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How severe a slump in China?

by Brad Setser
November 6, 2008

The US, UK, Eurozone and Japan all look to be in recessions. The US and Europe had been the main drivers of global demand growth – at least for finished goods. That is going to change.

Emerging economies that relied on a commodity windfall to support higher domestic spending and investment may also need to cut back. The windfall isn’t what it once was. That also will cut into demand.

Emerging economies that relied on borrowing from the rest of the world to support high levels of domestic spending and investment also will be cutting back. They have been hit by the credit crunch.

China benefits from lower commodity prices. It has no need to borrow from the rest of the world to support high levels of domestic investment.

The world economy could really use a Chinese locomotive. But it increasingly doesn’t look like it will get one. A recent Credit Suisse report noted that the latest purchasing managers survey suggests that China is about to enter a manufacturing recession. Export orders fell sharply – as one would expect. But import orders fell more. If that proves an accurate guide to China’s demand for the world’s goods and services, China won’t be doing much to support global growth.

There has long been a rather sterile – at least in my view – debate over how much exports contributed to China’s recent growth. It has long been clear that:

a) Most of China’s growth didn’t come from exports. It couldn’t. Net exports almost never generate 10% growth on their own.

b) The absolute size of the contribution of net exports to China’s growth was large. In 2005, 2006 and 2007 net exports added between 2 and 3 percentage points to China’s growth. When net exports added close to 3 percentage points to the United States growth in the second quarter, no one argued that the contribution to US growth from net exports was small.

Net exports contributed positive to China’s growth in the first half of the year. The World Bank expects that net exports will contribute around one and a half (1.5) percentage points to China’s growth. Real export growth topped real import growth – though both slowed. 1.5% percentage points from net exports isn’t bad. It is more than the US had gotten on average over the last seven quarters. Indeed, it is not all that different from the average contribution net exports have made to US growth in 2008.

The Chinese exporters who were doing well just weren’t as vocal as the textile and toy producers who weren’t. They also tend to be more capital-intensive and thus employ fewer people.

And despite all the (true) talk about the difficulties some Chinese exporters now face, net exports almost certainly contributed positive to China’s growth in the third quarter. Real export growth in the third quarter (on a y/y basis) still exceeded real import growth. That is why China’s nominal trade surplus was basically flat during the first three quarters of 2008 even though China was paying way more for its commodity imports.

The sharp contraction in US consumption, the rise in the yuan v the euro, Europe’s own slowdown and the latest data from China suggests that real Chinese exports could soon fall. If net exports are contributing to growth, it will be from a fall in imports, not a rise in exports. That is sure to slow China’s growth.

Absent the close to 3% contribution from net exports in the boom years, China’s growth would have been a (respectable) 9% rather than above 11%. With a negative 3% contribution to growth during the boom (as is often the case), growth would have been close to 6%. And if net exports turn negative now China’s growth clearly would slow sharply.

But the real key to forecasting China’s future growth consequently is determining whether domestic consumption and above all investment will continue to grow strongly in the absence of strong export demand. Remember, over the past few years both domestic investment and exports increased rapidly. If they fall together as well, Chinese growth will slow quite significantly.

And unfortunately the latest indicators seem to suggest that they are correlated; consequently domestic demand may fall along with exports.

That isn’t good for anyone.

The (likely) fall in construction is particularly worrisome. China’s new capital intensive export sectors haven’t been huge job generators. Building buildings by contrast employs lots of people – including a lot of migrants from rural areas.

Chinese policy makers recognize that China’s economy is slowing. They are trying to stimulate the economy in a host of ways. Loan limits have been lifted (and amusingly, their presence was only formally acknowledged when they were lifted). New infrastructure projects have been announced. Useful (though tardy) steps are being taken to improve China’s social safety net. It just isn’t clear if they will be powerful enough to offset a smaller contribution from net exports and a (likely) slowdown in investment.

I should note that China is also taking steps to promote exports, notably by increasing its export rebates. That is far less helpful to the global economy.

If the signs from China continue to point to a sharp slowdown, all the large parts of the global economy may enter into a slump at the same time. That isn’t good.

