Zombies once destroyed Japan's economy, now they're infecting China's
qz.com
qz.com
China is still going through urbanization in unprecedented scale. About half of the Chinese live in cities now. By 2030, cities will be home to 70 per cent of China’s population and generate 75 per cent of its GDP. There will be 200 million Chinese moving into cities in next few decades. China can be close to where Japan is now in the 2040 banking crisis. For now, even massive crisis just delays the inevitable increase in demand that eats away all mistakes in fiscal and monetary policy.
http://insights.som.yale.edu/insights/what-should-we-underst...
http://www.cn.undp.org/content/china/en/home/presscenter/pre...
http://www.cn.undp.org/content/china/en/home/presscenter/pre...
1. Every newly urbanized Chinese person moving from the country side will generate the economic potential of a Chicago or London person. So another 200 million investment bankers I suppose.
2. The property values of these ghost cities will dramatically deflate to measure up to the economic value added by the newly urbanized. Which means the value of these massive properties needs to written down by the banks.
Most people making the urbanization argument assume that option 1 will invariably occur. When in fact it is overwhelming likely that option 2 will occur looking at the massive number of people being urbanized and the massive deflationary pressure on every occupation. Urbanization per se will not cure the ghost cities problem. You have to look at the prices too.
In fact, if Option 2 is correct I’m pretty sure the Chinese leadership has no other option but to deflate the economic gap with a zombie like situation for decades. If you think they will let a Lehmann-like moment to happen and quickly reset prices back to the ‘right’ level you are mistaken. It would put the financial system at risk; the entire legitimacy of the CCP in danger and that would mean blood on the streets. They will keep shutting down the smaller non-state banks and keep rolling the loans of the bigger state banks and gradually write off the debt over several years. There is definitely no shock therapy of short-term pain that makes sense.
But in the end prices are simply an abstraction over the physical economy. China has an awful lot of families crammed into a single room, so there's clearly a reasonable case for building lots more housing. Like all abstractions they can screw things up and deflation can certainly cause problems, but not when it's much smaller than growth and Chinese inflation is right now comfortably over 4%.
1. Just doing a back of the envelope calculation will show your $15K per sq-m means that a tiny house the size of a small apartment (~ 100 sq-m/ 1000 sq-ft) is going to cost $1.5 Million. The average house in the US is over 200 sq-m (~2000 sq-feet) [1]. You are trying to tell us that an average house in the US costs over 3 million USD? Sorry, that makes zero sense. That $15K number is what the top 0.1% pays in Manhattan overlooking central park.
2. Since you gave a China average, for a realistic comparison lets look the medians in various cities [2]. Chicago median houses are at $1700 per sq-m. Chicago is probably in the top 25% of cities in the US from price of real estate and it is as expensive as average of China across all the cities. BTW, if you did the ranking of various cities in China like the guys in [2] have done you will end up with a list similar if not more expensive (Shanghai, Beijing, HK at top with prices much higher than the $1700 per sq-m you have listed). If we did the same averaging across the US pretty sure the average house price will drop much below $1700 per sq-m.
3. The US GDP per capita is nine times China on a nominal basis and at least 6 times on Purchasing price parity basis. So if the house prices in China are similar or more than the ones in the US how will the Chinese be able to pay for these houses. People in the US are barely able to make their payments. Even accounting for the fact that houses in China are smaller, they are definitely not 6-9 times smaller.
4. Where do you think the wealthy and elite Chinese are buying properties? Hint: not china.
As to your second point, I believe I answered that question. It is not a matter of what someone needs, it is a question of being able to afford a house at a given price.
[1] http://www.census.gov/const/C25Ann/sftotalmedavgsqft.pdf
[2] http://www.businessinsider.com/us-city-real-estate-price-cha...
Only when this stop to happen, we will be able to see the real size of the china economy.. not to mention the "last drop", when they will push efficiency into the engines, to get a little more expansion.. US and Japan already did both.. and til someone discover a new economical path.. nowhere to go for them..
