Asia’s two recessions
During the good times, both exports and investment boomed. Indeed, the fact that China ran a large current account surplus even as Chinese domestic investment soared — something only possible because of a large increase in China’s national savings rate — was one of the global economy’s core puzzles. Investment booms generally lead to current account deficits (setting aside investment booms financed by spare petrodollars) not large surpluses.
The risk always was that exports and investment might turn down at the same time. And, alas, that indeed is what seems to be happening. The Economists’ analysis this week was spot on:
many of Asia’s tiger economies seem to have been hit harder than their spendthrift Western counterparts. In the fourth quarter of 2008, GDP probably fell by an average annualised rate of around 15% in Hong Kong, Singapore, South Korea and Taiwan; their exports slumped more than 50% at an annualised rate … .
In the fourth quarter of 2008, real GDP fell by an annualised rate of 21% in South Korea and 17% in Singapore, leaving output in both countries 3-4% lower than a year earlier. Singapore’s government has admitted the economy may contract by as much as 5% this year, its deepest recession since independence in 1965. In comparison, China’s growth of 6.8% in the year to the fourth quarter sounds robust, but seasonally adjusted estimates suggest output stagnated during the last three months.
Asia’s richer giant, Japan, has yet to report its GDP figures, but exports fell by 35% in the 12 months to December. In the same period, Taiwan’s dropped by 42% and industrial production was down by a stunning 32%, worse than the biggest annual fall in America during the Depression.
Note the scale of the fall in Taiwanese production. There is a big difference between “worse since the Depression” and “worse than the Depression.” Hopefully the fall in Taiwanese production reflects a one-off inventory adjustment in the global electronics supply chain. Japanese industrial production is also down significantly.
Asia’s slowdown isn’t just a magnified reflection of the fall in US (and European) consumption. The Economist notes in its leader: “Most of the slowdown in regional economic growth so far stems not from a fall in net exports but from weaker domestic demand.”
More details are provided in the longer analysis piece:
Asia’s export-driven economies had benefited more than any other region from America’s consumer boom, so its manufacturers were bound to be hit hard by the sudden downward lurch …. Shocking as the export figures are, they are not entirely to blame for Asia’s woes. A closer look at the numbers reveals that in most countries imports have fallen by even more than exports, and that weaker domestic demand explains a larger part of the slump.
In China, for example, weaker domestic spending—mainly the result of a collapse in housing construction—accounted for more than half of the country’s slowdown in 2008. In South Korea, net exports actually made a positive contribution to GDP growth in the fourth quarter, while consumer spending and fixed investment fell at annualised rates of 18% and 31% respectively. … Domestic spending has collapsed elsewhere. Over the past 12 months, retail sales have fallen by 11% in Taiwan, 6% in Singapore and 3% in Hong Kong. …
A recent report by Frederic Neumann and Robert Prior-Wandesforde, two economists at HSBC, a large bank, argues that Asia is suffering two recessions: a domestic one as well as an external one. Domestic demand had been expected to cushion the blow of weaker exports, but instead it was hit by two forces. First, the surge in food and energy prices in the first half of 2008 squeezed companies’ profits and consumers’ purchasing power. Food and energy account for a larger portion of household budgets in Asia than in most other regions. Second, in several countries, including China, South Korea and Taiwan, tighter monetary policy intended to curb inflation choked domestic spending further. With hindsight, it appears that China’s credit restrictions to cool its property sector worked rather too well.
The two recessions reinforced one another. Part of the slump in domestic spending is attributable to falling exports, which force firms to cut investment and lay off workers.
The fact that China’s imports are falling more than its exports may not be an accident; China’s domestic economy has slowed alongside its export sector. That is a problem for China — but also the world. China would find it far easier to transition away from export-led growth if investment was soaring even as trade contracted.
That is, incidentally, what happened in the US in the late 1990s: a boom in investment (think .coms) offset the impact of the Asian crisis on US trade. And US demand, in turn, helped pull Asia out of its crisis.
The Economist argues that Asia cannot continue to rely on foreign demand to pull Asian economies out of their cyclical downturn — or as a future source of growth.
Asian governments have more than this year’s growth rate to worry about. Beyond the immediate crisis, where will growth come from? America’s consumer boom and widening trade deficit, which powered much of Asia’s growth over the past decade, has come to an end. America’s return to thrift is unlikely to prove a cyclical blip. For years to come, Americans will have to save more and import less. Asia’s export-led growth therefore seems to have reached its limits.
It needs a new engine of growth: in future it must rely more on domestic demand, especially consumption. In recent years, it has been doing the opposite: consumer spending has fallen as a share of GDP, while the share of exports and investment has climbed (see chart 4). Two decades ago, consumer spending accounted for 58% of Asia’s GDP. By 2007 it had fallen to 47%. Consumer spending in China is just 36% of GDP, half the American share.
The fall in China’s ratio of consumer spending to GDP largely reflects a fall in wage income to GDP, not a rise in household savings. The Economist notes, correctly:
“The popular explanation [for the fall in consumption] is that it is all because frugal households have been saving a bigger slice of their income in response to uncertainty over pensions and social welfare—uncertainty that will presumably increase in a recession. But this doesn’t quite fit the facts. In many countries, notably South Korea and Taiwan, household savings have fallen relative to income in the past decade; in China they have been broadly flat. (The rise in China’s savings rate comes from firms and the government, not households.)
The core goal of Chinese policy over the next few years, it seems to me, should be to raise the ratio of consumer spending to GDP. China’s exports aren’t going to increase by factor of five over the next eight years; mechanically, exports simply can not provide the boost they did in the past. And investment is already very very high relative to GDP. That leaves only one potential engine that could propel China’s future growth …
UPDATE: Korea’s January trade data was terrible. Exports to China are down more than total exports. And Korea is now running a trade deficit despite the huge fall in commodity prices because exports have fallen more. Japan is in a similar position. That suggests a huge fall in the global current account surplus, as the fall in the oil exporters surplus doesn’t seem to be offset by a rise in Asia’s surplus.
