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The Chinese puzzle: why is China growing when other export powerhouses aren’t?

by Brad Setser
June 9, 2009

Almost all countries that relied heavily on exports for growth have experienced large downturns. And there economies are still in the doldrums. Except one. China.

Why?

Few questions matter more. Right now, the markets believe that the expansion of Chinese demand will drive the global recovery. Or so it seems.

On the other hand, other countries that relied heavily on exports to drive their growth saw very sharp falls in output. Germany. Japan. A host of smaller economies. Few expect these economies to lead the global recovery.

In general, the crisis has led to large falls in output in countries that relied heavily on capital inflows to finance large currency account deficits (Latvia is the leading example) and in countries that relied heavily on external demand. That stands to reason. The crisis produced a very sharp fall in capital flows, which hurts all those who needed ongoing capital flows (The US is an exception, as US demand for foreign assets fell faster than foreign demand for US assets, so net private flows to the US actually rose during the crisis) And the contraction in trade has been sharper than the contraction in output. That has hurt those who relied more on trade. The fall in Japanese industrial production – -and output – has been incredible steep. And German output has shrunk by more than say French output.

See Wolfgang Munchau.

China doesn’t fit. It is a big exporter. But it hasn’t seen the kind of contraction that other big exporters have experienced.

One possible answer is that demand for Chinese exports has fallen by less than demand for other exports. That clearly is part of the story. US imports from Japan (through March) are down over 40% y/y. US imports from China are only down 11%. But China’s exports still have fallen sharply. They were down 20% y/y in q1 2009 after being up around 20% in q3 2008. So that isn’t the whole story.

Another potential answer is that China never relied all that much on exports for its growth. That is the preferred answer of the Economist. But it doesn’t really stand up to scrutiny. Chinese exports rose from under $300 billion in 2000 (and 2001) to over $1400 billion in 2008. That is a huge increase, one that was only possible with a huge amount of investment in the export sector.

While import growth matched export growth in the early stages of China’s expansion, back in 2004 China got worried that its economy was overheating and slapped on a host of limits on domestic demand growth. From 2005 to 2008, net exports contributed over 2% a year to China’s growth.

To put it a bit differently, the contribution of net exports to China’s growth over the past four years topped the overall growth in Japan’s GDP. That isn’t a small contribution in my book.

So why isn’t China doing worse now?

The answer, I suspect, is that China – unlike many other countries that relied heavily on exports for growth – actually did have an underlying dynamic of domestic demand growth. From 2004 on, Chinese policy sought to limit domestic demand growth by limiting bank lending and running a tight fiscal policy. The loan to deposit ratio in China’s banks was quite low going into 2009, thanks to high reserve requirements and tight lending curbs. That was necessary to keep China’s economy from avoid overheating – and to keep China from experiencing a real appreciation driven by rising inflation — even as exports contributed heavily to growth.

It also gave China an option other export-based economies didn’t have when the global economy turned down – namely to lift existing restrictions on domestic demand growth and see what happened. And that’s what China did.

Banks who previously had been kept from lending as much as they wanted were free to lend. Local governments that had been forced to scale back their investment plans were free to go ahead. State enterprises that hadn’t been able to borrow quite as much as they wanted were able to borrow on a large scale.

I initially underestimated the magnitude of China’s stimulus by focusing on the (fairly modest) change in the government’s fiscal balance. It is now clear that the majority of China’s stimulus has been off-budget: the huge increase in lending by state owned banks mattered far more than the change in the budget of the central government. The expected loss on these loans can be considered a form of fiscal stimulus.

China then was every bit as exposed to the global slump as the other export powerhouses – but it also had more capacity than most other large exporters to stimulate domestic demand.

Did the policy work? Did growth fueled by the rapid rise in domestic lending – and associated rise in investment — offset the export downturn, allowing China to hit its growth targets?

My best guess is that the transition wasn’t quite as smooth as the official data suggests.

