Beijing’s Three Options: Unemployment, Debt, or Wealth Transfers
carnegieendowment.org
carnegieendowment.org
* There will be no political gridlock between left and right that can be solved only with half measures. Decisions are done in small groups of 30 people at most, with several hundred people having some influence.
* They don't have ideological fear of meddling with the markets or private property. It's all about being practical.
Beijing can make mistakes when handling the crisis. After they realize their error, they can take as big hammer as needed to fix it.
I've spent some time near Washington politics. It gave me the opionion that our system is purposefully designed to create gridlock in order to tie up political energies. Political energies that would have otherwise been used to create rapid change. I think the entire point is to create a relatively stable climate for business investment.
So that's the exact opposite philosophy as how you described the Chinese system. Central planning and proactive decisions made by a few vs. market driven and reactive desisions made by many.
I'm not even sure if it's possible to determine which system is better or what the exact best middle ground would be. It may have complexity beyond our scientific tools' ability to study.
An oligarchy is efficient but can be oppressive. Also, the ancient Greeks figured that an oligarchy naturally evolved into an even more efficient government, a dictatorship (see Xi's purges of rivals, and preparing the stage to retain power indefinitely). And a dictatorship eventually always ends up in the hands of an incapable, uncaring, or downright cruel person, leading to misery for everyone.
My understanding is that was why we put so many checks and balances in the US government, we'd rather do things our own complicated way than submit to a tyrant.
The only problem would be if the US system becomes so weak that it was vulnerable to being conquered by a tyrannical system that was at the height of its power.
The flip side of this is, once a few bad decisions seep into the legal system, its incredibly hard to take them out. Which sets the country many years back while others develop rapidly.
When thinking about things like unsustainable growth rate and ghost cities in China I think that is the negative side of the top down model of central control. The ability to change policy quickly might be a benefit but I don't think we will know the true result in terms of benefit to civilization or country until we can look back and compare systems in the future.
Not when capital is not spread out evenly enough. And even then, larger capital will eventually eat smaller ones and then influence gov't and risk invoking a demagog like Trump (oh we already did huh). These mega corp that are controlled by groups of people called executives will do everything to influence the opinion and desire of the people into their favor. The people barely able to feed themselves will have no time to think about climate change. This is _practically_ the same as a controlling party.
The idea of owning a piece of the earth to yourself (and inherited by your descendant) is ridiculous anyway. Resources of our planet is limited. Usable land is limited. Our population grow by the day exponentially. What happens to those who don't have access to these resources and barely have a livable life? Do you expect them to care about climate change? Now you might call me some labels since this idea is not compatible with capitalism and free market, but I would appreciate a thoughtful reply to my questions in this paragraph.
This is not borne out by the examples we've seen thus far of deregulated markets. It's important to distinguish between a free market and a deregulated market, as pundits often conflate the two so regularly.
The benefits you state, a system aligned with "the psyche and desire of the people" does not, in fact, naturally emerge from deregulated markets. Every entity participating in a market would benefit by being the only participant in that market, so they do things like externalize costs, acquire competitors and leverage network effects to grow their share of that market.
Once that state is achieved, the people hoping to have their various desires met by various participants in the market will have but a single option.
A deregulated market devolves into central control.
Something like this has been seen in the one child policy which went too far and the government is now scrambling. Also, the clumsy attempts to prop up the stock exchanges a couple of years ago have ultimately come undone. So we will see whether we have true resilience in the system, or is it actually brittle.
That is where surveillance and big data comes in.
And I am not too sure if they are scrambling at their one child policy, there are simply far too many people in china.
This has led to a ridiculous situation highlighted in the New York Times, where a woman forcibly fitted with IUDs in 2012, is now being offered free removal of the same IUD.
This is what happens when policy is made centrally, detached from ground realities. I don't know whether there are enough people or not in China - the point was more about the issues with central planning.