As Asian inventories increase supply vs. demand and socio-unrest increase in all regions of the world we are nearing the possibiity of U.S.-China Trade Wars to set the stage for Summer of 2009.
http://business.timesonline.co.uk/tol/business/columnists/article5627402.ece?openComment=true
China needs to give up hopes on U.S. consumer to remain it’s driver. China needs to understand that it will have to start using far greater reserves for internal stimulus, expanding jobs in all sectors and allowing Chinese consumers to spend wisely on “not so stupid stuff”…
Brad: I agree with both the analysis and conclusion:
.” That leaves only one potential engine that could propel China’s future growth” I.e. increase domestic consumption. Many people have been saying this for a long time. Chinese leadership has heard the message loud and clear – and consumption (as well as wages) as a percentage of GDP have continued to fall. I don’t think this will change. Rhetoric, smoke and mirrors, yes. Change? No. I know, I know: the Usual Suspects on this blog will spend the afternoon disagreeing, but assume my assertion is correct; then what?
By the way, why does China purchase debt through the U.K?
Brad,
I have been constantly puzzled by you and others who reference magazines such as The Economist, Time, Washginton Post, etc for authoritative research and data. The real professionals, such as us (including myself), know that these news outlets print superficial analysis and dressed-up research because we know conclusions cannot be drawn without a legnthy period of time doing all the due diligence with real data, which in fact is hard to come by without time. Even the smallest conclusion in my field seems to require a lot of patience and data. And to our credit, we send the satellite into orbit and make your mobile phone to work. However, how much confidence do you have in your research? To me, this speculative conclusion you are drawing is best left to the professionals who can actually look through the data, which may be six months to a year away. Do you think you should take up some role models? If not people like me, at least Ken Rogoff and Carmen Reinhart.
waiting out …
in this case I think the economist is implicitly drawing on a lot of real research based on real data from folks like Davis Dollar and Louis Kuijs and Eswar Prasad and Li Cui and Murtaza Syed. That is why i liked there analysis; it was consistent with a great deal of the best research on China.
How much confidence do i have in all of this? Less than than the confidence I have in newtonian physics to be sure. Social science isn’t a true science.
But I do have a lot of confidence that China cannot count on 30% y/y export growth (I understand exponential growth) and it cannot realistically count on adding $250b plus to its exports a year either. China is too big for its exports to consistently grow faster than world trade at this stage. And i am pretty confident that china’s investment to GDP ratio is extremely high even relative to the experience of other fast growing Asian economies.
And when it comes to my estimates for China’s foreign assets and its dollar portfolio, i have a fairly high level of confidence. Not total, but this is something i have spent years working on …
Great analysis, Brad. I think the question is what would possibly motivate the Chinese to begin spending their savings? Even when the economy is buzzing along, they are so fearful or conservative that they don’t spend. Now, with the economy dreadfully slowing down, and possibly in for a hard landing, why would they spend? The uncertainty will only result in more fear and consequently more savings(or if they have already lost their job, at least not an increase in spending).
New to blog – very interesting read, Thank-You Brad.
I just realized something. Is it possible that Chinese government is buying mainland traded securities in order to support their demand on the mainland stock exchange?
Is there any info about the above?
It’s just, there were number of bad news / earnings and most of the CHinese firms traded in Honk Kong are down while their counterparts on mainland are up.
The Economist does have very well argued essays that to draw on a lot of researchers. *However* they have an particular ideology that they wish to advance (and they don’t disguise or apologize for that fact), and they will put together facts to advance their ideology (which can be summarized as classic liberal ideas of free minds and free markets). Again, there is nothing wrong with that, but I do find that it is useful and at least interesting to see how someone with a different view of how the world does or should work puts the same set of facts together. Something that the Economist in particular and British news media do which American news media don’t is that they don’t pretend to be objective.
The increase in Chinese savings and investment is not hard to see once you look at the numbers. Chinese household savings have remained constant over the last 20 years, but the huge increase in savings was due to cash rich state owned enterprises. In the late 1990’s, there was a massive restructuring of SOE’s which made them profitable, and starting around 2000 those profits started entering the banking system.
This also points out the flaws in thinking of “Asia” as anything other than a geographic entity. The PRC has a state-owned sector that is unique in Asia (and probably unique in the world), and the SOE’s are likely under marching orders now to spend, spend, spend (and not to lay anyone off).
Also I don’t think that the goal of Chinese economic policy for the next decade should be to increase consumer spending, but rather to massive increase spending on infrastructure and governmental provided public goods. China is still far less underdeveloped than most other countries that there are still lots of places where you can get value from pouring concrete.
Finally, I think that there is a public mood for more health and education spending rather than higher wages. Higher wages are useless if an accident eats all of that up.
Chaos: I just realized something. Is it possible that Chinese government is buying mainland traded securities in order to support their demand on the mainland stock exchange?
The government is doing some of that, although it is limited intervention since massive intervention to buy shares won’t work, and will lead to more problems when it is obvious that it won’t work.
However, I don’t think that government intervention would explain recent changes in Shanghai versus Hong Kong, because when the government intervenes to prop up share prices it tends to stabilize both Shanghai and Hong Kong. The other thing is that when the PRC government intervenes in the stock market, it doesn’t do so quietly. Usually it is very loud about the fact that it is buying up shares on the theory that letting people know that there is an intervention will stabilize the markets.
In the case of China, the fall off in investment was self-inflicted and should be relatively easy to reverse. Last year the economy looked like it was overheating so the government started slamming on the brakes, by the time the slowdown started to hit the economy, we were in a vastly different situation. This is a lesson in why Keynesian fine tuning doesn’t work.
It’s also the reason why I tend to be against things like sudden devaluations or currency appreciations. If you make decisions based on what the situation is now, with the three to six month time lag it takes any macroeconomic policy to work, you may end up chasing your tail.
A lot of the stimulus package consists of “do whatever it was that you were planning on doing last year before we told you not to.”