A final point: it is often argued that China needs rapid growth in order to generate jobs, and consequently 6-8% growth doesn’t cut it. That is only partially true. A lot depends on the composition of growth. Recent Chinese growth has been capital not job intensive, so very rapid growth hasn’t translated into rapid job growth. If China shifted the basis of its growth, it might be able to generate more jobs even if the overall pace of growth changes. The risk though is that China won’t change the basis of its growth – so slower growth will mean fewer jobs. But we shouldn’t lose sight of the fact that it is unusual for a country growing at 5-6% not to be able to generate strong job growth.

Update: Yves Smith interpreted my post as a critique of Nouriel’s argument. That isn’t really the case. I wanted to avoid Roubini’s framing, which seemed to lend itself to a semantic debate over whether 6% growth is a hard landing or not. It certainly is a sharp slowdown in China’s pace of growth. But it would still imply that China is the fastest growing (maybe the only growing?) major economy. My tone differed from Nouriel’s tone, but we are both now convinced that China’s economy is slowing quite rapidly.

I tried to be diplomatic, but my riff on net exports directed far more at the Economist than at Dr. Roubini. The Economist has long argued that a) the RMB wasn’t undervalued and b) net exports were not driving China’s growth. It certainly has been true that domestic demand mechanically accounted for more of China’s growth than net exports. But it also has been the case that the acceleration of China’s growth over the last five years has been driven by an increase in the contribution of domestic investment and net exports to China’s growth. China’s current account surplus rose from around 3% of China’s GDP to around 11% of China’s GDP in 2007.

As Nouriel notes, exports are now about 40% of China’s GDP. As importantly, the Chinese value-added in Chinese exports has increased; I have estimated that the value added in China’s export sector is now close to 20% of China’s GDP. Gross US exports are less than 15% of US GDP — and since some US exports (think Boeing planes) have substantial imported content, US value-added would certainly be less than that. As a result, China is quite exposed — for a large and diverse economy — to swings in the global economic cycle.

Moreover, China’s own property cycle seems to be swing from boom to bust at the wrong time. So it is possible that China’s real exports, investment in the export sector and investment in urban property (construction is a big source of jobs) could all slow in a synchronized way. That is what worries most China watchers right now — the possibility that exports and the main driver of China’s domestic demand growth will fall together, leading to a much larger and sharper swing in China’s growth than most anticipated a few months ago.

38 Comments

  • Posted by RBG

    Brad,

    Which could be capital intensive export sectors?

    Why is negative contribution of net export to GDP growth “often the case”? Because in boom economy, people spend more and thus import spike; even if the boom is led by strong export?

    Thanks.

  • Posted by Twofish

    China is largely a reprocessing plant, so as exports go down, imports of raw materials are also likely to go down, and that will blunt the impact on growth. The big worry, I’d imagine isn’t growth, but rather 1) employment and 2) local finances.

    For 1), the Chinese government was generating massive numbers of jobs. The thing is that it was generating massive numbers of jobs at the same time it was closing down the old state owned enterprises and shedding large numbers of jobs. Looking at net employment numbers gives you a very misleading impression of what is going on, since the companies that are creating and losing jobs are the same ones, and the people who are getting and losing jobs aren’t the same people.

    One thing that will help China this time is that there isn’t an overhang of people that need to be laid off from the state owned enterprises.

    For 2), local government have been heavily relying on land sales to cover expenses, and I think you are likely to see a lot of defaults on local government owned companies and a general recentralization of Chinese finances.

    For 1), China is planning a massive fiscal stimulus package in rural areas. Getting local government officials to spend money on infrastructure is rather easy to do.

    There’s likely to be an increase in health and education spending, however, it’s more difficult to use health and education to do fiscal stimulus. One problem is that basic health and education is cheap and really doesn’t have that much of a stimulus effect. The other problem is that what do you do once you’ve stimulated the economy. It’s not as if you can (or should) fire doctors and teachers once the economy gets going.

    One final point is that this is not the first time that China has had an economic down turn, and it’s in far better shape now than it was in the previous downturns. The basic reason is that productivity in China is still extremely low, so its still easy through capital spending to find ways of boosting productivity.

