastructure, and the housing and dot-com bubbles.

The best system seems to be a mix of both central planning and private markets.

There was (and is) a tremendous involvement of central planning in the housing market, so much that calculating its influence the bubble is impossible. Using it as evidence that we need more central planning is essentially using No True Scotsman - "no, I mean the good kind of central planning".

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

Would you agree that the worst abuses (like NINJA loans and selling assets known to be toxic) weren't centrally planned?

Sure. My disagreement, or actually, my skepticism is on whether having "more" centrally planning would have made things better. That idea seems to rely on some utopic visions of the political process, in which the responsible people are not only extremely honest, but also have uncanny foresight.

I'll grant that - obviously the government failed to prevent the housing bubble - but I think the bubble and the crash were fundamentally driven by market forces.

And central planning was essential to the clean up afterwards.

I think that supports the idea that a mix of the two is best.

The housing bubble was not driven by market forces.

It was driven by central planners by incentivising mortgage companies to lend recklessly, as these companies knew the mortgages were guaranteed by quasi-governmental companies like Fannie Mae and Freddie Mac which currently hold ~87% of all mortgages [1]. No wonder the Fed is so keen on pumping up housing prices (through too-low interest rates)

[1] http://www.nytimes.com/interactive/2013/08/06/business/helpi...

That link shows that the "share of mortgages backed by the government" dropped during the bubble and fell as low as (about) 38%, and it didn't increase until after housing prices peaked.

I think you've misinterpreted the statistic you quoted.

During the bubble, lenders found easy money for mortgages from private markets, and it was after the bubble ended that the government stepped in to prop up prices.

I have a couple of questions for you.

But first, when the bubble was happening, conservatives said that prices were sound, would never crash, and this was because they were the product of market forces. But then the bubble burst, and overnight conservatives switched to saying it had all been unsound because of government intervention.

So let me ask you, what was your position when the bubble was happening, and how did you respond when conservatives suddenly changed their story?

Why do you bring politics into this? This was neither conservative nor liberal bubble. Both sides are guilty, this is central planners vs the market. I saw the bubble for what it was, most of my friends looked at me strangely, thinking I was probably jealous, because I was not interested in buying a $2M shack masquerading as a house.

That's not the worst abuse; the worst abuse is studio apartments renting for over $2000/mo.

As a counterexample: Military logistics tends to be centrally planned/standardized, not market based, and while it's rarely efficient, part of that has to do with the environment (where P(success) > unit price; it's perfectly ok to have ammunition which is marked up 100x at the front line vs. manufacturer's door if you're certain to have enough at the right time/place).

The risk of not having ammunition is factored in to the price in this example. For the same reason, I may pay 2x for marketing collateral I need for a trade show from a local supplier instead of purchasing online because the risk of not having it for the show is reduced. The price of goods in a free market is never necessarily the same in all contexts where transactions take place.

The F-35 alone is $163 billion over budget, with each plane costing hundreds of millions. Meanwhile, the $77 billion F-22 planes have been barely used, and probably won't be in the near future.

But hey, as the Lockheed Martin VP says, "the best weapon is the one that's never used".

Because the best case scenario for a weapon is that merely having it prevents an attack.

I spoke with military logistics folks about ten years ago. They told me that at one point, DoD had over 40,000 containers missing in Iraq.

40,000.

But yes, if you keep throwing money at a problem, it tends to go away. Or at least disappear.

For as long as there have been armies, good logistics continues to be a critical need. There's a reason large army deployments are always accompanied by large black markets.

Also, US military procurement could not possibly work without a free market in which they could buy supplies in. There's entirely too many different kinds of things they need, from uniforms to food to parts for materiel. It would be utterly impossible to manage the production and distribution of these things of these things without a robust market that rewards everyone involved.

That perspective was Hayek's primary contribution to economics. Markets are not just short-term allocation systems. In the medium and long term, their primary function is to collect, compute, and communicate granular information about what is wanted where.