Similar U-turns can be seen in the stock market. The government was exhorting people to invest in the stock market as a patriotic duty, creating a huge bubble. When it burst, they tried to manage the stock market by punishing investors who were selling shares! No wonder the stock market has tanked - would you put your money in a stock market where you could be punished for selling?
I agree the Chinese government with its Orwellian-like control of the population can get away with a lot. But they get a lot wrong as well.
Democracies do have less scope for action due to checks and balances, but on the other hand if they pursue a mistaken policy, every 5 years the voters get the chance to force a change. The fact this is so means the current rulers have a strong incentive to course correct themselves as well either executively, or through an internal coup in the party in the case of parliamentary democracies. They are enormously more flexible.
The Chinese governments back handed handling of their stock market is a good example. They exercised powers far beyond those available to democratic leaders, but they were wrong headed and they persisted with them long after it was obvious they were harmful. And the same people that made these grave errors are still in charge and faced no consequences. This is a better system?
As another poster pointed out, how comfortable would you be investing if the government might decide to threaten to punish you if you try to sell?
Anyhow large Chinese techs are all listed in New York or Hongkong. Most other large Chinese companies are dual listed on the mainland and Hongkong.
Eventually the Chinese government is going to face a real, full bore economic crisis. Hopefully that’s a long way off and they will learn many lessons before then.
It's not the absolute number that's the issue it's the age distribution: https://en.wikipedia.org/wiki/Demographics_of_China#/media/F...
If you believe complex economic systems follow simple, well-known control laws, then yes. But I haven't seen much evidence for this.
For lighter control look at the post war economies in Europe, Japan and Korea. Tight control of the economy worked just fine to stabilize the system.
Five year plans appear historically sketchy.
When the political power is not widely distributed, you can take care of the elites without hurting the economy.
If the top 100,000 power players and their families are shielded from the fallout, how much will that cost? Few $100 billions or so?
Meaning, that usually internal struggles will prevent the participants to be so generous, cool headed and foreward thinking.
Sure, the Politburo / Central Committee is small, but they still represent hundreds of millions of people, many different regions, cities, to a degree even many ethnic groups.
Usually shielding the elites does not show up as a goal, and differing circumstances of those can easily lead to serious opposition against the generally useful solutions.
We shall see how the current regime handles whatever history throws at them.
The only elite safe is xinjingping. Because he is the dictator
That's true at the micro scale, not the macro. Tienanmen may be fading from memory, but it happened before and it'll happen again. Those 30-person decisions have winners and losers, and the losers not being in the room doesn't mean they'll just shut up and go quietly. Nor does it mean that those 30 people are going to be insensitive to or unwilling to accommodate their needs in all cases. They know what the stakes are if they mess up, and it goes farther than poverty.
Basically: "political gridlock" looks bad, but it's a safety valve that democracies use to avoid unrest, which is a far worse problem in the long run than a debt crisis.
> Decisions are done in small groups of 30 people at most, with several hundred people having some influence.
To all the ideological responses to nokinside: don’t underestimate China. China isn’t perfect but is an incredible story.
That said, the challenges they face are enormous. I hope they can navigate through them.
Think Greece vs. Venezuela.
Also, How do you get the bureaucracy to actually do what you want?(A major recurring problem in Chinese History).
At the moment, China is only strengthening private property rights, looks like they learned that lesson.
The soviets and Mao's regimes had ample powers to do what they wanted, yet it resulted in mass murder and complete catastrophe at unprecedented scale because they made very, very poor decisions. Having leverage does not mean it fits prosperity nor crisis. Look at how soviets encouraged the killing of Kulaks which led to the great starvation (dozens of millions of deaths) in Ukraine in the following years.
https://hn.algolia.com/?amp;sort=byDate&dateRange=all&am...
Effectiveness is about achieving goals, it's quite possible to be very effective while working towards evil goals.
Yes, but it was effectively half measure anyway - they bought some time at expense of poverty and got nothing in the long run - the union is gone, poverty killed what nationalism was not able to and with fall of the union nationalism came back with 6 more millions of reasons to prove it.