  • Posted by Twofish

    Victor Shih has written a wonderful book on the political economy of China when he points out that the business cycle in China corresponds to shaping power relationships between two groups of officials. One group consists of local officials that want more spending, and one group consists of central government finance officials that are more concerned about monetary stability. When the economy overheats, the monetary stability people come in and cool things down. When the economy goes into a slump, the local officials come in and start building things left and right. Also, you have to look at incentives, local officials love big infrastructure projects for the same reason Wall Street CEO’s love big complex financial instruments, you make lots of money personally off of them.

    We agree that this is going on. He seems to think that this is a bad thing, and if the monetary hawks could stay in permanent control that we could abolish the business cycle. I disagree since I am a fan of Hyman Minsky and I don’t think the business cycle can be abolished and that the shift between these two groups of officials is that Chinese government reacting to the business cycle rather than causing it.

    The other thing is that the notion that the financial system ought to be ideally independent of any government supervision is I think dead. It’s hard to fault Wen Jiabao calling up Chinese banks and says “LEND MONEY” when Paulson is basically trying to do the same thing, and the fact that Chinese banks are more willing to listen to Wen than American banks are to Paulson may not be such a bad thing.

  • Posted by 4degreesnorth

    Certainly, the recent behavior of commodity prices, where China has been the major source of demand expansion, lends credence to the suspicion that China could slow more brutally than generally thought.

    China may also be hit by the well known curse of the Olympics: their completion generally signals the start of a deep construction and public works led funk.

  • Posted by nevket240

    Brad:
    to fund a pro-employment boom in China in order to preserve social order will the Chinese dump US treasuries. They have to fund a massive scheme somehow.
    Could this be the proverbial Black Swan. Or am I dreaming.
    regards

  • Posted by EvilHenryPaulson

    You could also choose to view China’s growth in terms of absolute exports.

    My reasoning is that a lot of the Chinese economy is centered around importing from surrounding countries, and then doing the final assembly.

    While its logical to only look at net exports alone to measure that value-added, it also overlooks the diffusing & multiplying effects that production has.

    Have the net exports slow down, and all the ancillary investment will brake.

    Keep your head up to see what happens when the rampaging Chinese CRE boom crumbles (after first being bailed out by the _national_ government for being too big to fail) Around that time we will see the transmission of the recession spread throughout China like a forest fire jumping after jumping a fire break

  • Posted by Twofish

    One other thing about Chinese employment statistics is that is it true that manufacturing hasn’t increased, but if you look at the trends, services have increased and agriculture has shrunk. What’s happened in China is that there have been two transitions.

    agriculture -> manufacturing – peasants working in factories
    manufacturing -> services – laid off SOE people finding employment in services

    This leaves net manufacturing numbers constant. Also, I think it is a bad idea to try to boost the number of manufacturing jobs if the new jobs are not high paying. Unlike a lot of other countries, the fact that the land is owned by the state rather than by landlords means that agriculture is something of a make-work welfare program that prevents people from going totally jobless. If you have a rural residency permit, then you are legally entitled to land to farm, which is why lots of peasants keep their rural residency permits even after they move to the city. People are finding export factories shuddered, but unlike Latin America, they can go back home to farm in the worst case scenario.

    The reason that it’s a good idea to move to higher end manufacturing even if it doesn’t increase employment numbers is that boosts in manufacturing income create service jobs.

  • Posted by Twofish

    EvilHenryPaulson says: Keep your head up to see what happens when the rampaging Chinese CRE boom crumbles (after first being bailed out by the _national_ government for being too big to fail) Around that time we will see the transmission of the recession spread throughout China like a forest fire jumping after jumping a fire break.

    Probably the same as last time. China goes through these periodic construction/real estate boom-bust cycles, but because the money that funds these construction/real estate consists largely of retained earnings and not borrowed money, the transmission is slow enough so that I don’t think that you will get a financial crisis.

    The banks will lose money off bad loans, but they have huge cash cushions, and things will happen slowly enough so that it won’t get too bad before government infrastructure programs kick in. The last time this happened, there was a massive highway building effort. This time, I think you are going to see a massive infrastructure effort focused on rail and the power grid.

    The big people that will need bailing out aren’t the banks. They are the local governments mostly in coastal provinces, and this will give Beijing an excuse to recentralize power. The local governments will get money from the national government, but as with all money, there will be strings attached.

  • Posted by Twofish

    nevket240 responds: to fund a pro-employment boom in China in order to preserve social order will the Chinese dump US treasuries.