Bureaucrats can compile reports on the broad strokes in static systems, and by doing it without wastes like marketing, or redundant infrastructure they could maybe even do those parts more efficiently than markets. But nothing beats a market for realtime servicing of rapidly moving demand (unless you ask the techno-utopian communists).

I've been wondering if stuff like this was the reason for initial growth spur of soviet union. It was easy for Lenin to see in 1923 that the country needed steel, food, housing and railroads. If you just churn out that stuff, you can't go wrong too much. But once those markets we're saturated in the 70's, you had no data provided by the markets about what to do. So the soviet union was pretty much doomed to that level of GDP.

Now I imagine it would be still relatively easy to take a country like Peru, turn communist and simply churn out steel, food, housing, install internet cables and improve roads. But you would hit a wall in decade or two.

Today that's called "The State Development Capitalism Model" as opposed to the market-led capitalism model in "The Washington Consensus" and I think it has a lot to recommend it. But the hand-off to a first world economy and governance style is really really tricky (see the "middle income trap").

Ah the good old "national socialism". It worked good for Nazis for a short while. But I don't think we have no long term data? Francoist Spain suffered from trade restrictions and Baathist countries used to benefit "unfairly" from oil.

I suspect the problem is the same. Your indicators get skewed if you accept them as goals. Bit like if you go to school, not for learning, but for getting good grades. It's going to kick you sooner or later, but at latest in academia.

"The Use of Knowledge in Society" [0], Hayek's famous essay on the subject, is an enjoyable 12-page read. I first read it as an undergraduate economics major, and it remains one of my favorite economics papers for its clear and simple insight into the role of markets as basic mechanisms of social organization.

If you want to get a feel for what the other side of things was like in Hayek's era, I recommend a curious book written a few years ago by Francis Spufford called Red Plenty [1], which illustrates (partly in fact, partly in fiction) the immense ambition of economists at Gosplan, and the even bigger task they faced, as they tried to modernize the Soviet economy of the 1950s and '60s.

0. https://www.aeaweb.org/aer/top20/35.4.519-530.pdf

1. http://www.redplenty.com/Front_page.html

I'm a big fan of Hayek, however I don't think he ever discussed what I feel is the strongest argument against state-sponsored central planning - contingency planning. When the government decides it needs to be responsible for some basic human need because it is too important to be left up to the free market, such as food security or healthcare, it crowds out alternatives that actually behave as valuable insurance/backups to a primary provider of a given good or service. If/when the government fails at providing something as vital as food or water, there isn't much you can do when the government controls the means of production. If a natural monopoly exists, people are at least free to find alternatives on their own, and thus profit from them, should those managing that natural monopoly fail at their jobs.

> you need to build 1 billion housing units. That is going to keep a lot of people very busy for 20+ years.

By all accounts, though, housing is already vastly overbuilt in China. They spent all those labor-hours already fueling the boom, and those "very busy" hands are now idle.

Reportedly, China wants to move tens or hundreds of millions of people to the "ghost cities" by 2020.

http://europe.chinadaily.com.cn/epaper/2015-07/03/content_21...

http://www.nytimes.com/2014/03/18/world/asia/china-releases-...

http://www.techinsider.io/heres-chinas-big-plan-to-move-a-po...

It's seems like a strange plan: build empty cities then move people to them en masse. I guess it makes more sense for a centrally planned economy.

china is operating on a longer timescale than commercial real estate developers.

on the flip side, there's a housing shortage (symptom: insanely high prices) in many US cities. i don't think that's any more or less strange, it's just an artifact of the system that's in place.

in vancouver there's a housing shortage (insanely high prices), combined with a housing glut (in the form of empty units). that's weird too.

Yes, strange was not the right word.

What China is doing is like building a whole housing development before selling any, but on a much larger scale.

It's the scale that I find striking.