Chinese have not been strongly ideological after Deng Xiaoping.
Communist party is more like ruling aristocracy with privileges. Communist party is using communism the same way as aristocracy used religion to justify their divine mandate.
What is true though is that institutionally China is much smarter about economics and less ideological than in Mao's era, but that is predicated on retaining institutional norms and memory past Xi and his ostensibly tactical rollback. It could totally work out in a worse way.
Wherever recent history has gone awry is when a few powerful people think they know what's best for everyone else.
Just like I said in other comment, Look at the post war economies in Europe, Japan, Korea etc. Wage controls, price controls, rationing etc. still a market economy and not a command economy.
Note, this is still not a suggestion to do it, for humanist reasons, which I think is mostly what the Western (cultural) objection has always been. But from a practical perspective, centralization (even totalitarianism) has been accepted as the norm in various smaller and non-governmental contexts that have also involved highly complex decision-making, e.g. the corporate employer. People seem to accept this level of de-individualization, and a strong evidentiary case has yet to be put forth that full decentralization of that relationship works out better over all.
Yeah, but a planned economy wasn't the reason. The reasons were:
(a) they wanted to establish their elite rule (and that required a big show of force and getting rid of potential enemies)
(b) ideology was at play (ethnic tensions, coming up with a BS "elite class" to get rid of in the form of kulacs, etc)
(c) they started from very poor rural economies very fragile to weather, famines, and such
(d) they improvised their decisions with much incomplete data from ad-hoc established regional bureaucracies.
Those are not problems with a "planned economy", but more of those particular historical circumstances.
Neither (a), (b), or (c), or (d) are the case anymore (I mean, they still need to enforce their party rule, but not establish it from nothing).
In fact China's growth in GDP the last 50+ years has been phenomenal, so it's not like "they made very, very poor decisions" for their economy over this span.
Besides, today China's economy is not at all planned the same hard way Stalin's Russia or Mao's economy was.
I strongly disagree; the above is an old shibboleth of dictators and other anti-democrats. Mussolini promised to make the train runs on time.
Authoritarian governments are actually starkly limited by the individuals with power - by their ability, their vision, their own greed and interests, and their political limitations (authoritarian power structures are not democracies; the limits are not voters and law but other power bases). When those leaders are incapable, the country fails - rule of man, not rule of law and by the people. In a democracy, the pluralism in people and inputs creates great flexibility: This especially applies to vision, a reason market economies, which factor in the vision of all, work so much better than command economies, limited to the cognitive processing of a few; it's the reason why micromanaging CEOs fail while delegating and empowering ones are so much more successful. Democracies are much more innovative politically and economically.
More generally, when one person can't do it, in a democracy others can; either others in the broad power structure do it, or the people in power are replaced. IMHO, that exact problem explains the lack of dynamism in authoritarian government, and the reason by imperial China fell so far behind the 'West' - when the emperor failed to adapt, the country was stuck with him (and his progeny) for another century. In a democracy, he'd be gone within months or at worst a few years.
Finally, corruption is an enormous problem and impediment in non-democracies, a fact long-established in Chinese histories. (IIRC, in Chinese histories the standard model of the long-term political cycle is the ascendancy of a new power, then its decline due to corruption, then chaos, then it repeats.) Policy is not driven by serving the voters, a necessity in democracies, but by those in power serving themselves.
Finally, reality does not bear out the strong-man theory: Without question the best performing economies historically are liberal democracies. China remains - and many believe will remain without liberal democracy - a poor country compared with the liberal democracies. Everything the Chinese dictatorship does well economically, from monetary policy to market capitalism to universal education, are innovations of liberal democracies. The most economically successful parts of China, Taiwan and Hong Kong, are liberal democracies (speaking very broadly about Hong Kong - the complexities there are out of scope in this comment).