    They can’t. People want to be paid in RMB. Dumping treasuries to get dollars won’t help.

    nevket240 responds: They have to fund a massive scheme somehow.

    Standard tax and borrow. The central government has got record revenues from its value added tax, and it’s domestic debt is quite low.

    I should point out that the same is true for the United States. The US government is far from bankrupt, and the reason for the high US budget deficit has to do with a governmental ideology that calculated (wrongly) that by limiting tax revenues it could reduce the size of the government (the “starve the beast” theory). One good thing about the United States economy is that it is so large that it can handle a lot of incompetence and still keep working.

  • Posted by otto

    Excellent job, Brad. An important post.

  • Posted by credulous_prole

    Twofish:

    As someone who follows metals markets closely, I have noticed that despite recent lows in base metals, MinMetals has recently announced an expansion in their exploration program for copper.

    I know that huge firms like MinMetals do not act with a mandate from central committee. As a matter of fact, when a chinese firm acquires a foreign firm, the bidders from china decide IN CHINA who gets to bid for the foreign firm.

  • Posted by Twofish

    credulous_prole responds: I know that huge firms like MinMetals do not act with a mandate from central committee.

    The Central Committee has about 300 people on it, so it’s much too large to give specific instructions. What the Central Committee does is it meets about once every year to discuss and ratify general policy decisions. The Central Committee consists of “everyone who matters” and so what they come up with is usually rather vague.

    The people that determine economic policy in China include the Politburo, the State Council, various Communist Party leading groups, the NDRC, SASAC, SAIC, MOFCOMM, MOF, local governments, the CCP Organization department, PBC, just to name a few…

    All of these groups have different people, functions, and interests, and from time to time, there are some conflicts, often major one’s between these different groups.

    When people talk about the Communist Party, then have this notion that the Politburo decide everything, which is just not the way that it works.

  • Posted by LC

    Two comments, 1 regarding the topic and 1 off topic.

    1. Assuming the Chinese growth model doesn’t change and growth slows down to 5-6%, what is the estimate for number of jobs lost?

    2. Now that Obama administration is busily staffing people, are you being called to serve in the treasury? If so, I’d miss the excellent blog you have.

  • Posted by fly

    A friend of mine used to work for the Chinese Statistics Bureau. The way they compile and release numbers can be political. If numbers look bad they frequently manipulate them, adding and subtracting items arbitrarily. They don’t reveal how their numbers are gathered and calculated.

    In the recent past real economy was doing well, thus their numbers are credible. If the current slump gets worse, I wouldn’t be surprised if their numbers start to exaggerate growth and under-report problems as they try to lure more foreign investments and stem outflow of dollars. Measures were announced yesterday to curb outflow of capital, which means they know that a large amount of capital, both domestic and foreign, is poised for a massive exodus.

  • Posted by Twofish

    fly writes: A friend of mine used to work for the Chinese Statistics Bureau. The way they compile and release numbers can be political. If numbers look bad they frequently manipulate them, adding and subtracting items arbitrarily. They don’t reveal how their numbers are gathered and calculated.

    The trouble with doing changing numbers is that it causes a lot of numbers to get out of sync sometimes causing things to appear worse than they are. For example, if GDP is overestimated in the early 1990′s then this means that any GDP growth is going to be underestimated in the good years.

    For national GDP and inflation numbers the process of gathering and computing the numbers is fairly transparent. Part of the problem is that for numbers like unemployment and NPL’s, there is actually quite a bit of room for fudging because those numbers require some judgment. How do you define NPL or unemployment.

    fly writes: I wouldn’t be surprised if their numbers start to exaggerate growth and under-report problems as they try to lure more foreign investments and stem outflow of dollars.

    I really don’t think that this is a strong motivation for national GDP and inflation numbers since without good national GDP and inflation numbers it’s impossible to do any sort of monetary policy, and the government conducts monetary policy as if those numbers are correct.

    *Regional* GDP and income numbers tend to be bogus because officials are promoted based on those numbers, and if you compare regional numbers with national numbers, the two sets aren’t consistent.

    The problem is that a lot of people go through and say the numbers are fudged therefore they are all bogus and the real situation is very, very bad. However, figuring out what is going on involves going through the numbers one by one and figuring out *who* fudges them, *why* they are being fudged, and *what* the consequences are.