For an extremely simplified example, you have 1 billion people in China, so you need to build 1 billion housing units.

Well, only if you want to have empty units, as there's (almost?) always more than one person per housing unit. How many? Well, that depends on the wealth of the household, on how many children they plan to have, on how many generation will be living with them.

And where should those houses be located? That depends on the (future!) employment opportunities, on the surrounding environment, on personal preferences, etc.

And what kind of zoning should there be applicable? US-style sprawling suburbs? High-density skyscrapers? Smaller towns? How dependent is that on other factors?

What building materials should be used? Is it better to build something cheap for now, betting on improving economic conditions for later rebuilding? Or is a medium-term solution better?

If a layman like me can think of a few dozen variables in 10 minutes, how many are actually there? How can one make a plan that accounts for the particulars of each of the billion?

My example was extremely simplified, and my point was not that China's central planning is correct, working well, or a good idea. It was that it is easier to get away/justify central planning on basic necessities (especially when 500 million people don't even have access to these things) than more complicated luxuries that are more subject to individual tastes.

Your thought experiment was lazy and clearly illusionary. At most your comment has some explanatory power as to how the central governments and central banks of the world trick themselves into believing they can make intelligible decisions for billions.

Sheer hubris which costs millions of lives and needless poverty.

This page contains many pleasantly-made visualizations, which I always like. The editorial content is a little slim to my tastes. For instance, I have a slightly hard time looking at a graph indicating a mere 7% GDP growth and concluding that an economy is in need of fixing.

In a related fashion, I'm a bit surprised that there is not a dedicated graphic to some sort of private debt. Perhaps this information is simply not known well enough. But it's my [admittedly quite limited] understanding that one of the problems the Chinese economy will soon have to face is rising reliance on individual debt for wealth generation.

7% would be fine elsewhere, but China needs more. The deal with the general population is that, in exchange for stalled political progression, the people shall be allowed economic progress. Should the later break down, the population may/will become difficult to rule. Anything even hinting at revolution may see the Chinese economy do far more than stall. So china's 10% goal isn't so much an economic but a political necessity.

The problem is, essentially nobody credible on China believes they're actually growing at 7%.

Their imports and exports have declined dramatically as of late. Their manufacturing sector is contracting, with millions of people set to be fired across several major industries such as steel and coal. Their services sector is barely expanding. Capital outflows are of epic scale. Their stock market has crashed by ~50% and is lower than it was five years ago.

7% is basically impossible given that data, and those are government figures. Where is that vast growth supposedly coming from while most of the economy is contracting?

Going by China's history on economic data (a statement which is not excusing any other nation on bad data accuracy), the real data is likely even worse. No chance they're growing anywhere near 7%. Given their behavior and the government figures alone, I'd bet on their economy being closer to recession than not.

While China has a lot of corporate debt, household debt is actually far less than in the US or Canada.

http://www.tradingeconomics.com/china/households-debt-to-gdp http://www.tradingeconomics.com/united-states/households-deb... http://www.tradingeconomics.com/canada/households-debt-to-gd...

They don't just have a lot of corporate debt, they have a vast amount of muni debt and shadow debt. Their total debt to GDP ratio exceeds that of the US [1], and it's still expanding rapidly. Their non-financial corporate + financial institution debt is now roughly twice that of the US.

http://www.bloomberg.com/news/articles/2015-05-08/china-s-ve...

So, according to your link, Chinese 'total' debt is about on par with the rest of the world? And this is cause for extra concern? Despite the fact they have very low household and relatively low government debt, in a fast-growing economy?

South Korea's 'total' debt is higher with slower growth. Yet no one is predicting their collapse...

The reason it's cause for extra concern is two fold.

First, their accumulation has been extraordinarily rapid. A pace the likes of which the world has never seen before.

Second, it's still climbing rapidly.