That is where the debate over China’s electricity power generation data comes in. Electricity generation is down y/y, even though industrial value added it up

Manufacturing accounts for a large share of China’s economy; so if the manufacturing sector is contracting, it is hard to see how China can achieve its stated growth target.

Stephen Green of Standard Chartered (in his May 25 note) argues that there is no evidence that energy-intensive sectors of the economy have contracted (or grown) more than other sectors, undercutting one explanation for the disconnect between the power generation numbers and China’s growth numbers. He also notes that the data on industrial value-added hasn’t tracked the data on industrial production that well. The industrial production data suggested a sharper fall in activity – and a more choppy recovery than the GDP data.

That seems right to me. China’s trade data (through April) suggests that the stimulus did spur a pickup in imports (and it clearly spurred auto sales). But China’s import data also suggest a quite sharp slowdown last fall, far larger than the slump in the official data.

In other words, China didn’t spur domestic lending quickly enough to avoid the global downturn, especially as China’s real estate sector was clearly slowing even before the Lehman crisis.

75 Comments

  • Posted by Thomas

    @Twofish

    the argument of “investments disguised as trade surplus” is an intriguing one. But I would argue that it cannot possibly explain a major part of the trade surplus:

    Let’s assume for the sake of argument that this factor accounts for roughly half of China’s trade surplus, i.e. 4 % of GDP.

    This would mean that the total value-added of China’s exports is only in the 10-15 % of GDP range, as opposed to Brad’s estimate of 15-20 %.

    When looking at the stuff that China exports, we can safely say that most of it does not belong to the “MNC-internal” category:

    – What about China-sourcing by foreign retailers: Surely you aren’t saying that Walmart secretely owns a huge chunk of China’s manufacturing industry financed by artificial profit transfers?

    – I know some people in Germany’s china-sourcing trade. The way their business works is that they look for the best deal from various Chinese suppliers. There is no equity connection whatsoever with the suppliers.

    – What about products such as steel or ships or solar cells made by Chinese companies and exported directly to the end customer?

    – And what about Chinese MNCs such as Huawei and Lenovo: Why would they engage in such activities?

    In short, if total export value-added is 10-15 %, I think it’s safe to say that only 5 % or less potentially belongs to the category that you use for your argument.

    But if so, then what you are implicitly saying is:

    Companies that achieve at best 5 % of China’s GDP as export value-added invest at least the same amount (4 % articifial profits + official FDI + legitimate onshore profits) into expanding their Chinese factories every year.

    That sort of amount makes no sense, especially not during the last 9 months when export volumes plummeted. Or are you implying that they channelled the money into the Chinese stock market or real estate?

    So my take is: Possibly this effect explains 1/10 or so of the trade surplus. But it cannot possibly explain 1/2 or more of it.

  • Posted by DanieldeParis

    Attention Eric deCarbonnel,

    Thank you for the great post. Yes Brad’s blog is the place to post for those enlightening posts. Do not forget to post in Roubini’s comment zone as well. Your post deserve a bigger audience.

    As always with posts of this size on subjects that I tend to grasp, I have read the comments in details and skipped part of the argumentation.

    Will do it for sure. Yes, as a matter of principles – for those who have read Rueff and likes – the current peg-and-associated-yuan-flow is definitely a 100%-garantee way to trigger massive inflation. That has happened in a relatively mild way with Euro-dollars in the 50-60, with Asia later. Could alas certainly be the trigger to next big thing.

    Calling it hyperinflation is mostly a political or journalistic issue. Difficult not to buy at least partly into the conclusion. The West will foot the bill as well in the end via its own kind of inflation. Via monetization when the “poors” stop buying the debts of the “richs”.

    I’d be glad if Brad could take the time to enter this monetary-à-la-Autrichienne debate as well. As most autrian-based economists, I’m only sure of one thing, a system with systemic debt problems – aka more debts than can service – will not go the right way. Inflation or deflation. Certainly not peaceful way-out. That should have been considered ahead of time. Not now. Nobody wanted to.