Export oriented countries have been told for years to increase domestic demand; they know it as well. China doesn’t want to be reliant on the US consumer, but they are. I have yet to hear plans to increase domestic spending in China that would work, without wrecking the competitive advantage of their labor intensive industries (through higher wages, or higher taxes for a health infrastructure and social safety net). Also, holding the de facto reserve currency means Americans have access to credit that few do.
It’s a question of perspective and very simple step of looking at the data objectively. Had posted the following on Economist (the descriptor got changed) –
First one : I don’t get this at all – the cover page has a line “Where the crisis is hitting hardest” and the home page descriptor is “Leader: Why the crisis has hit Asia hardest”
“Hardest” – how ? Was under the impression that the crisis actually knocked the breath out of US/Europe since last year and we are currently witnessing the knock-on effects ?
Have we suddenly forgotten about US, UK, Iceland, Russia and PIGS/emerging economies in Europe?
Misleading to say the least or is it a panic reaction to the banana republic sort of situation in few developed countries …..
Second one : In case any of the authors/editors missed it – the latest IMF projections
http://www.imf.org/external/pubs/ft/weo/2009/update/01/index.htm
2009 growth
World : 0.5%
US : -1.6%
Euro Area : -2%
UK : -2.8%
Japan : -2.6%
Developing Asia : +5.5%
China : +6.7%
India : +5.5%
Now that doesn’t exactly support the cover byline – “Where the crisis is hitting hardest” does it ?
Americans savings habits are becoming more like Chinese and that’s a good thing. The economic fiasco was a result of too little long-term savings and too much overspending.
Writes Robert Frank, Cornell University economist,
“For economic purposes, paying off debt and saving are the same,” he said. “Incurring debt is negative savings; paying down debt is savings.”
He sees a long-term behavioral shift. He calls the spending of the past decade or more unsustainable.
“The only way people were able to (spend heavily) was by harvesting cash out of their home equity, which was just an illusion,” Frank said.
Financial Signs that China’s Economy maybe picking up growth
http://www.reuters.com/article/usDollarRpt/idUSL16852020090201
LONDON, Feb 1 (Reuters) – Chinese Premier Wen Jiabao said on Sunday he saw signs of recovery in the final days of 2008 after growth in the world’s third largest economy slowed abruptly but indicated that further stimulus measures might be needed.
“During the last 10 days of December it started to get better. The goods piled up in port started to decrease and the price of industrial products started to rise,” Wen told a business audience at a dinner during a visit to London.
The government has already pledged 4 trillion yuan ($585 billion) over the next two years to help boost domestic demand. Work on projects including rebuilding the earthquake-hit southwest and improving road and rail links is under way.
Underlining his positive comments, he said 900 billion yuan in aggregate loans had been added to the Chinese economy in the first 20 days of January, more than double the figure for last November as a whole.
Wen said China’s financial sector remained in good health.
“The financial sector in China has in the face of this crisis been affected to a certain extent, but generally speaking remains sound, healthy and stable,” he told an audience of business figures at London’s Natural History Museum.
Just a few brief thoughts on the next cultural revolution that needs to be completed if things are to stay »quiet« enough. I agree with that and with Brad’s points but there is a need for both time and income to make such adjustments.
Generally (Marxian) speaking, the vast and almost never-ending pool of cheap labor – that is another way of describing China’s inclusion into the global economy- has reached its peak. Peak cheap labor (along with completely misguided western counterpart’s policies) did two things:
- it lowered the share of labor participation in GDPs in the west while
- not enabling the Chinese wage earners any increase (if not the opposite) in theirs.
While Japan was much better positioned for such a shift, it was in fact China and »organized western labor dismantling” both that seeded the seeds of global consumption to burst. That leaves us with no-one to pick up consuming. As for the EMs potential consumption pool, for it to materialize, we’ll have to require somewhere around +/-4bn people to radically change their habits / values maybe even their religion.
It s is in fact a call for the next global cultural revolution (GCR), that dwarfs the previous one. It is cultural and religious much more than economic in nature. Let s just call that (the right) »direction« as oppose to the »near-term goal«.
Let `call from our thumb for the 60% US vs. 50% Chinese C/GDP in the medium term. Then let us complicate:
We need to lubricate adjustment for GCR to take place.
There are in fact two sets of EMs – base producers / and end product producers (of course the developed countries also the part in %s).
As for the price of oil & food (+ the rest of commodities) it was pumped, dumped and shorted to blast. How exactly did we arrive from 40 to 145 and back? Suffice it to state that the EMs didn’t do that because they have not learned from the “proper banking” manual. The “others” might as heard in the Congress. Some currency rates might have helped.
So, no income for base producers left. Yes this does prevent Russia and Venezuela and even Iran from trying anything funny. But at the same time there is no income from which to facilitate the base producers share of GCRs shift.
Couple that with the end-product (trade) bust and it becomes clear that there is no income for end product producing EMs to change also. Here it appears that the end-product “producers” and the developed countries “consumers” determine the value that`s added (the income or flow) on base. However that’s just an(other) over-simplification.
And then there is “the financial economy” that nominally dwarfs the previous two stages by a factor of 10+. It also affects both
- end product pricing as well as
- base commodities prices.
Let s just say that currently “the financial economy” in its mysterious ways is effecting the developed countries in the »correct« way (from C to S) but leaving EMs (of both types) with no room for adjustment. As for the first one – there’s is the »I« question. It would appear that currently the only »I« for all three stands for “Treasuries”. But let us assume that there are two markets. The gross one and also the retail.
For problem solving it is a mistake to view Treasuries` market as »gross« in its nature.
The reason US is able to achieve 60-70% consumption to GDP was because once upon a time the US was a net creditor and a fabulously wealthy country (PER CAPITA!). I think it is unrealistic to expect China to achieve anywhere near that level of consumption. Hence it is understandable why calls for more consumption led growth is not a priority for the chinese central government. What I think the chinese govt is trying to do now is as much stimulus as it is modernisation a la Japan to raise its people’s standard of living using state savigns.