If you combine these elements with: the command economy approach; the likelihood that their debt is even higher due to shadow debt; that the government is making the wrong choice and is propping up the mess ala Japan's mistake with zombies; and that all of their other economic data is heading south as they're continuing the debt accumulation (including a rapid bleed-off of foreign reserves, half of which they can't use anyway) - the sum picture you get is economically frightening and very unstable compared to the debt picture in eg Australia, the US, or Germany.

Finally, to make matters a lot worse, China still has a billion very poor people and almost no social safety net. How is China going to deal with their rapidly aging population (which will demand far greater total care expense with each passing year), while already being more in debt than other developed nations?

You don't seem to realize that the companies' debts are the people's assets. There are two ways to invest in a company, directly holding shares or lending it money.

> The editorial content is a little slim to my tastes.

Usually the "editorial content" is just filled generic information not necessarily related to the topic at hand. Given the choice I'd much rather a slimmed down article filled with just the relevant information.

A 4850 × 2879 wide raster image for a simple graph could be a "pleasant visualization" if transferred to the side of train, or a billboard.

Latest News: China to lay off five to six million state workers

http://www.reuters.com/article/us-china-economy-layoffs-excl...

The report comes from anonymous Chinese government officials and cannot be accepted at face value as fact.

However it is unlikely that China can rebalance from massive overproduction without massive layoffs. The quoted government official, Yin Weimin put the number closer to 1-2 million.

" it is unlikely that China can rebalance from massive overproduction without massive layoffs."

Why is that? it is a genuine question. Do they have an inflation problem?

Problems greater than inflation. Overproduction incentivizes dumping, which results in backlash from trading partners. It is also used to finance regional and local governments, which incentivizes overproduction and waste of resources. Sure, the thousands of construction workers making ghost cities get paid, but someone has to pay them. Not to mention the rampant corruption that occurs like magic when you mix money and power with a dash of unaccountability.

http://www.economist.com/news/business/21693573-chinas-exces...

So the western world should just take the Chinese government media at face value? since the foreign media now needs a 'permit' to publish online in China. This is a government that cheats, lies, and steals. Oh, and kidnaps foreign citizens and forces them to tell lies on state TV

http://www.forbes.com/sites/jnylander/2016/01/07/swedens-for...

We both agree. Anonymous Chinese government official statements are two layers of bullshit. Quoted officials are one.

"hard to fix" : "business opportunity"

Answer Demographics, China's Working Age Population peaked 4 years ago. Since then the working age population of China has been losing over a million people a year.

Long Story Short, it is too late for China, they just don't know it yet.

I'm guaranteeing you supply of labor is not the dominant factor in China's economic climate. The rigged economics of their core competencies has a much larger impact than the availability of cheap workers - labor markets can adjust seamlessly and effectively to less available labor by having the most valuable work done and less valuable work gets delayed. To some degree you have a cutoff valuation where less valuable work is not worth doing - in the west we call it minimum wage. I highly doubt China's economy is anywhere near that threshold yet.

I think parent wasn't saying that supply of labor is the problem now, but that it will be in the future. If thinks are looking bad now, imagine when dependency ratio increases significantly.

It's not just about absolute supply of labor, but also about how much of that labor is being used towards supporting old and young people.

Thanks, I'm often amazed how many people like zanny are incapable of seeing the likely future for societies who's economic and social models are dependent upon constant expansion. At this point in time it is simply too late for most of the EU and Asian nations, it is not a question of if but how the population will react when things begin to unravel. The Demographics of said nation's give us a very good idea of when.

They already are heavily investing in robots to counteract this.

You're still misunderstanding this point. It ins't about labor availability, but dependency ratio (people working vs. people not working).

This ratio is increasing regardless of mean population age. Automation is making even 20 year old prime-of-their-life human labor gradually obsolete.

I wasn't clear. Dependency ratio doesn't depend on unemployment, but on people who CAN work vs. people who CAN'T work (elderly, young, sick, disabled, etc.).