(This is not a knock on the people of China. I dream of the day they will be set free to run their own lives - it's hard to imagine the innovation of a billion people set free with those incredible cultural resources at their disposal.)
On top of that they haven’t touched retirement age, so they have a lot of leverage there.
See http://carnegieendowment.org/chinafinancialmarkets/75355
But I’m not an economist.
You also inflate asset bubbles, some Chinese property is as expensive as Silicon Valley or NYC, per square foot.
Wrong. Fake GDP. It's estimated that 1/3 of their GDP is wasteful government spending. Many of their provinces also have confessed to 20-30% fake GDP, thus another 1/3 of their gdp is fake. https://www.bloomberg.com/news/articles/2018-01-19/this-is-h... https://www.investors.com/politics/editorials/new-study-shin... so we're looking at maybe 1-2% gdp growth, and maybe their GDP is only about 70% of what they claim (9T vs 13T)
> Their wages are steadily increasing.
Wrong. Chinese graduates salaries have fallen for second year in a row. https://www.ft.com/content/fb5865e4-4993-11e7-919a-1e14ce4af....
> Their internal market is the healthiest of any g20 economy
Wrong. Consumer spending growth declined. https://www.google.com/search?q=chinese+spending+down&rlz=1C... . Beijing rent increased 25% !!! in july year over year. That's not a healthy sign of any economy. https://www.ft.com/content/6324fc2a-a445-11e8-8ecf-a7ae1beff... . and now we know Chinese consumers are taking on too much personal debt https://www.bloomberg.com/view/articles/2018-02-15/chinese-c...
And did you forget China is about to be hit with tariffs from US on 200B worth, soon to be 500B? when their economy is export oriented?
> Investments both internally and internationally are up
Wrong. Yuan has lost 12% this year. Chinese stock market has crashed 30% this year. That's not a sign of increasing FDI. that's FDI leaving and screaming
> On top of that they haven’t touched retirement age
Wrong. Chinese demographics looks horrible, and will reach peak in 2025. Their population will shrink 1/3 in the next 60 years.
(Though I acknowledge that it's a newish account... So I put much more credibility on the linked content. Anyway, you deal with this BS way more than anyone else, so major hat tip to you regardless - keep up the good work!)
The core issue is the word primarily. It's one thing to occasionally comment on the politicized topics that naturally come up on HN. That's what most users do and it's fine. But there's a different class of account that exists primarily to do this, pushing a political or ideological or national agenda. That is what we don't allow, as the site guidelines are careful to say. We have to draw a line somewhere, in order to prevent flamewars from taking over HN entirely, and experience has shown this 'primarily' test to be the best place to draw it.
The reason we draw the line this way is that there is a bimodal distribution of accounts and the two categories behave differently. People in the first group are motivated by intellectual curiosity, so post on a wide range of things and tend to post curious, factual, open-minded comments. People in the second group are fighting a war. That destroys the curiosity HN exists for. Indeed, that's the first thing it destroys, because the point of political battle is not to curiously meander, but to blast enemies. This site is for curious meandering.
This second type of account often comes armed with pre-existing talking points and links, which can look like contributing to good conversation, and sometimes add good information. But their fixation on an agenda and the intensity with which they seek to destroy other views instead of—let's say—dance with them, make their cumulative effect on HN not just negative but toxic.
Figuring out how to moderate this kind of thing without excluding politics altogether (which is undesirable and impossible anyway) is a challenge, and the observable difference between these two kinds of account turns out to be a useful heuristic. So when we notice an account that shows the telltale signs of being agenda-driven and guideline-breaking, we ask them not to do it. We try to explain why, and we ban them if they don't change.
There's an aspect of this that isn't publicly visible. It's not uncommon for people we've banned for abusing HN in this manner to create new accounts to continue doing it. So sometimes, when we bring this issue up with a new user, we're looking at more of a track record than might appear.