Also, when looking at the impact of treasuries issuance on the US debt, savings, dollar and interest rates, it is helpful not to think of the US in isolation but inclusive of all the other pegged and semi pegged currencies (CHINA!). The savings in US and China should really be lumped together because the mechanics of maintaining the peg means support for the dollar and debt issuance. This i think is the reason why a lot of the US doomsayers were “early” (wrong?) in their armegeddon scenarios. The inflationary effects of US monetary easing is spread across all the pegged nations so is much less acutely felt in the US alone and buys the US a lot of time.
Australia’s Rio Tinto in strategic partnership talks with state-owned Chinese aluminum company Chinalco
http://www.cnbc.com/id/28967490
Rio Tinto has held talks with state-owned Chinese aluminum company Chinalco on the latter acquiring minority interests in various Rio businesses, the global miner said on Monday.
In a statement responding to press speculation, Rio said there was no certainty a transaction would take place.
“Rio Tinto confirms that it has held discussions with Chinalco regarding Chinalco acquiring minority interests in various operating businesses of the Rio Tinto group and also investing in convertible instruments,” it said.
The Australian newspaper reported on Monday that Rio was thought to be close to selling up to $8 billion in asset stakes to Chinalco.
The paper also said Rio was looking at a combination of asset sales, convertible notes and share issues to the Chinese that would generate $15 billion and lift Chinalco’s stake in Rio to greater than 11 percent from its current 9 percent.
phaedron — i should have mentioned the IMF’s forecast. My strong view is that its forecasts for growth in the emerging world remain too optimistic, and that includes its forecasts for Asia. There is political pressure not to have a number for China that is too much below the government’s number — and, given the lags in the production of the imf’s forecast, it has lagged the recent data flow from Asia. That data flow shows a huge q4 08 contraction in industrial activity.
Tis true tho that the fall in output in parts of emerging europe/ russia also looks steep.
Brad Setser: the large increase in China’s national savings rate — was one of the global economy’s core puzzles.
DJC: There isn’t any core economic puzzle. Western Neo-liberal Economists plug away at their ludicrous mathematic economic models that completely disregard cultural and historical factors. A high savings rate is culturally ingrained even in weathly Japan. Japanese school children are instructed from nursery school that Japan is a resource poor nation that needs to save, conserve, and invest. Chinatown immigrants that live in New York City save a much as their income as counterparts in China. The vast majority of Asian have lived a substantial portion of their lives in abject poverty, and simply aren’t going to change their cultural savings habits because US Treasury/IMF bureaucrats think it is detrimental to the Western Neo-liberal globalization project. Frankly, if I wire any of my hard earned savings to China, if I discover that my relative goes on a spending binge with the funds, it will meet with great disapproval in my family.
The US Treasury / IMF doesn’t operate any different than a former Soviet Union politico. Except that the IMF thinks it is entitled to dictate the monetary policy of not only the sovereign China PBoC, but even the cultural savings habits of the 1.6 billion Chinese people. The collective Asian response to the US Treasury / IMF can best be summarized with the statement, “Mind your own damn business”.
When comparing most of the last economic Asian crisis endogenous and exogenous , this one is having a much more abrupt downward inflexion slope.
I wonder if it is the impact of a more on line efficient management of OEM (original equipment manufacturing)?
“China on Sunday extended it rural subsidy scheme for home appliance purchases nationwide in an effort to boost rural consumption, the Central Committee of the Communist Party of China and the State Council announced in the first joint document this year.
The document said the government would provide a 13-percent subsidy to all rural buyers of home appliances, including color TVs, refrigerators, mobile phones, washing machines and freezers.
A trial scheme had been conducted in 12 provinces, which had seen a boost in home appliance sales.
The Commerce Ministry said that in the first 20 days of January, Chinese farmers bought more than 160,000 appliances with government subsidies, 90 percent of the total in December.”
http://virtualreview.org/china/zoom/913842/rural-home-appliance-sales-grow-under-national-subsidy-program
(quote from Feb 01)
8000 appliances/day does not seem to be much of a surge in buying does it?
The article continues:
“More items would be added to the list if necessary, said the document, which called for the expansion of chain stores in rural areas and better delivery and billing systems.
It also encouraged local governments to establish rural service centers to enhance chain store management and strengthen market supervision.”
So a push in 12 pilot areas ups sales 30% or 200 day/area. This included mobile phones
And they need to build the commercial infrastructure to reach more markets.
Quick fix to replace Overseas demand??
Twofish:
I enjoyed your comments a lot. Although we have quite different starting points, very often I come up with similar conclusions as you do.
However, about “Keynesian”, I have a couple of counter-arguments.
>>>
government started slamming on the brakes, by the time the slowdown started to hit the economy, we were in a vastly different situation. This is a lesson in why Keynesian fine tuning doesn’t work.
<<>>
A lot of the stimulus package consists of “do whatever it was that you were planning on doing last year before we told you not to.”
<<<
Isn’t it nice to have a pipeline of “shovel ready” projects at the moment? You can do it with much cheaper materials, and you smooth the labor market at same time.
For some people, “Keynesian” is bad and it doesn’t work. As I see it, “Keynesian” has two tasks for the government. To save at the boom time, and to spend in the bad time. For some political systems, it can not work; but for others, it may work.
If you have officials do fine tuning to win popularity (among the voters or in wall street), you get tax cut in the boom time, and bail out in the bad time. “Keynesian” won’t work.
If you have officials treat the economy as a machine with science and technology, and are willing to do the unpopular things, you can save in the boom time, and spend in the bad time. “Keynesian” may work.
(repost)
Twofish:
I enjoyed your comments a lot. Although we have quite different starting points, very often I come up with similar conclusions as you do.
However, about “Keynesian”, I have a couple of counter-arguments.
—
government started slamming on the brakes, by the time the slowdown started to hit the economy, we were in a vastly different situation. This is a lesson in why Keynesian fine tuning doesn’t work.
—
The thing is, PRC government was fighting a big battle. The hot money was threatening to put the economy out of control. PBOC had to keep raising the bank reserve requirement to historic high of 17.5%. In last June, oil price was expected to be $200 by GS. The economic policy of PRC had been shifted 180 degree in November. So the timing was off by at most 3 months. For a ship as large as China, it was a big and swift turn. I would say it as a “grand tuning” and it is working.