So only china and the emergents will be able to grow right now, under the old economical gears..
(not to mention that nobody is making more babies anyway to fill the void)
So even if China found itself in the exact same situation as Japan was that day, we'd only see the equivalent of a lost decade if the Chinese monetary policy was as backwards as that of the Japanese back then, and after that, and the latest world financial crisis, I'd be shocked if China repeated the behavior of yesteryear. This is especially true due to China's love of playing with the country's exchange rate. The Chinese central bank would not bat an eye if it had to devaluate the Renminbi forty percent.
So while the article describes the current situation very well, the predictions aren't really necessary given the premises.
The cheap money effectively subverts large parts of the economy because they become dependent on it, but it only works while there are asset classes that can continue to rise and can be easily traded into and out of e.g. real estate.
Mr Bernanke as you quoted wrote a paper about this and yet in the end the Central Bank alone in the US could not contain the fallout when the bubble could blow no bigger. The US government had to absorb the losses by writing cheques to bailout the institutions that were failing until they reached a point where it was no longer politically feasible.
I don't see an easy solution to this, the issue is not just bad debt, it's that there won't be an asset class to bid up anymore, there won't be a practical way to get that easy credit into the system anymore.
A few commenters argue that China is different - it has different features, but the above tendency will prevail here. Chinese politicians, businessmen and economists are hugely invested in a system that is top heavy, vastly corrupt and built around pillars of cheap labour, property/development and credit-based investment. Politically speaking, they are also committed to a system based around media control, repression, lack of debate and 'stability' (ie. no change of the political status quo).
My personal fear - my house, family and business are all in China - is that in the face of an economic crisis, we will also see a backwards slide into repression as the party attempts to put an iron grip on the economy AND public opinion.
My great hope is that China will see a few years of correction - letting the people's income catch up with the bubbles, supported by a government that is aware of the problems and motivated to act. Let's see...
http://www.nytimes.com/2014/03/21/business/international/blo...
Japan in the 1980s already had significant advantages that China still lacks in the 2010s. First of all, it had a political system with actual elections that weren't wholly rigged. (The political system in Japan has opened up more since then, but even thirty years ago it was well ahead of where China's political system is now.) Second, Japan had a free press and unfettered access to foreign reporters and foreign news media for decades by the 1980s. China still doesn't have either of those information channels for correcting problems in sufficient degree. Third, although primary education in China is quite good in urban areas, good primary education in China is still not as pervasive nationwide as it was in Japan by the 1980s. That's illustrated in part by how few people in China (compared to Japan) are even conversant in the national language. Barely more than half the population is conversant in standard Mandarin Chinese.[2]
China is at risk. The "socialism with Chinese characteristics" (中国特色社会主义) economic policy it officially now has cannot be sustained. It looks like it has been growing rapidly in recent years for some of the same reasons that Spain looked like it was growing rapidly a decade ago--a housing bubble. The inevitable correction that has to happen in the investment markets in China may not bring about a recession, but it can't help but bring about a change of investment priorities that may make China look less amazing for a while. China will really rise to world prominence when its common people enjoy free and fair elections, a free press, and good educational opportunity all over the country, something I hope they experience sooner rather than later. Meanwhile, I'm actually more optimistic about India during my lifetime.
[1] http://www.amazon.com/Japan-Number-One-Lessons-America/dp/15...
[2] http://www.bbc.com/news/world-asia-china-23975037
http://news.xinhuanet.com/english/2007-03/07/content_5812838...
Why?
in short, whilst not tooting the horn of libertarianism, the only ways we have found to turn 18th century standards if living into 20th century standards is the path we are all familiar with.