  • Posted by Twofish

    Cedric: Don’t know why it would be different in China, or why anyone would create a zombie subsidiary whose sole purpose is to sub contract out the company work to others, and increase the parent company costs.

    Because the Chinese government requires it. A large Western company that wants to do business in China can for the most part only do it through a Chinese subsidiary, and the Chinese want it that way so that they can keep control of the currency.

    Also it doesn’t increase the costs of the parent company at all. It’s either a joint venture or a wholely owned foreign enterprise, which is for all intends and purposes part of the parent company. Any profits that the sub make is booked to the parent company.

    There are also huge tax reasons for doing it this way. Money that the Chinese subsidiary makes is basically tax free. Money that the parent company makes is subject to US corporate income tax.

  • Posted by Thomas

    @ Eric de C.

    Would you care to explain why China’s hyperinflation is inevitable?

    Your blog post dated January 2009 said that hyperinflation is “imminent”, so shouldn’t we be seeing it by now?

    Also, I fail to understand why you think that China’s “shrinking economy” (you claim it is shrinking, if I read you correctly) is supposed to be one of the main causes.

  • Posted by Twofish

    Thomas: When looking at the stuff that China exports, we can safely say that most of it does not belong to the “MNC-internal” category.

    I think it does. When Walmart buys plastic cups, it has to do it via a Chinese subsidiary. You either set up a wholely owned foreign enterprise, a joint venture, or a representative office.

    Thomas: What about China-sourcing by foreign retailers: Surely you aren’t saying that Walmart secretly owns a huge chunk of China’s manufacturing industry financed by artificial profit transfers?

    Walmart doesn’t own a huge chunk of China’s manufacturing industry, but I’m arguing that it is financing a huge chunk of China’s manufacturing industry by these sorts of transfers. A Chinese subsidiary of a Western company can’t easily own a local firm, but it certainly can advance them credit, and I’m arguing that Walmart and Apple have became Chinese banks, without probably realizing it.

    The reason I think this is happening is that there is nothing about this that is remotely illegal. In fact, if you are a Western company doing any sort of business in China, you have to create subsidiary.

    Thomas: – I know some people in Germany’s china-sourcing trade. The way their business works is that they look for the best deal from various Chinese suppliers.

    And the supplier is often just a middleman, which is owned by some Hong Kong or Taiwan corporation that plays this game.

    Thomas: There is no equity connection whatsoever with the suppliers.

    I didn’t imply that there was.

    Thomas: What about products such as steel or ships or solar cells made by Chinese companies and exported directly to the end customer?

    Makes up a small fraction of the trade balance.

    Thomas: And what about Chinese MNCs such as Huawei and Lenovo: Why would they engage in such activities.

    Because they have to. It’s a result of the currency firewall that the Chinese government uses to separate internal and external economies. Lenovo’s US operations are subject to the same restrictions as far as currency transfer as Apple’s are.

    Thomas: Companies that achieve at best 5 % of China’s GDP as export value-added invest at least the same amount (4 % articifial profits + official FDI + legitimate onshore profits) into expanding their Chinese factories every year.

    Yes. I’m saying that the numbers are huge. Once the money gets into China, they don’t have to use it to expand factories. They can just keep it in a bank account or lend it to a joint venture partner or supplier, at which point it enters the southern Chinese financial system. In fact, one could argue that this sort of financing by MNC’s is the southern Chinese financial system.

    Also it’s not a matter of legitimate/illegitimate profits. What I’m saying is that the way that MNC’s are required to operate in China causes them to declare high values for exports.

    Thomas: That sort of amount makes no sense, especially not during the last 9 months when export volumes plummeted. Or are you implying that they channelled the money into the Chinese stock market or real estate?