—
A lot of the stimulus package consists of “do whatever it was that you were planning on doing last year before we told you not to.”
—
Isn’t it nice to have a pipeline of “shovel ready” projects at the moment? You can do it with much cheaper materials, and you smooth the labor market at same time.
For some people, “Keynesian” is bad and it doesn’t work. As I see it, “Keynesian” has two tasks for the government. To save at the boom time, and to spend in the bad time. For some political systems, it can not work; but for others, it may work.
If you have officials do fine tuning to win popularity (among the voters or in wall street), you get tax cut in the boom time, and bail out in the bad time. “Keynesian” won’t work.
If you have officials treat the economy as a machine with science and technology, and are willing to do the unpopular things, you can save in the boom time, and spend in the bad time. “Keynesian” may work.
DJC — you are missing the point. China’s culture didn’t change (that much) in the last five years. China’s savings rate increased enormously over this period. It is hard to find a cultural explanation for this rise. Especially as the household savings rate — which presumably is most culturally determined — has been constant.
I think many Americans of the depression era would argue that thrift isn’t just an east asian virtue.
Finally, so long as Beijing voluntary chooses to implement US monetary policy, the neo-liberals at the IMF don’t really have to work very hard. China’s dollar peg is china’s choice, not that of the IMF, i assume?
DJC: Western Neo-liberal Economists plug away at their ludicrous mathematic economic models that completely disregard cultural and historical factors.
The trouble is that cultural and historical factors really doesn’t explain why the savings rate in China dramatically increased between 1995 and 2005. It also doesn’t explain why the savings rate wasn’t high in the 1930’s.
There are cultural/historical factors here, but they aren’t Chinese/Western ones. There is a Chinese proverb that wealth only lasts for three generation. Depression era Americans tended to be savers, whereas Chinese born in wealthy urban areas in the 1980’s tend not to be.
Brad,
The old “iron rice bowl” no longer exists in China as the SOE sector was allowed to divest social commitments such as free housing and hospital care. China SOEs corporations which are actually a hybrid of state and private ownership dramatically improved their profitability and global competitiveness. The China savings rate among households remains high and rising higher since the Chinese public must now pay for their children’s education, and personal retirement. As a result of WTO entry, China SOE corporations also need to prepare for the “lean and mean” environment of US multinational competition by restructuring their balance sheet with greater cash savings.
China’s dollar peg isn’t china’s choice. Under US Dollar hegemony, the US petro-dollar remains de facto backed by the strategic Gulf Arab energy reserves under protection by US military power projection. Everyone in the world needs the strategic commodity oil, thus everyone needs reserve currency US Dollars. As a result, 80% of global trade transactions are in US Dollars. The Washington Consensus demand that China revalue it currency is tantamount to economic suicide. Any sovereign nation that revalues its currency versus the US Dollar is subject to a significant loss of global competitiveness.
Brad: China’s savings rate increased enormously over this period. It is hard to find a cultural explanation for this rise. Especially as the household savings rate — which presumably is most culturally determined — has been constant
China has to pay an annual import bill of $ 1 trillion and it has accumulated close to $ 2 trillion in the forex reserve. The ratio of 50% for forex reserves/annual imports in nominal US dollar seems comparable to mose other emerging market countries.
I’d like to know if the $ 2 trillion reserve contributes to a higher savings rate for China?
Seems to me if China/Asia wants to boost consumption they would need a minimum wage law first. That was the first stepping stone in the labor movement in the US long ago that started the emergence of a middle class with “disposable income”.
Not doing this does have knock-on effects in the ROW. For instance in Mexico, multi-nationals were encouraged to set up manufacturing industry there thru NAFTA. In the late 80s we had a plant there that paid $2.25/hr. More recently I read that min wage in Mexico is presently $4.50. But I also read that some of the border town factories are still paying closer to $2. They say the are doing that because they are losing business to China, and would have to close otherwise. This seems to be a sufficient threat to keep the Mexican government from enforcing current minimum wage laws.
I remember a while back some were floating the idea of a global minimum wage. It of course couldn’t be the same number everywhere in the world. But it would give some teeth to redistributing income. That is one thing that you can’t really guarantee to happen by merely letting exchange rates take care of things. “Trickle down” doesn’t work.
Indian Investor,
Western Economic Neo-imperialism under the global US Dollar hegemony regime
http://en.wikipedia.org/wiki/Dollar_hegemony
Americans get to consume for “free”. Chinese and Indians get to work for “free”.
Brad: Tis true tho that the fall in output in parts of emerging europe/ russia also looks steep.
http://www.cbr.ru/eng/statistics/credit_statistics/print.asp?file=external_trade_e.htm
The chart at this link is official data on external trade from the Bank of Russia; it shows a rising trend in both exports and imports. I also noted Russia’s interest rate rose from 10% to 13% during 2008, and though there is a fall in the Forex reserve levels the fall seems to be changing both in absolute and percentage terms from week to week. It appears that the Rouble has been devalued steadily since November 2008 or so.
There’s a widespread interpretation of the Russian economy as doing very poorly, though these numbers on the Bank of Russia web site seem to indicate otherwise. I’d find it useful to get information either from Brad or from anyone else on this.
indian investor — google a bit and you will have no trouble finding evidence of a slowdown in russia. roubini had a good piece on it. china’s large reserves reflect policies adopted to support the exchange rate that have had the effect of pushing up gov. savings, so high reserves are a reflection of the rise in gov. savings linked to china’s desire to manage its currency against the dollar and avoid an real appreciation from inflation.
Twofish: It also doesn’t explain why the savings rate wasn’t high in the 1930’s.
DJC: During the 1930’s, the Japanese Imperial Army occupied a large swathe of China around the Shanghai-Suzhou region. If any Chinese owned Gold coin, it would be confiscated and the owner would be left with a lead bullet in his head. Do you think this might provide some disincentive to save?
Cedric: Seems to me if China/Asia wants to boost consumption they would need a minimum wage law first.