This problem isn't about using robots to refine steel or manufacture iPhones, or have workers magically move up the value stack, it's a question of who will take care of the legions of elderly Chinese. Throw in the fact that China lacks a serious social safety net and the spice of nobody wanting to be an elderly care worker, and you have a full on crises on your hands.

It will be interesting to see how more-powerful labour replacements effect these predictions. With the death of Moore's law, perhaps this point is moot, but if we get perfect replacements for intellectual and physical labour, a large population of savers may be ideally placed to benefit from the transition, as perfect mass-produced labour substitutes will likely presage enormous economic growth.

That large population of savers is largely doing so because houses are extremely expensive and the gender gap is so wide that most (of the few) Chinese women can disregard (the very many) men without property and do so without consequence.

So even if this large population of savers were to start spending their money, what are they expected to do with their lives, jack off until they die?

I wonder if this point will hit home to Bay Area engineers who live and work mostly among men and can't afford a house without serious pay or a startup buyout.

>So even if this large population of savers were to start spending their money, what are they expected to do with their lives, jack off until they die?

VR girlfriends? A comfortable retirement as the economy expands. There have been far worse fates in history.

I doubt a VR girlfriend would be of much help for the (already) millions of elderly Chinese with dimentia and in need of constant care.

http://www.economist.com/news/china/21693241-china-ill-prepa...

China has between 400 and 500 million fake farmers that are a readily available supply of working age labor.

Supply of labor is the absolute least of China's problems. In fact, they have far too much labor compared to global consumer demand, which is why the bottom 50% of China is so poor.

If China operated its farming as efficiently as South Korea, much less the US, they'd need no more than 30 million farmers. They have hundreds of millions of people producing very little output, and they're kept that way - and without any ability to own their own farms - on purpose because the state has no idea what to do with them if they're not subsistence farmers.

I'm sorry could you please explain to me why you believe I'm talking about the supply of labor?

There's no other reason to have referenced their working age population than to talk about what their actual supply of productive labor is.

Losing a mere one million people per year in working age population is entirely irrelevant when you have 400-500 million people sitting on the sidelines available to replace them.

China could improve the efficiency of their farming by 0.25% each year and replace those lost one million working age persons. It's a complete non-issue, they have drastically too many working age persons and nothing for them to do.

Seriously?

From The Article you linked to: China risks growing old before it gets rich As China’s population becomes richer and more urban, it's also getting older...

Extend the graphic out a few years and its an inverted pyramid. I'm sorry you're unaware that working age population means much more to a country than simply the supply of labor...

You're not in any way explaining how China has a working age supply problem when they have 400+ million people intentionally being held in subsistence farming because the state has nothing else for those people to do.

They have 400+ million 'farmers' with nothing to do. You can't have less of a working age labor problem than that. It proves they have a vast oversupply of working age labor.

Unless for some reason you think China needs ~35% of its population to be farmers, while the US needs only 1%, and no other developed nation needs anywhere near that 35% level.

Please explain what happens to those 400 million surplus farm workers if China allows their farming efficiency to rise.

Can't reply to your last post, so...

>>They have 400+ million 'farmers' with nothing to do. You can't have less of a working age labor problem than that. It proves they have a vast oversupply of working age labor.

>>Unless for some reason you think China needs ~35% of its population to be farmers, while the US needs only 1%, and no other developed nation needs anywhere near that 35% level.

-------------------------------------------------------

I don't understand where you come off on this kick about Chinese farmers, or why when you think I'm referring to Demographics and working age population that it means they have a problem right now, they don't.

It does not mean they don't have a very real problem in the near future due to having more people that will need taking care of than their economy and society will be capable of handling due to the inverted population pyramid.

I'm not wasting any time teaching you to think about how Demographics shape the future. The Demographics of those rural Chinese farmers you are in love with are aging rapidly, and the generation coming behind is much smaller...