    Exactly. I’m sure that the people in the companies don’t realize that they are doing this, but they are.

    Once the money gets into China, then it gets channeled into the local economy. A WFOE or joint venture can use the money they have locally to provide credit to its contractors. Once that money disappears, then the whole southern Chinese economy contracts which is what basically happened in Q4.

    This explains why the Chinese banks are in good shape. The system evolved because Chinese banks just don’t lend to export industries, and so export industries need to get credit from their customers.

    It also explains why the Chinese economy seems to be recovering so quickly. The primary purpose of the export industry in China is to provide credit not demand, and it’s easier to boost credit than it is to boost demand.

    Again, the important thing that I want to emphasis is that nothing I’m describing is illegal or even legally grey. It’s how the system evolved. This might be incorrect in its details, but it is designed to solve a mystery. There was obviously tens of billions of dollars in “hot money” going into China, and you can’t have flows that big through illegal or quasi-legal means, so how does the elephant manage to cross the river?

  • Posted by Thomas

    @Twofish

    Interesting.

    So you are arguing that (e.g.) Walmart has Chinese trading subsidiaries which record billions of US$ of local Chinese profits by selling the stuff they bought cheaply from Chinese subsidiaries to the US mother company at highly inflated prices? And that Walmart keeps those many billions of US$ in China to effectively run a huge shadow-banking operation?

  • Posted by Thomas

    Sorry, typo: not “bought cheaply from Chinese subsidiaries”, but “from Chinese suppliers”, obviously.

  • Posted by Twofish

    Cedric: So if state banks are making loans to a ball bearing manufacturer to build China’s 301st ball bearing plant next door to three ball bearing plants that just closed, then this is not really a good thing.

    As far as I can tell the commercial banks aren’t. China does have a set of policy banks to do non-commercial lending. It’s not that you don’t want to do non-commercial lending. It’s that if you have the same person trying to be both a bank and an employment agency bad things happens, so what the Chinese government has done is to split up those functions.

    The result of this is that you end up with hard budget constraints for social lending. The government can basically say we are going to spend $X to lend on things that we aren’t going to make immediate money on.

  • Posted by Twofish

    Thomas: So you are arguing that (e.g.) Walmart has Chinese trading subsidiaries which record billions of US$ of local Chinese profits by selling the stuff they bought cheaply from Chinese subsidiaries to the US mother company at highly inflated prices?

    Inflated prices makes it sound as if something illegal or unethical is going on, when my point is that it isn’t. If Apple sells Ipod’s at $250, declares the import value at $200, and pays its subcontractors $50, all of that is perfectly legitimate. If Apple valued the imports at $60, then it could only convert $10 to RMB, but by valuing the imports at $200, it can convert $150 to RMB.

    Thomas: And that Walmart keeps those many billions of US$ in China to effectively run a huge shadow-banking operation?

    Apple is a better example. Things may be more complex with Walmart since they are sourcing through Hong Kong, Taiwanese, local middlemen. But yes, I claim that Western multinationals are part of a massive shadow-banking operation. Again, it’s not illegal or unethical what they are doing, and that is important because anything that is the slightest bit illegal or unethical simply couldn’t transfer the massive scale of money that is being transfered.

    And Chinese export suppliers get financing from Western buyers because none of the local banks will finance them.

    And I’d guess that practically none of them realize that they are doing it. The thing about shadow banking systems is that they tend to grow to massive scales before anyone really notices them.

  • Posted by Thomas

    @Twofish

    my point is not that it is “illegal or unethical”. It simply seems hard for me to understand why all these companies would want to transfer so much money into China every year and leave it there forever.

    That’s why I picked Walmart as an example, because they spend huge amounts of money in China, and if you want to argue that most of China’s trade surplus is in effect artificial, then Walmart and other retailers need to be part of it in one way or another.