None of the above implies that an account is wrong in its views or that the topic at issue is unimportant. On the contrary, it's almost always very important and legitimately intense. That's actually why we have to moderate these forces on the site-in the literal sense of 'moderate'. Otherwise they would dominate everything, which would turn HN into a very different kind of forum. It would also quickly kill it as a place for thoughtful conversation.
More on this at https://hn.algolia.com/?sort=byDate&dateRange=all&type=comme....
So, healthcare + education + military accounts for around 27% of GDP and about 5.2% weighted average growth for that 27%. US GDP is up 4.2% annualized for Q2 this year, so that growth in our 3 categories is only accounting for maybe a third of total GDP growth.
[1] https://www.advisory.com/daily-briefing/2017/02/16/spending-...
[2] https://en.wikipedia.org/wiki/List_of_countries_by_spending_...
[3] https://www.washingtonpost.com/news/wonk/wp/2018/06/19/u-s-m...
https://www.businessinsider.com/these-chinese-cities-are-gho...
You're telling us that they have found The Holy Grail. Let me stay confident that it isn't the case.
...
US in my eyes, evidently scores much, much, much less than China when it comes to public education. Both secondary and undergraduate tertiary level.
Only graduate school does well in US, just because high profile academicians tend to like working in high profile universities
Undifferentiated low end products are more price elastic than brand goods. China will do fine even if USA will declare a 100% embargo.
Edit: specified that I talk about price elasticity
This is what happened in 2008. To Chinese electronics industry the crisis was a blessing in disguise. It saw an unprecedented expansion after it reoriented from OEM for "rich American co." to selling own products to places like South Asia, CIS, and African nations.
A bit of explanation:
Pre-2008 industry was very oriented on developed countries with contract manufacturing of high premium goods secured by branding, marketing, IP lockdown and such - in other word, niches with very inefficient market and companies hellbent on profit maximisation. Thus, they had a huuge leeway for trading unit value for volume which they used to devastating effect.
That was right the time when people in places like Africa realised that $20 Nokla is no worse than low end $100 Nokia, the rest is history.
In a totalitarian dictatorship, "political opposition from so-called vested interests" is not that strong a barrier when political and economic stability is at stake.
I think while some unsustainable debt will continue to be allowed to default, a lot of debt will eventually be painfully bailed out by taxpayers (both households and corporations) over time.
This mean lower health, education, and social welfare spending affecting people who didn't cause the debt problem in the first place. That's just the unfortunate price of accumulating large amounts of non-productive debt.
From my personal observations, the leeching of public debt through borderline fraudulent projects barely ceased under Xi. This is an elephant in the room. Only the moment they will lift a knife on it, will we be assured that they began an actual move on that front.
Do you know why Xi raised his hand on his closest supporters in the reactionary camp he leads - Bo and Co?
He did so because he was too afraid that Bo as a much more charismatic person will take over the lead of reactionaries from him.
Now, he needs to pay his supporters in the party lavishly in form of state sanctioned corruption - all kinds of unsupervised small local projects where money vanish using long lending chains, or simply stratospheric remunerations for offsprings of party officials employed somewhere in the chain.
* Zhu Rongji is the more reformist leader in the late 1990s, and seen as one of the few leaders (maybe along with Zhao Ziyang in the 80s and Wen Jiabao in the 2000s) who may have been favorable for a move towards democracy in China.
* Bo and Co = Bo Xilai and ... Zhou Yongkang? They were arrested in 2012-2013 for plotting a coup against Xi and human rights abuses such as organ harvesting of prisoners of conscience, after a high-ranking security official (Wang Lijun) defected and sought refuge in the US consulate, providing inside dirt on these two party chiefs.
* Xi = Xi Jinping, current Chinese leader.
Note that what he did was the most brutal form of autocratic policy making, by forcing unemployment of millions of workers who are not trained to live in a different system; was possible because of autocratic government; and his policy pretty much made the rich out of the ranks of former government officials just like what happened to the Russian oligarchs.
I am guessing the rich do know how to court the expectations from inside and outside. And I often hear praises from Chinese people to zhu, while at the same time none of them suffer during zhu's policies...