I think you’re going in the right direction, but this direction may very well to lead you elsewhere than where Brad’s conclusions. There’s no social security system in India, so unemployed people don’t get any doles, the most likely consequence for an unemployed person is temporary survival on any past personal savings (which is unlikely to last more than 6 months, even for the best educated). After that temporary survival on loans from friends and relatives followed by starvation and extinction if the problem isn’t solved.The analysis can be extended to China, though perhaps China has better Govt. hospitals.
If there’s a strongly enforced minimum wage law, employers can choose not to have production at those higher wages, so a social security system has to precede a minimum wage law.
The forex reserve is at a level where it sort of ensures the non repeat of the 1998 crisis for some time. Before setting up a social security system the country has to look and see if there’s a sufficient surplus available already, which isn’t the case.
Overall, countries like China have just a forex reserve to boast of, which has saved them from being dependent on the IMF for a dollar loan. If they’d had that problem, by now all the FDI laws in China would have been changed and most of their industries would have been forcibly privatized and bought over to the American advantage, just as it was in the 1998 crisis for the Tiger economies.
Brad: china’s large reserves reflect policies adopted to support the exchange rate
I’d like your opinion on whether the desire to have sufficient forex reserves determined the dollar peg from other independent factors, or was it the other way round?
From the 1998 crisis most emerging market regulators should have learnt to provide for sufficient forex reserves. The forex reserve level has to take into account annual imports, short term maturity external debt, FDI, and so on, ensuring that a flight of capital from highly leveraged foreign financial institutions doesn’t lead to local currency crisis. It would be useful to make a comparison across different emerging market and Tiger countries to see if China is deviating from the rest, or is the abolsute size of the China forex reserve reflective of the absolute size of China’s external debt, annual imports, etc?
indian investor:
Providing all the safety nets a developed country has and who pays for it is a big subject, and min wage is just one element.
What you are describing as “social security” is really called “unemployment insurance” in the US. And companies are the ones that have to pay it.
But don’t over estimate how great a deal it is in the US. I recall it maxed out at $250/month for 6 months. That might keep someone in India from starving, but not someone with a California mortgage.
Brad: The core goal of Chinese policy over the next few years, it seems to me, should be to raise the ratio of consumer spending to GDP.
I would agree with the direction of this recommendation but this has to start with ensuring sufficient infrastrucuture in China, followed by unemployment insurance, followed by minimum wages. Ideologically it’s beneficial for China’s common people to have an economy which produces for local demand. But fiscal stimulus measures such as allowing a discount on rural purchases of household goods haven’t yielded significant results because there’s a constraint in terms of electrical, telecom and road connectivity of rural areas to the Eastern region. Secondly, of course people who’re dependent on personal savings to survive in times of crises will naturally spend less than they earn, and borrow only as much as they can comfortably service.
indian investor — this all has been done. china has a very level of import cover (3ms of imports would be a standard metric) and is off the charts in terms of coverage of s-term ext. debt (as china doesn’t have a lot of ext. debt let alone s-term ext debt b/c of its controls). coverage of 2:1 is considered safe, china was at 10: 1 or so (I haven’t looked recently). and its reserves to GDP ratio is an outlier as well if you exclude the city state/ financial center like countries (HK, singapore). reserves to GDP is now well above 50%; the IMF estimated that EMs should have something like 10% after asia (the jeanne and Rancierre paper). Raising that to 20% seems reasonable in light of recent volatily. but 50% for a country with a closed capital account is insane. it clearly isn’t a reflection of a need for a prudent level of self insurance.
Those were good years on the commodities export side and hot capital inflows. One may see the same worldwide homothetic inflexion point when the CB of the Russian Federation will publish its next update in 2009.
The main issues:
will imports fall faster than the prices of commodities?
Will debts fall faster than revenues?
Will financial debts fall faster than the interest rates rise?
Will revenues increase faster than inflation rise?
Brad: I think many Americans of the depression era would argue that thrift isn’t just an east asian virtue.
I think most Americans of the current day would also argue the same, though perhaps not in public. The Mortgage Bankers Association estimated in 2007 that around 35% of American homes were owned OUTRIGHT, with no loan on them. This is true even today. Less than 5% of the mortgage loans were both ARM and sub prime in 2007. Americans never bought homes because they were “spendthrift” or “financially illiterate” or “profligate”. Buying a home is a big decision and most people made that decision 1) as a rent saving long term investment 2) as a speculative investment, a smart way to make profits outside the job
3) as one of the “best things I’ve ever done for myself”
Most of the middle-class Americans tend to start working much earlier than the middle-class Asians. By the time they’re 18, Americans are supporting themselves on a full time or part time basis; the university students have to work for their expenses and take a loan for their studies, with a small exception. After studying, either till 18 or till about 22, most of the Americans just get a job, and stay in the same company and same location for decades at a stretch.
There might be a lot of variations, but basically culturally this is the average American’s course of life.
Brad: Raising that to 20% seems reasonable in light of recent volatily. but 50% for a country with a closed capital account is insane
So China can benefit during this crisis by utilizing some amounts from the forex reserve. One way seems to be to subsidize imports, such as crude oil. Another way is to import some capital equipment, etc from the US to build some infrastrcuture.
indian investor:
I wouldn’t assume that China needs to make policy that keeps the geo distribution of it’s population the same.
In fact I have read that the Chinese government told its unemployed rural population that they should move to the big city. I also heard they built a huge overabundance of very small cheap apartments to accommodate the shift.
So that is where the Chinese sizable middle class resides, and China does have more millionaires than the US now. So that does give the big city some latitude to afford development of a service industry underclass, i.e. laundromat workers, Chinese take-out chefs, etc…
China does have a minimum wage law, and people working in the Guangdong factories typically get paid well above minimum wage.
Its interesting that India hasn’t been affected by the Global slump as much as Korea, Singapore and even China
Indias exports keeps falling but the indian imports keep rising. That might sound weird but I think Indian corporates are going for the kill here. They are buying loads and continue to expand capacity. when europe and US emerge from recession, India will be ready to deliver.
Speaking for myself, our textile export business is robust as it had been in the past. We are starting a third factory in 3 months time specially meant to export to UK.