    Walmart would need to have many billions of dollars somehow “parked” or “invested” in China. And can only makes sense for Walmart to do so if it is the ultimate owner of those investments, because otherwise, it is giving profits away to what you call “middlemen”, and there’s nothing in it for Walmart in that case.

    In other words: The way I understand it, your argument only works within one MNC. It breaks down once you transfer money to outsiders, because then it isn’t transfer pricing anymore, and the outsiders make real profits out of it.

    And let’s also look at Apple: Why would Apple want to permanently transfer most of the revenues from an Ipod to China? What’s the point of doing so, if Apple’s on-the-spot operations are comparatively tiny as far as local value-added is concerned, and most components are also sourced from other countries, not from PRC?

    And in any case, assuming that Apple still reports profits in the US as well, it cannot possibly transfer anything close to 150 $ out of a 250 $ retail price into China, because its overall profit margin (based on full costing) is far lower than that. If Apple makes – say – 20 $ of profits on an Ipod on a full-cost basis, then it would need to show massive losses in the US (or other countries) if it transfered more then those 20 $ to its Chinese subsidiary.

  • Posted by Thomas

    @Twofish

    If I understand you correctly, you are saying that one of the main attractions of showing profits in China is to pay little or no taxes on those profits.

    If so, then Apple does not appear to be doing so to any major extent, because Apple’s financials show an average tax-rate of 30 % of pre-tax profits.

    So either the profits accruing at its PRC subsidiaries are comparatively minor, or they are also paying significant amounts of PRC tax.

  • Posted by Thomas

    Another interesting snippet from Apple’s financials:

    Most of their assets are “cash and marketable securities” (more than 20 bn US$ in fact), and most of those are “US agency securities”.

    It doesn’t look like they have lots of PRC onshore assets. “Property, plant and equipment” is comparatively minor (2.5 bn $ worldwide, including software) and not growing much. “Inventory prepayments” are downright minuscule (only 306 m US$).

  • Posted by bill j

    Walmart are good example of what Twofish is talking about. How is a firm which makes nothing the biggest company in the world?
    Thanks to a phenomena know as an unequal exchange. They buy output, mainly from China, way below its real value and then sell it back home at its real value, pocketing the difference.
    That difference is a super profit way above what is recieved by China’s manufacturers, the actual producers of that output. How can they do that? By their monopoly control of retail distribution in the main market for Chinese output – the USA.
    The extent of this unequal exchange explains why the collapse of foreign demand has had such a relatively small albeit impoortant effect on the Chinese economy.
    At an annualised rate and in dollar terms in the three months to January exports were falling at around -57%, yet GDP fell by -3% quarterly from the summer.
    Chinas manufacturers do indeed add far more value than traditional estimates – the point is they are not paid for it. Rather it is appropriated via the mechanism of unequal exchange by the purchaser, who gain a bumper profit as a result.

  • Posted by Gabor

    There are three temporary effects:
    1. Net exports are up in Q109 only because the oil prices dropped. Net exports are up 18 bn dollars from Q108, oil imports down 30 bn from Q108.
    This means that in Q3 and Q4, when 200 bn dollars net exports come into the 2008 base, there will be a sharp fall in net exports 2009 H2 on 2008 H2.
    2. investent is up 30% in Q109 (in nominal terms), that is because of the 4.9 trn total lending growth in Q1, which is more than 08 year total lending growth(4.8 trn)
    3. FAI (17.2 trn yuan in 2008 ) is only fractionally financed from net corporate lending (only 3 trn yuan in 2008), majority of FAI is from company’s and government’s own sources. As exports and manufacturing goes down, FAI financed from own source is supposed to go down, because profits are shrinking.
    In the time domain, FAI is concentrated in Q2 and Q3. In 2008, only 15% of yearly FAI was delivered in Q1.
    Thus it was easy to prop up Q1 FAI by a huge stimulus, because the 2008 basis was low.
    So in Q109 we saw that government spending in FAI was taking over private FAI spending.
    If private FAI is really shrinking, we will start to see it in Q2 and Q3 because there is no way government spending can replace all FAI (which was 57% of GDP in 2008!!).