    For example, if coal production statistics are overstated this means that China is actually more energy efficient than the numbers suggest.

  • Posted by Twofish

    IMHO national inflation and GDP numbers tend to be reasonably accurate since these are done mainly through surveys of more or less disinterested parties and anyone that wants to can do their own surveys to see if they are accurate. Income numbers are less accurate. NPL’s and corporate earnings are less accurate. Unemployment is even less accurate. Production numbers and regional aggregates are totally bogus.

    The determinants of statistic accuracy are:

    1) how reproducible the numbers are by outside parties
    2) how critical is an accurate number to policy decisions
    3) how interested or disinterested are the people gathering the data to the resulting number
    4) how much human judgment is needed in compiling the numbers and how interested/disinterested the people making those judgment are to the outcome

  • Posted by Blissex

    I like the general tone of the article, but I am even more optimistic than BradS about the Chinese economy. Exports will slow down, but precisely because so much of it is about adding value to imports, that slow down will mean cheaper import prices, as Chinese exports will slow down because importing countries enter a recession.

    So Chinese import prices will go down too (and exporters of those imports will not be happy, but then they will be lucky that China is still growing), and then China has very large reserves, and they still have too high a savings rate; overall China is in a much better position for growth than the USA and other importers of chinese goods.

    Which way the balance falls is difficult to predict.

    The most interesting point is about Japan: by and large China as someone mentioned is still doing offshore component assembly, and the highest value added components are Japanese (as Japanese companies disguise their still enormous trade surplus with America with a final assembly step in China). Japan may be hit more than China by a slowdown in traditional import-oriented countries.

  • Posted by bsetser

    japan has already taken a hit — but largely b/c it didn’t have a domestic engine to fall back on. China still gets a decent share of its GDP from agriculture, which really does move to a different beat than other parts of the economy. Not sure Japan really disguises its trade surplus tho. We all knew it was large. It just wasn’t growing — and if it was producing lots of components for final assembly in china for sale to the us and europe its overall surplus still should have been rising.

    lc — the odds I will return to the treasury at some point certainly increased at around 11 pm on tuesday night, but i have no idea how high (or low) those odds are!

  • Posted by fatbrick

    Roubini is correct that the gross export is related to jobs. When you keep a constant net export, lower gross export means fewer jobs. That cannot be good.

    But brad, you correctly mentioned that most of export value are actually import value. It means that those jobs added a little value then re-export to US or EU.

    Thus, when US and EU have a crisis and demand falls, those very low-value-added low paid jobs will difinitely lose. The people would possibly go back to the countryside…if the CCP can maintain the stable situation during this process. Those people will wait for another boom time to come out and work again…is this wishful thinking

  • Posted by bsetser

    i actually have argued that about 50% of China’s export is domestic value added — and it seems likely to me that Chinese value added has increased over time (mostly as a result of increased production of electronic components in China), so china’s exposure to the global economy has gone up over the course of its boom

  • Posted by fatbrick

    Just saw your response to Smith’s blog. Then the most efficient way to deal with increasing unemployment is ….continuing education as far as i can see…

  • Posted by TN

    Why doesn’t China spend some money cleaning up their environmental debacles? Buy some clean tech from the US, relieve some of the trade imbalance, and create domestic demand.

  • Posted by t

    Brad
    Off topic but up your street – could you comment on the striking flattening off on the following graph?

    http://www.financialsense.com/editorials/salinasprice/2008/images/1106.jpg

  • Posted by fly

    Twofish:

    I believe the Chinese (national) numbers for the last few years, because real economy was doing well, but going forward, I’m not so sure.

    One major point often overlooked regarding China’s economy is the unprecedented housing bubble.

    It is different from the US version in that down-payments are typically high, defaults are low, and banks are in better shape. However, housing price is a whopping 15x average annual income (in some places even higher than that). Right now the housing market is practically frozen. The government (both central and regional) are doing everything they can to stop this bubble from bursting. We all know how that’s going to work.

    China is now where the US was in 2007. The amount of wealth destruction coming, in addition to the 70% drop in the stock market, will wipe out any hopes of real growth in the short term, in my judgment. They can spend all of the $2 trillion in reserves, and it won’t be enough to fund these bloated mortgages.