The role of government should be to provide for the less fortunate (but only where they are in that situation for reasons out of their control) and to create a level playing field for all entrants (whether that be workers entering the labor market or companies entering industrial markets), no more. Of course, the devil is in the details, since what sort of intervention is required to create a level playing field varies wildly by industry/market, and it gets constantly reshaped as technology advances. And of course, no one has so far found a good solution to regulatory capture.
In the 30s (yes, during the Great Depression), 40s, and 50s, the Soviets achieved rapid economic growth, largely because they were starting from such an economically backward situation (ring any bells when it comes to China?). But when growth on the basis of "catching up" started to plateau, they could make no further progress.
That's a bold statement, the Soviet Union was far too big and non-homogenous a construct to easily hand wave such generalizations. The post Soviet states are (and were) rich in natural resources and before the exodus of the last 25 or so years, had a very strong engineering and scientific base. You'll have to be a lot more specific about when "cathing up" is supposed to plateu because much, if not most of, the soviet republics had (and still have) a long way to go to catch up with the western world.
I also don't see how it applies to China. Just like it was with the Soviet Union, China's success or failure will depend on their leadership but they are in a very different situation. The Soviet Union's entire political and social structure was in upheaval in the 1980s and all sectors of government suffered as a result, especially the ones in engineering, with wildly mismanaged civil and technological projects. China, although I'll admit I have little confidence in the accuracy of media analysis of the political situation there, doesn't seem to have anywhere near the systemic instability that the USSR did since it's population, although bigger, seems far more homogenous and united under the state. Even though they aren't as resource rich relative to the size of their population, they happen to be a major economic economic partner (supplier) not only of many of its allies, but also its rivals (the US & Europe).
The plateauing process is gradual, so stagnation started long before they finished catching up (not to mention the chaos of the post-Soviet era resulted in a few steps backwards). When you've got an oppressive government that justifies its legitimacy on the basis of growth, people are going to get antsy from the slowdown long before you actually reach 1st world levels.
> I also don't see how it applies to China.
It applies to China because the authoritarian Chinese government results in the politically powerful directly benefiting from the economic growth. Like I said, innovation requires creative destruction, and this won't happen when the political (and therefore economic) system is controlled by those who benefit from maintaining the status quo.
This is not all that different from how the Japanese government and banks (many of which were nationalized) propped up the "zombie" companies for years, rather than investing that capital in newer firms.
> China, although I'll admit I have little confidence in the accuracy of media analysis of the political situation there, doesn't seem to have anywhere near the systemic instability that the USSR
Because China hasn't yet reached the state that the USSR was in in the 80s. It's still growing, even if not at the same clip that it was a decade ago.
[1] - http://en.wikipedia.org/wiki/File:Graph_of_Soviet_National_I...
The "deserving poor", really? Are we back in the 19th century now?
Democracy and freedom is certainly worth striving for, I just don't know if there is an absolute connection between them and economic power.
Since we don't know of any system other than democracy that can produce inclusive institutions, democracy and freedom are a pre-requisite for economic power that will last and continue to grow.
That's my understanding of the argument, based on reading 'Why Nations Fail' by Acemoglu and Robinson. As far as I can tell this is the prevailing line of thought in the West, even if it's not always stated in the same terms.
China has been down this path before- once a technological leader of the world - it turned inwards and lost ground to the dynamic, open and inclusive societies forming in Europe during the medieval period.
But my point is that it's just not simply a clear cut issue of "democracy", "democracy" like everyone in the West like to chant whenever they talk about China (and to certain extend, East Asia as a whole). Look at Japan, one party (Liberal Democratic Party) has been in control of the goverment since 1955 - and not because of corrupted election or anything like that. The social and cultural situation in East Asia is much difference than the West.
"Third, although primary education in China is quite good in urban areas, good primary education in China is still not as pervasive nationwide as it was in Japan by the 1980s. That's illustrated in part by how few people in China (compared to Japan) are even conversant in the national language. Barely more than half the population is conversant in standard Mandarin Chinese"
To me means they have huge room for easy improvement and as such can continue growth for years.