When he says "China's debt problems", what exactly is he referring to?
When he says "there are also only four ways that Beijing can respond", what are they responding to and what is the goal of their response?
Briefly, though: China has had artificially cheap credit in its corporate sector due to explicit government policies restricting the growth of household spending. This cheap credit caused a lot of malinvestment ("bridges to nowhere"), and there hasn't been an accounting reckoning yet.
To continue to grow, China needs its household sector to grow, both in consumption and share of the economy. This is a classic shift from middle-income to developed economy. Because right now continued growth from the corporate (generally export-driven) sector has topped out, and getting more growth out of it is costly in terms of debt.
I think those are the broad strokes. To summarize: the Beijing is responding to the explosive growth of internal debt in the economy, and the goal is to continue growing. That growth must come from the household sector, but must also include dealing with the massive debt overhang. (I suppose you could also say that Beijing's goal is to stay in power, which requires economic growth to keep the populace happy.)
China’s response to the financial crisis was to loosen credit and “encourage” banks to lend. The result was that debt started rising faster than GPD and total debt now stands at 300% of GDP.
Since GDP is the income needed to pay off debt there is a point where it is no longer sustainable. If there were no limit it would be possible to eliminate poverty by simply giving poor people loans.
> When he says "there are also only four ways that Beijing can respond", what are they responding to and what is the goal of their response?
With a looming trade war it is unlikely that China will be able to sustain the trade deficits with the US like it has in the past. It is also unlikely that China can find any other viable markets that could absorb exports that are currently destined for the US. China will want to mitigate the domestic impact of the outcome in a way that preserves domestic stability.
As for the what are they responding to is the engine for economic growth is stalling out from knock on effects behind whats going on above, and I can only speculate that the "goal" of any kind of response will be to maintain some kind of economic "stability".
[0] https://www.bloomberg.com/news/articles/2018-07-02/china-hea...
The second option is wealth transfer through debt default; or government forced wealth transfer (taxes or inflation). China’s debt could be brought down from 300% of GDP to 100% of GDP overnight if creditors simply forgave 2/3rds of debt. That could happen though debt default (debtor bankruptcy) or taxing creditors and giving it to debtors. Having the bulk of your life savings disappear tends to make people angry and so China will attempt to avoid that.
The last option is to kick the can down the road and increase domestic debt which is what they have been doing for the last 10 years.
Well I put "stability" in quotes because in reality, every economic actor will have their own perspective of what the goal is and how effective any solution will be in achieving such goal. Some people thought zero lower bound and real negative interest rates solved things, and others thought it was just kicking the can down the road…
My issue with the first four bullet points is that the government now can point to instances where they say that they have been doing all of those things (because all these bullet points address things at such a high level), and all this is telling them to do is just do more of the same and expect different results.
Economists are impotent at predicting the future effects of monetary policy so it’d be great if they stopped pretending.
China is about to hit its Brezhnev era. That's my fear.
But for as long as Yi Da Yi Lu and state contracts rain gold, I see no personal reasons to worry
I have passed some articles to economics professors I know, but haven't heard whether Pettis' ideas make sense from a theoretical perspective. I know they make sense to me, a layman.
All economic decisions have political implications because all economic decisions are inherently political. Recall that until recently, we called it political economy until the Neoclassical school decided they wanted to pretend to be—and be viewed as—a science.
Or...a fifth path would be to entice people to convert "unproductive" savings into investment. If only there were some mechanism where people could tell if this was a viable route like, say, a market based interest rate.
Quite surprisingly, it turns out that "saving" and "investing" are nearly synonymous.
Isn't this exactly what the Communist Party or socialism (fake capitalism) with Chinese characteristics is supposed to have retained the option to do?
To be more specific, a charitable interpretation of affairs is that Xi or whoever is engineering Xi's policies has made sharp left turn, and is taking authoritarian measures to carry out exactly this.