    I expect to see FAI stagnating/mildly falling in Q2 and Q3. Next exports sharply falling in Q3 and Q4 (compared to same period last year). Private consumption to hold mild growth.

    I speculate the response of Chinese government will be to start to prop up net consumption somewhere in H2 2009 or H1 2010.
    Needless to say that might mark the end of BW 2.1

    Fall in electricity consumption is explained by the above numbers.
    Net exports grew only because oil prices dropped, total exports dropped, investments grew by record because government stimulus.

  • Posted by Twofish

    Thomas: It simply seems hard for me to understand why all these companies would want to transfer so much money into China every year and leave it there forever.

    The whole point of the exercise is to move money into the PRC in a way that the money isn’t locked there. PRC currency restrictions close the capital account. If you move money into the PRC directly to build a factory, you have to have SAFE’s permission to move the money out again.

    If you convert USD->RMB through trade exchange, you have authority to convert RMB->USD. All you have to do is to show a bank a receipt saying that you converted $100 million USD->RMB through trade, and you can convert that RMB back to USD and move it out whenever you want.

    Thomas: Why would Apple want to permanently transfer most of the revenues from an Ipod to China?

    They wouldn’t, that’s why they may be doing these sorts of tricks.

    Thomas: It doesn’t look like they have lots of PRC onshore assets. “Property, plant and equipment” is comparatively minor (2.5 bn $ worldwide, including software)

    First of all, property, plant, and equipment figures uses numbers depreciated from cost, so that often underestimates the amount value of these items.

    Second what’s interesting is the change from 2008-2007. You have an increase of $600 million. Accounts receivable increased by $800 million.

    What’s already interesting is this statement…. In 2008, Apple had $11 billion cash equivalents in foreign subsidaries. In 2007, Apple had $6 billion.

    Hmmmmmm….

    Looking at the balance sheet, there are all sorts of places that you can see that Apple could move maybe $2-$3 billion into China. Now multiply by all of the businesses that are doing business in China, and you get some huge numbers.

  • Posted by Twofish

    bill j: Walmart are good example of what Twofish is talking about. How is a firm which makes nothing the biggest company in the world?

    Because creating a product doesn’t create much wealth. If I have a car in San Francisco, and I’m in Chicago, that car is worthless to me.

    bill j: Thanks to a phenomena know as an unequal exchange. They buy output, mainly from China, way below its real value and then sell it back home at its real value, pocketing the difference.

    There is no such thing as real value. A thing is worth what people are willing to pay for it. If I’m on a desert island surrounded by gold bars, those are worthless to me if I need a tooth brush.

    bill j: By their monopoly control of retail distribution in the main market for Chinese output – the USA.

    WalMart has nothing near monopoly control. WalMart is extremely efficient with hyper-low margins. That is why it is such a huge company. It needs to generate large amounts of volume to deal make money.

    One thing that you will find interesting is that Made in China products that you get at WalMart actually cost more in China, because WalMart is super-efficient at moving things from China to the US.

    The reason I used Apple as an example rather than WalMart is that Apple *does* have a monopoly. Only Apple makes Ipods and Itouch, and as a result Apple is a surprisingly small company.

    bill j: Chinas manufacturers do indeed add far more value than traditional estimates

    Personally, I don’t think that they do. The value in a 21st century product is a nice logo that says that you will enjoy using this product. China hasn’t gotten to that stage yet. It will.

    bill j: Rather it is appropriated via the mechanism of unequal exchange by the purchaser, who gain a bumper profit as a result.

    There’s nothing unequal about this. China could kick WalMart out if there is a belief that WalMart isn’t acting in China’s national interest. China will kick WalMart out. WalMart learned a nasty lesson when it tried to prevent a union from forming in its Chinese stores.