I think you've successfully argued the opposite.
If you somehow knew that a hypothetical China in 2040 with all these things would still be pursuing domestic and foreign policy divergent from American interests, would you still be saying this? If so, I applaud your intellectual honesty.
2012 - $46000 per capita
http://www.google.com/publicdata/explore?ds=d5bncppjof8f9_&m...
Compare it with a high growth rate between 1985 and 1995
For example: http://en.wikipedia.org/wiki/List_of_countries_by_past_and_f...
Japan:
1995 - $22,955
2012 - $35,724
Average growth: 2.6% per year
United States:
1995 - $28,763
2012 - $51,709
Average growth: 3.5% per year
However, the above figures may not be a good indication of the increase in the standard of living for each county because:
(1) Japan has almost no immigration while US has had a huge influx of immigrants. My guess is that immigrants have lower incomes than the general population but much higher incomes than in their previous country. It is not fair to compare an immigrant's 2012 income with the average US income in 1995.
(2) USD GDP growth between 1995 and 2012 heavily favoured an elite, very small minority. The vast majority of the US population increased their average income by far less than 3.5% per year. I doubt Japan has skewed its income growth to the same degree.
Figures for the top 1% income share including capital gains:
Japan 1995: 8.67%
Japan 2010: 10.44%
United States 1995: 15.23%
United States 2010: 19.86%
And for the top 0.01% income share including capital gains:
Japan 1995: 0.82%
Japan 2010: 1.03%
United States: 1995 2.46%
United States: 2010 4.78%
So at the extreme end of the scale, income inequality is not just greater in the US but growing at a faster rate.
Basically, he argues (perhaps my interpretation) through statistics that income equality is very significantly related to what is typically considered a good country to live in, which in contrast to many, does not include salary/GDP and such monetary stats but rather how long you live, infant mortality rates, social mobility, etcetera, where the Nordic countries and Japan outperform all other countries (more or less) and where the USA have it really difficult to compete against other Western/developed nations.
Thus, one can quite easily argue that regardless of the adjusted GDP growth, Japan has managed to develop in a much more healthy way compared to the USA, which may be because of the quickly rising income equality.
http://www.forbes.com/sites/eamonnfingleton/2013/08/11/now-f...
"Whereas the U.S. labor force increased by 23 percent between 1991 and 2012, Japan’s labor force increased by a mere 0.6 percent. Thus, adjusted to a per-worker basis, Japan’s output rose respectably. Indeed Japan’s growth was considerably faster than that of Germany, which is the current poster child of economic success."
And here China will also find itself in the similar situation soon due to their one-child policy for the last 40 years. And it will be even worse than Japan's. Fortunately U.S. demographics is healthy - it's nice to have a conservative and religious society :)
By the way, this seems also to be the case in general with the top leaders in China. As been previously stated, China is probably way behind on the prerequisites to be able to run a working democracy (compare for example many of the countries where democracy have been quickly forced upon a country such as many of the countries where the US have been engaged in various conflicts such as Iraq and Afghanistan as well as countries in Central America). The positive sign from the leaders in China is their current and (as it looks anyway) real fight against corruption, which is a huge problem in any democracy (it seems anyhow). Of course, education is another problem but it seems like maybe there's not so much that can be done right now that let it take the time it takes to develop (since old people in general are not targeted for the educational system).
This, in combo with my comment where I mention Hans Rosling's interesting statistics, makes me quite positive about the future of China. Hopefully it lands rather than crashes and perhaps it is healthier to the country to avoid a crash and slowly manage the much needed creative destruction rather than face the consequences of a crash. A crash may for example cause a lot of social unrest, which probably will become a larger problem for China as their growth slows. Hopefully, they'll plateau into a healthy developed country, similar to what (in my opinion) it seems like Japan did. Although we don't here much about it, China is a much bigger countries with many more different groups of people than Japan (as far as my knowledge goes anyhow) and I think social unrest has much bigger potential as a serious issue to China's well-being (and thus probably the world's well-being since we do so much trading with China).