You keep trying to argue on the basis that you need to teach me something. That isn't a data point. If you could back up anything you're saying, you'd bring data to the table instead of constantly using argument from intimidation attempts. Notice that despite disagreeing with you, I don't need to use that kind of language toward you.

China will still have hundreds of millions of farmers doing nothing but subsistence farming 20-30 years from now, unless the state finds something else for those people to do. The demographic curve is not so sharp that it will eliminate hundreds of millions of those farmers from the labor force in just a few decades.

You didn't explain what happens to 400-500 million farmers if you dramatically increase farming efficiency. I can answer it however: you get a surplus of available working age labor to the tune of hundreds of millions of people.

Losing one million working age persons per year, does not matter at all, if you have hundreds of millions doing nothing waiting on the sidelines. They could lose five million per year and it would not matter at all. For the next several decades they will have a surplus of hundreds of millions of people that have nothing to do. It means your proclaimed theory about there being a problem with China losing a million per year, does not matter, they aren't lacking for working age persons at all, now or decades from now.

They have 400 million working age farmers too many. If they lose an average of 5 million total working age persons per year for decades, that means in 20 years they'll still have hundreds of millions of surplus working age persons too many.

Historically, growth from agrarian to factory based economies is massive and fast once the political and capital elements are put into place. We saw this with the USSR, North Korea, China, etc. The problem is that the move past factory economies is tricky. The pre-reqs to be successful here are just much more complex. Service based economies are special and they can't be successful in a political vaccuum like factory work can. You need a lot of western ideals to make this actually work: free speech, open markets, powerful banking, strong monetary policies, anti-isolationism, free trade, employee protections, anti-corruption, capital protection, pro immigration policies, multi-party government, non-corrupt judiciary, etc.

This is why Russia stuggles now. It ignored almost all of the above and has been held up solely by its state-owned petrochemical industry and petrochemical derived reserves. I think there's a reckoning coming for the autocratic BRIC states soon. Either they'll liberalize and migrate to a US/EU model or become economic sob stories. Russia is looking at 1% contraction this year and its oil slump has moved into a real estate slump. China has a chance to fight this I suppose, but I doubt it has the political will to move away from autocracy and political oppression.

The next decade will be interesting for BRIC economies. The low hanging economic fruit in many of these countries has already been snatched up. What happens now is the big question.

> You need a lot of western ideals to make this actually work: free speech, open markets, powerful banking, strong monetary policies, anti-isolationism, free trade, employee protections, anti-corruption, capital protection, strong pro immigration policies, multi-party government, non-corrupt judiciary, etc.

That is an interesting point, I wonder how all the points you have listed are intertwined.

Do you need free speech because it is a prerequisite to have a low level of corruption ? Or could you in some systems have the low corruption without the free speech ? (I don't really believe that but it seems that is what is the PRC is trying to achieve) What would be the more and less important factor if you had to "implement" one first ? And so on.

As a single data-point, Singapore managed low corruption without free speech (and indeed, economic development without much attendant political freedom).

I think a problem with Singapore style solutions is that it is so dependent on having one very wise leader. Democracy is more robust I think in that it can weather even bad leaders. Bad decisions will happen sooner or later. The problem is that a country like Singapore or China has no good way of dealing with that.

Especially with China over a billion people are all dependent on the decision made by one single very centralized government.

Friedman argued you could use free markets as kind of a trojan. Once they get implemented even in an authoritarian regimes it is easier to transition to an overall free society. Chile is generally seen as having made that transition from Pinochet to full republic by 1990.

It's not so much a trojan, but as a way to transition to a free society gradually without the chaos caused by a collapse of the authoritarian system.

I'm not sure all of them are required - to me the minimum package is multi-party government + non-corrupt judiciary + free speech + relative ease of starting a business or NGO legally. Some sort of employee protection or at least representation helps a lot with stability.

A lot of people would say that employee protection conflicts with free trade and free movement of people.

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