    The value of WalMart is that it has a finely tuned system of logistics that can figure out when a product is about to sold out at store A, and then deliver the exact amount.

    There are countries that are ruthlessly exploited by Western multinationals because they have governments that are too weak or too distant from the populus, and Western multi-nationals *will* ruthlessly exploit a country if you let them.

    But none of this applies to China…… If you do business in China, you have to play by Chinese rules, which is why companies do these bizarre things to get USD into the country.

  • Posted by Thomas

    Quote Twofish:

    “Accounts receivable increased by $800 million. In 2008, Apple had $11 billion cash equivalents in foreign subsidaries. In 2007, Apple had $6 billion.”

    I agree that the accounts are not very transparent in terms of where the money is.

    Accounts receivable shouldn’t be relevant for the topic we’re discussing, because those refer to claims that Apple has against its customers.

    As for cash equivalents in foreign subsidiaries: I didn’t manage to locate those in the financial statement. That is indeed a large increase. Though the statements also say that 3/4 of Apple’s foreign operations (in terms of owned floor space) are in Ireland. They tell us nothing about the location of the rest.

    To me, it mainly boils down to this question: Why would Apple want to channel all this money to China? What’s in it for them? Their customers aren’t there, and most of their suppliers aren’t there either (at least that’s what the various IPod sourcing studies claim). And considering their overall tax-rate, it doesn’t seem that they are minimizing tax exposure.

  • Posted by Michael Pettis

    Brad, the debate in China about this has become more schizophrenic than ever. I think there are two things that might have influenced China’s relatively good growth. First, even though they did not devalue the currency (which the MoC wants but which would almost certainly led to even more trade friction) they did a lot of other things that had the same effect and increased China’s relative competitiveness, effectively forcing more than 100% of the adjustment in the contraction of the US trade deficit onto their trade competitors. You can see that in the relative trade numbers, as well as in the furious reactions towards China of several Asian exporters. This can’t go on forever and at some point more of the adjustment must be borne by China, if for no other reason than the increase in trade tensions.

    Second, the investment-led fiscal stimulus, although inefficient and structured in a way likely to make the overall adjustment over the next few years much more difficult, nonetheless was huge, and has involved a massive expansion in debt, both through the banking system and through indirect borrowings at the provincial and municipal level. Andy Batson has a good, and very worrying, piece on the sharp and sudden rise in provincial debt in the WSJ (http://online.wsj.com/article/SB124457041123298695.html).

    The stimulus program is almost certainly not sustainable but the PBoC and others have said that as risky as it is, it is less risky than to stop. I am not sure I agree, but as Lu Lei writes in a very thoughtful article in this week’s Caijing: “We’re stuck with a painful choice between two losing scenarios: a more moderate monetary policy that would cripple fiscal policy, leading to an outright ‘hard-landing;’ or continuing a loose monetary policy backed by fiscal spending, which risks future loan losses and a weaker market.” A number of economists at the universities and think tanks are saying, usually privately but increasingly publicly too, very similar things. One CASS researcher I know compared it to the continued bank-lending-led 3-year surge in Japan after the 1987 crisis in the US, which should have forced an adjustment in Japanese growth. He is worried that we may be seeing a smaller version of a similar process. He may be right.

  • Posted by Thomas

    If I understand correctly, the China-based assembly of Ipods and other Apple-stuff is outsourced to Taiwanese suppliers that do not have an equity relationship with Apple.

    If so, then how can the transfer pricing argument work at all? To do profit transfers from US to China, Apple needs to “claim” massive value-added within its own China subsidiaries. They can’t just “artificially” inflate the amount they are paying to the subcontractor, because that would imply a massive profit for the external subcontractor, not for Apple.

    So what they would presumably need to do: Apple’s Chinese subsidiary would have to buy the finished Ipod from the subcontractor at a low price, do something very notional itself, and then reexport it to the US at a much higher price. Can’t rule it out, but to me it sounds a bit farfetched as long as there is no further evidence to back it up.