China has a long way to go and lots of problems such as corruption, educational level of the average man, transparency, human rights, and so forth. I hope for the best! :) My 5 cents anyway!
During this period, Japan borrowed heavily and spent the proceeds, boosting the GDP.
You need to look at different measures to see if per-capita productivity and output have grown to make a real decision.
And the article, from my Sino French perspective, smells very strongly as us centric, narrow minded, "only money counts" kind of thinking.
Taiwan - one party state + martial law from 1949 - 1987.
Singapore - one party has held power for over 40 years.
These three countries have transformed themselves into advanced high-income economies. My expectation is that China will follow the same path as its neighbours - authoritarian government + restrictions on personal freedom during the rapid industrialisation phase, then eventually a transition to a functioning democracy once urbanisation is mostly complete. If China can attain the same GDP per capita as the Asian Tigers, then it will easily be larger than the US economy.
In fact, don't trust macroeconomists in general: individual preferences cannot be aggregated, at least not with our present mathematical tools. As a result, micro-founded macro models (99% of them) are complete nonsense: that's why Caltech doesn't even bother teaching macro to its PhD students anymore. It also explains why DSGE models have no predictive power whatsoever. Rant over.
Compare for instance the situation where 50% of elderly Chinese starve after they stop working, and the situation where 50% go on extensive state welfare. In both situations the elderly aren't producing anything, but in the latter they're consuming national resources and in the former they aren't, so from an economic perspective the former would produce better results.
Of course this isn't a very humane way of looking at it, but the Chinese leadership don't have a history of particularly humane behaviour.
It's sometimes called the 4-2-1 problem: 4 grandparents produced 2 parents who produced 1 child. It's one of the reasons for their very high savings rates, even with negative real returns. And like Japan, the retirees are in for unpleasant times when they try to turn paper wealth into real consumption.
Except if the only part of this article worth analysing is its very end: "[...] or permitting foreign banks to compete [in the chinese market]", then it's case closed and it was just a piece of banking propaganda against China.
http://www.treasury.gov/ticdata/Publish/mfh.txt
I am having trouble finding historical data, but what I can find from the 90s indicates that Japan alternated for the top foreign US debt holder with the UK. I am not really sure what data to look for general Japanese foreign investment.
Don't you? There were jokes about how the Japanese owned so much of California they might as well buy the state from the US.
http://snbchf.com/global-macro/gdp-growth-per-capita/
As the proverb goes, we need to take the plank out of our own eye. Those commies in Sweden are kicking our libertarian asses.
If the typical American isn't prospering, what good is it?
Well, neither is the typical Swede. They have an astronomical housing bubble that's just waiting to burst, the average household has a debt around twice the income, while the gap between rich and poor has been widening for a long time now.
It's not all roses and relative to where they are, most seem to be preparing for worse days ahead, rather than better ones.
I'm not claiming the wealth gap in Sweden is healthy on an absolute scale, but relative to the US it's about half. Every economy has challenges, but the historical results I posted show that US chest-thumping is exceptionally silly.
I can read it in Firefox but with noticeable UI latency when scrolling, as if my computer was 3 or 4 years older than it is.
Seriously, these guys should fix their website...
Ask anyone in the US trying to live off interest income right now, like my 77 and 80 year old parents. Aren't that real interest rates in the US negative or thereabouts, and I read that was true following the bust in Japan.
(Except of course in the US as of now our money isn't trapped in the country, unlike Japan's back then for individuals and small business as mentioned in the article, or China, who's currency wasn't even internationally traded until a pilot scheme started in 2009, and is still, in the scheme of things, taking baby steps.)
I think you'd be very hard pressed to find a people more responsible than the Japanese.