China says 20 million migrants have lost jobs
2 Feb 2009, 1107 hrs IST, AGENCIES
BEIJING: An estimated 20 million migrant workers have lost jobs because of the global economic crisis, a Chinese official said on Monday.
Slightly more than 15 percent of the 130 million migrant workers in China returned to their home provinces after becoming unemployed, said Chen Xiwen, director of the Central Rural Work Leading Group.
In recent years another 5 million to 6 million new migrants have entered the work force every year, Chen said.
China’s economy has plunged in recent months as a sharp decline in demand for Chinese goods globally has forced thousands of factories to close. Many factory workers have already taken to the streets demanding pay and protesting layoffs.
China’s communist rulers, meanwhile, have told the military to strictly obey the Communist Party as the country faces economic unrest this year.
China’s 2.3 million-strong force should “resolutely obey the central party committee and the Central Military Commission’s command at any time and under any circumstances, and ensure the military forces’ security, stability and high level of unity at all times,” said a notice posted on the central government’s Web site Monday.
Similar calls have been made in the past, showing that China’s massive military answers to the Communist Party and not the government
Then there is Welfare. That has a longer duration than unemployment insurance.
See? I’m coming up with lots of ways to spend China’s excess reserves.
Brad: but 50% for a country with a closed capital account is insane
If China is pegging the RMB too low to the dollar that should show up in high operating margins for export firms, or high real wages for workers in export – oriented firms. Alternatively, it might show up in some other government finance form, maybe they’re drawing from tax revenues, or printing RMB, to peg to the dollar.
A matter of much speculation and controversy, recently.
High real wages for workers seems unlikely since that conflicts with wage levels in Brazil, India and so on for manufacturing activities, such as they are.
I know the operating margins in the IT services industry in India
But I’m not sure what it is for China’s export firms in different sectors.
If China can keep existing levels of employment with lower operating margins they can avoid drain on their finances by pegging higher to the RMB.
Exporter: India’s exports keeps falling but the indian imports keep rising.
I’ve tried to make the point before that adjusting the current account imbalances would be easier if the US were to export more to India. I noticed on the RBI web site that the utilization of new ECB is mostly for the import of capital equipment.
They’re building a lot of new infrastrucuture in India and I heard there are plenty of jobs in Delhi. At the same time employment in the IT services sector continues to trickle down and evaporate each quarter.
I found a link that says Russia now has 6 million unemployed people, calculated accoridng to ILO standards. Also another essay shows falling industrial output and marginally falling oil output.
http://uk.reuters.com/article/marketsNewsUS/idUKLO47316220090124?rpc=401&
Agree with what twofish said that the government needs to spend wisely for the benefits of long term growth and prosperity of the country. Personal consumption on luxury goods such cars and expensive home appliances are not the way to go. Chinese has to think hard what are most important things for their life. Progressive education, science research and study, health care, agriculture infrastructure, environmental research and study, recycling industry, renewable energy, arts, free time for parents to raise better educated and healthy children are the way to go. Chinese need to create its own model what counts to be a good standards of living.
China is a canard. EVERY country is in distress, it just so happens that China has yet to indebt herself to the Fed or the IMF.
Brad, do you expect a new global central bank a la IMF with SDR’s, or will the Fed be the issuing authority? There is no way to recapitalize the global capital markets without nations taking on new debt.
Water is an important element often left out economic calculations of The Standard of Living. But I think it’s important, not only because humans drop dead in 2 days without it, but showers greatly improve both an individual’s and society’s perception of the standard of living.
I have read that China’s water table is heading for the center of Earth, but I don’t know how one addresses that with government policy.
That’s a good point, Cedric Regula. The majority of rivers and lakes are heavily polluted during the industrialization process. The drinking water in many areas are polluted too. Also there is a shortage of drinking water in many regions due to large population base. Air in many areas is also heavily polluted too. Pollution has a big effect on the total cost of health care. Lots of money needs to be spend on these things.
Ying:
It’s also possible to poison the food supply.
Toxic industrial by-products like heavy metals and PCBs are very potent carcinogens. They mutate chromosomes in a way that allows cancer growth in cells.
When these are dumped in rivers and eventually the ocean they accumulate in seafood. Not to mention people drink them when they seep into the groundwater and wells are what supply the drinking water.
I wonder if it’s possible for a country like China, with its economic make-up, to stimulate truly domestic demand as much as we might imagine. They are not only export-oriented but their service industries are very unlike ours in state of development. The one thing that comes to mind is housing stimulus since that is both localized and has an investment multiplier. But much of what we’d do may well not work the same in this kind of economy.
The stooge IMF echos the “politically correct” mantra by Treasury Secretary Timothy Geithner that China is entirely at fault for the Global Financial meltdown.
http://www.reuters.com/article/usDollarRpt/idUSN2637778320090126
WASHINGTON, Jan 26 (Reuters) – The Chinese yuan currency is “significantly undervalued”, the head of the International Monetary Fund said on Monday.
IMF Managing Director Dominique Strauss-Kahn said the IMF had been “straightforward” on the issue of the yuan’s value and repeatedly said the currency was undervalued. Last year, he also called the yuan “substantially undervalued.”
Last week U.S. Treasury Secretary-designate Timothy Geithner said that President Barack Obama believes China is manipulating its currency, a statement that former President George W. Bush’s administration had avoided.
A commentary by China’s official Xinhua news agency on Sunday said that such criticism over its currency was misplaced and unfair.
China is not going to pick up the demand slack left by global economic recession. For example, you can not expect Chinese to buy new cloths every week to solve overcapacity issue in textile industry. What will Chinese do with these old clothes? You can’t expect Chinese consumers to pick up car consumptions to save the global auto industry. There is already severe air pollution problem in China. The overcapacity of existing industries is not going to be solved by demand increase. The demand for existing products which are produced for global consumers are simply not there. Chinese need to produce goods and services that satisfy their own needs. The needs need to be defined by Chinese themselves depending on their existing circumstances and priorities. It will be a restructure of its economy towards its own development. It’s not going to save the world economy, but will save China and make it more independent in the future.
ways to stop the chinese saving so much without having to constantly nag them about it . . .