    The only way I see they can grow nominal GDP next year is to inflate the RMB. Growth rate will be 5%, 6%, or 8% depending on how much they devalue their currency.

    I like Brad’s articles but on this issue, I think Roubini is right.

  • Posted by t

    i.e. – is it even accurate? It seems to contradict…

  • Posted by Judy Yeo

    not surprising, if you have been watching industrial and residential property prices; they were wildly out of whack, the surprise is, no efforts at truly correcting them earlier. as for exports, the guangzhuo toy factories are a dismal symbol ofwhat’s to come but hey, better early than late. sticking to earlier guesstimate of May/June 09 for crisis to hit hard in asia.

  • Posted by adiemuso

    though popular, the decoupling theory is not exactly working.
    China, like many of the other Asian countries are relatively reliant on their export economies.
    High Personal Savings levels aside, (though many might have it being depleted or deflated by the plunging stock markets), corporate financing will be a big issue here in Asia.
    My view is that the Government will have to step in, at some point of time, to take on the bad debts. With their huge reserves, the write offs should not be a huge issue.
    Crucial point though is how China is going to step up the global ladder, further increase their value added ecnomies, upgrading the skills of their labour pool, further diversification between labour n capital intensive and weeding out the inefficient and outdated modes of businesses.

  • Posted by DOR

    My view is that China’s exports to the US and, to a lesser extent EU, do not contract as much as would be expected based on the depth and length of this particular post-GOP crash. People need to buy stuff, and when they run short of cash they look for cheaper stuff. China makes a lot of cheaper stuff for Wal-Mart, et al, and that is going to provide something of a cushion. I don’t want to go overboard with this, but it does bear consideration.

    - – - – -

    Twofish,
    China in the 1990s was largely “a reprocessing plant, so as exports [went] down, imports of raw materials [were] also likely to go down, and that blunt[ed] the impact on growth.” Then, China changed and today it produces iPhones and other very sophisticated stuff. Employment and local finances are very important (don’t forget corruption, too), but this isn’t the 1990s. (EvilHenryPaulson, please take note.)

    If the central government is going to create infrastructure jobs, it will need to borrow in a very big way. That’s not a problem, and yet it also isn’t a solution. There is a geographic mis-match between the collapse of employment growth in the coastal export centers and the soaring demand for rail- and road works workers in the center and western parts of the country.

    Other than that, I quite agree with your analysis, and I’m a great fan of Victor Shih’s “Factions and Finance in China,” although I think he places too much emphasis on his central-local analysis.
    (If Dr. Shih is right, Wen Jiabao should pretty much vanish about now.)

    Oh, and I wouldn’t put much faith in Chinese employment statistics (or many of the other data they produce).

    - – - – -

    4degreesnorth,
    The Olympic construction boom was largely confined to Beijing, and unlike Tokyo, Seoul and many other examples, Beijing isn’t the driving force in the national economy.

    - – - – -

    nevket240,
    China’s foreign exchange reserves have very little to do with fiscal stimulus. The money would come from issuing domestic Rmb bonds.

    - – - – -
    LC,
    My estimate would be about two million jobs not created (as opposed to “lost”) for every percentage point the economy slows. The tricky part is “slows below what?” and there isn’t really an answer since the GDP (size, pace) estimate has about a 20% margin of error.

  • Posted by Twofish

    fly: However, housing price is a whopping 15x average annual income (in some places even higher than that). Right now the housing market is practically frozen. The government (both central and regional) are doing everything they can to stop this bubble from bursting. We all know how that’s going to work.

    So a Chinese real estate bubble bursts, it’s not the first time that this has happened. One reason that this doesn’t have that much of an effect is that most urban Chinese own their home outright when the state owned enterprises transferred title over worker homes to them in the 1990′s. Since they have 100% ownership, there is much less of a linkage between house prices in China and the rest of the economy.

    fly: China is now where the US was in 2007.

    No it’s not. There is much less leverage in the system.

    fly: The amount of wealth destruction coming, in addition to the 70% drop in the stock market, will wipe out any hopes of real growth in the short term, in my judgment. They can spend all of the $2 trillion in reserves, and it won’t be enough to fund these bloated mortgages.