    Or do I misunderstand your argument in some way?

  • Posted by John

    In a rapidly deflating world more Chinese capacity is all we need. It will all end in tears at bedtime.

  • Posted by Gabor

    January-May FAI figures came out today.
    FAI growth holding strong at 30% on same period last year. Still no sign of the stagnation in FAI I expect later this year.

  • Posted by Broomhilda

    This is what I’ve been figuring. Their economy was running with a serious governor on the gas pedal: it was working at maybe 1/4 of throttle. Everybody else was leveraged to the hilt – running with the pedal all the way down, top gear, with leverage like a nitro boost. If a tire came off, we were all in the ditch, burning.

    But the Chinese have so much unmet domestic demand, they can pretty much always turn production inward. Those enormous savings rates reflect the inability to purchase what the Chinese people wanted at home, be it for investment or consumption. And depending on whether China FINALLY opens its borders a little to trade, we will see whether they fuel global growth or whether they just leave the rest of us in the dust, trading with each other for charred remains.

  • Posted by Shannon

    Mr. Setser states that the Chinese government did not act quickly enough to stem the effects of the global economic crisis. In some industries, however, it was not just insufficient speed but also insufficient action that left them vulnerable to the recession. A ChinaStakes.com article on the automobile industry explains that “insiders blame the decline in sales on the ending of the government’s previously favorable auto industry policies.” The government, now aware of the depth and severity of the economic crisis, is now scrambling to re-enact its stimulative auto policies.

  • Posted by Shannon
  • Posted by Huyu

    China is just a bit player; the world economic super power is really India. I am Chinese and an under-deserved Anglophile as well. To us Chinese, we prefer not to exaggerate our role in world affairs and we think you should just look to India instead and please spare us a little bit of attention. India is already the world’s No.1 Superpower, transending the best traditions of the British Empire every day. No dispute here, and much admired. In PPP terms, India is already the world’s No.1 economy, not even the US comes close. India has a super high-tech economy with InfoSys, Wipro, Nano, Slumdog, and much more that the average Chinese never even heard about, in whose unfit minds, they only know about BYD, Hauwei, ZTE, and Lenovo; never mind, how limited horizons. In the democratic guidance of Gandhi, Nehru, Indira, Rajeev, and Singh super human politicians,India shines while the world declines. India has a huge population dividend, and as time advances and the multiplier labours forth the advantage will become much more pronounced, just imagine millions more Singhs all equalled by only the Oxford Sheldonian debate chamber forged speakers. With her close to 1.1 Billion Software Engineers, they are making this profession obselete; literacy is not even worthy of men’s will as these boys and gals can all express themselves in the languages of their laptops. In the next 100 years, India with her super effective democracy will prevail mightily; as we Chinese just pray that India will also have mercy to leave a bit of room for us to earn a modest living in our corner of the planet. India just needs to sleep walk through the next 30 years, or better yet with their superior intellectual powers they can make an galactical contribution to human scientific endeavours like whether the black cats are superior to white cats, or white ones to black ones, or what the hell, maybe even both, whereas us poor Chinese will have to continue to slave under the Sun, rain, and snow just to keep us fed and our kids in school. Oh, I take it back, I may have to skip my meals so my kids can stay for one more lesson. With the current economic crisis, my salary here in Beijing is shrinking by 8% each year, together with the overall economy; oh maybe I am confused with the sign of this figure as you see I am not that educated with numbers. All I know is that all that necessity is becoming harder day-by-day, yet these crazy people, like my wife, are clamouring for those fake Gucci bags. In 30 years, I suspect my salary would march on to zero, with how many … I really do not know now, but then I would also be dead and need not to care. Oh, by the way whatever you hear from our government and the foreign press, if it is good news, just ignore it, it is not quite right, shall we just say. Cheers to India! Cheers to India!

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