1 outsave them. the ordinary american citizen should be given incentives to buy treasuries. buy one get one free if you hold for ten years ? – that would hit the throughput of electric kettles at wall-mart.
2 the chinese could sell their dollars and buy yen. they would have the fun of seeing their asian rivals roasted on the spit of yen appreciation. then the japanese would have to ‘manipulate’ their currency against the dollar an be the bad guys for a change . . .
3 counter advice : the chinese could bring counter nagging to bear – regularly advise wall street c e os to stop investing in art and yachts and just blow their millions . . .
4 or an international agreement to replace the dollar as the reserve currency, so that the chinese are left saving something else ?
5 or let oil be traded in the yuan for a while, organise a private takeover of china’s central bank (model it on the fed) and see if they make as big a mess of it as you guys just did.
6 send them greenspan.
gillies:
Some good ideas, however…
China had a real estate boom already…so they don’t need Greenspan for anything.
Wal-Mart sells food now, but the disturbing thing is they sell Asian shrimp.
The Japanese would do massive quantitative easing the moment after China buys yen.
Ceo’s never listen to anybody.
What if the PBoC bought gold?
Let oil be traded in yuan…ok, but I think the US should be allowed to charge China for at least a part of our $500B defense budget.
Whaddaya mean the Fed is screwed up? They have a business similar to Citi now, except they have the thing that was missing in Citi’s business plan…a printing press. So what could go wrong?
Brad,
Good to see the nexus between China’s low employment share (of GNI) and its stagnating level of consumption discussed again. There is only one way to fix that: higher wages. But there is no institutional framework to make wages go up (unions and collective bargaining might help) in a disciplined manner and the market is still in structural oversupply (at least in low-skilled work). However, a warning is in place. Although the data confirm intuition, it is quite posible that both the system of national accounts and quirky Chinese implementation lead to exaggerated results. I wonder how rural workers who are not self-employed farmers but may receive all kinds of income in kind, are treated, as well as the many millions of unofficial (non-hukou) urban workers. I would not be surprised if “profits” contained a growing lsice of quasi-wages. But this should be the core issue when dealing with China diplomatically about trade.
Twhofish’s recommendations appear to reveal an unexpected degree of sympathy with people in the party who have not given up on non-laissez-faire economics (I wonder what label should be used here: communitarian? (no, where’s the civil society here), social democracy (no, where’s the democracy?) enlightened authoritarianism???. It is clearly not old fashioned communism. I would rather put more money in people’s pockets than offer then all kinds of free services instead. Once the shift from the countryside is complete, the country would be lumbered with UK style government. Or is Twofish thinking of a Singapor model with Chinese characteristcs. As the great mr Zhu said: what works very well in Singapore might not work at all in China.
Anyway, I would applaud more discussion of the phenomenon (is it really there) of a declining employment share (who gains) with its implications for class politics (now China is largely an industrialized country with 19th century social characteristics, what about introducing some class-based ideological debates?) I can hardly believe that a “communist”party is ideally qualified to oversee the relative impoverishment of the Proletariat or that such a policy would guarantee the Party’s ultimate survival. If all these GNI non-employment residuals end up in private hands, OK. Sooner or later market response will correct that. But if it simply enriches the State, we have another problem, that the SOEs will be there to stay, tempting would be Oligarchs and misallocating profits that are partially (not merely) the result of wage suppresion. Essentially consumers subsidizing state businesses. Who would benefit from that?
after a while you have a state/business combination that is hostile to civil society and shows massive entrenchment of businessmen/bureaucrats/politicians.
brad –
OK, let’s say IMF is politically biased and last quarter was bad for global trade & export dependent economies.
Lets look at the private sector 2009 projections -
CITIBANK
US : -2.3%
Japan : -3.4%
Euro Area : -2.7%
Asia Pacific : 4.6%
China : 7.6%
India : 5.5%
CREDIT SUISSE :
Global : 1%
US : -2.3%
Japan : -2.1%
Euro 15 : -2.3%
UK : -2.5%
Non-Japan Asia : 5.4%
China : 8%
India : 5.5%
CLSA
US : -1%
Japan : -1.5%
Euro : -1.5%
China : 5.3%
India : 5.5%
MORGAN STANLEY :
Global : 0.1%
US : -2.4%
Japan : -2%
Europe : -1.5%
UK : -1.3%
Asia – ex Japan: 3.5%
China : 5.5%
India : 4.3%
GOLDMAN SACHS
Global : 0.6%
Advanced Economies: – 1.2%
US : -1.6%
Japan : -1.6%
Euroland : -1.4%
UK : -1.5%
BRICS : 4.7%
Asia ex-japan : 4.4%
China : 6%
India : 5.8%
Its a slowdown alright, but not a train wreck like in the developed world and the downturn is due to the knock-on effects of deleveraging in US/Europe, brought about by the financial crisis. In another 11 months we would know who is right and hopefully there is no Smoot Hawley II
Albion,
You mentioned an very interesting point. See most government starts to open their wallets to spend out of nothing instead of dealing with some structural issues. It’s interesting to see how it ends up.
[...] South Korea is case in point…quietly moving from large current account surplus’s to deficits…and thereby losing its incentive to accumulate foreign reserves. It also means that the upward pressure on the S.Korean currency has vanished. “The fall of 32.8% is far more than drops of 19% in November and 17.9% in December. With exports accounting for nearly half of South Korea’s economic output, the plunge represents the biggest challenge that South Korea has faced so far in the global economic downturn that began more than a year ago with the housing crisis in the U.S. source: WSJ From Brad Setser’s blog: “And Korea is now running a trade deficit despite the huge fall in commodity prices because exports have fallen more. Japan is in a similar position. That suggests a huge fall in the global current account surplus, as the fall in the oil exporters surplus doesn’t seem to be offset by a rise in Asia’s surplus. source [...]
where has dave chiang gone ?
Lol. The only funny thing in all this is how people pretend to be surprised at the course of events.