    What mortgages?

  • Posted by Twofish

    DOR: There is a geographic mis-match between the collapse of employment growth in the coastal export centers and the soaring demand for rail- and road works workers in the center and western parts of the country.

    One the other hand much of the employment from the export centers were migrant workers from the interior anyway.

  • Posted by Twofish

    One thing I do find interesting is that the financial system of the United States is looking more and more Chinese, you now have four big banks that are quasi-governmental entities with lots of regional banks beside them.

  • Posted by RebelEconomist

    Although China might not escape the US-led downturn, I think its prospects for recovery are better than the US, simply because China’s potential to continue to grow fast by catch up is greater. China’s property prices, for example, may be high, yet prove sustainable because of rising earnings, like the high p/e of a growth stock. For its population, the US is using a lot more resources than China, and the levelling forces will continue. It seems to me like the early 20th century handover of economic leadership from Britain to the USA – the US suffered at least as badly in the depression, but emerged much stronger.

    If you should find yourself looking for mildly protectionist policies, Brad, here is a suggestion: <a href=”http://reservedplace.blogspot.com/2008/10/just-say-no.html”Reserves Control

  • Posted by Twofish

    RebelEconomist: China’s property prices, for example, may be high, yet prove sustainable because of rising earnings, like the high p/e of a growth stock.

    I don’t think so. One warning sign that prices really shouldn’t be that high is if you have to think about reasons why prices should be that high.

    The problem with this sort of logic is that if there is some sort of shock, then everything falls apart. Lower earnings -> lower property prices -> lower earnings -> etc. So high prices based on future expectations are very dangerous because the bottom can and will fall out when future expectations change.

    I think it is reasonable to assume that the property markets in China will continue to crash. My relative optimism on the Chinese economy is that I don’t think you will have a crisis when the markets crash. This isn’t to say that everything will be lovely, but “crisis avoidance” is important since avoiding crisis means that you have time to think and react.

  • Posted by DOR

    Try again after losing my connection . . .

    Twofish,

    My experience is that rural folks move to towns and cities within their own regions, and urban folks move to other urban areas, especially the coastal cities. Not 100%, but a large factor.

  • Posted by Glen Mikkelsen

    Twofish wrote: “I think it is reasonable to assume that the property markets in China will continue to crash. My relative optimism on the Chinese economy is that I don’t think you will have a crisis when the markets crash.”

    A couple of weeks ago there were opinion polls on Sina and QQ (I think it was those two), asking whether Government should intervene and support the failing housing market.
    The answer was a whooping NO! from app. 70 percent of respondents.

    And no wonder. Young people in Shanghai for instance who are not born to rich parents or have an in to the vast corrpution gravy train… they are never, ever going to get a decent apartment at today’s price levels.

  • Posted by fly

    China’s impressive growth in the last decade obviously left a lasting impression on the minds of many people, to the point that they think China will grow no matter what.

    The 8% unofficially declared official bottom line is believed to be necessary to stave off massive unemployment and possible social unrest.

    But massive layoffs are beginning as we speak, from virtually all private sectors (2/3 of total GDP). Latest report from top leadership says 38% of medium to small businesses are on verge of collapse. This is not just the export sector. There is a 2.5 years of supply of unsold new homes at current snail pace. Implications for pending layoffs in construction and 40 other real estate related industries are obvious. Real estate accounted for 20% of GDP in recent years.

    In the first two quarters of 2008, auto sales in Beijing registered 20+ percent growth year over year. In the third quarter it went to negative 1.4% y/y. That’s how dramatic the change of mood is. Domestic consumption is imploding. It’s only going to get worse from here.

    When virtually every sector of the Chinese economy is in contraction, it is still widely believed that government spending alone will drive growth rate to 5-6%, even 8%. Amazing.

  • Posted by credulous_prole

    Bob Zoellick recently announced that China’s “obligation” will be fiscal stimulus, and that China can maintain growth through fiscal policy.

  • Posted by David Foster

    Just a macroeconomic measurement nit-pick. The statement “If net exports are contributing to growth, it will be from a fall in imports, not a rise in exports. That is sure to slow China’s growth.”

    Rising and falling imports has no net effect on GDP. If imports fall, then investment (and/or consumption) falls in lockstep.

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