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The good and bad news in the World Bank’s China Quarterly

by Brad Setser
June 21, 2009

The good news in the latest World Bank China Quarterly:

One. China is growing, thanks to China’s government. The World Bank estimates that the government’s policy response will account for about 6 percentage points of China’s 7.2% forecast growth (p. 8). That’s good. There is a big difference between growing as 7% and growing at 1%. This was the right time for China’s government to “unchain” the state banks. Ok, it would have been better if China had allowed its currency to appreciate back in late 2003 and early 2004 to cool an overheated economy instead of imposing administrative curbs on bank credit and curbing domestic demand. Then China might not have ever developed such a huge current account surplus and avoided falling into a dollar trap. But better late than never: this was the right time to lift any policy restraints on domestic demand growth.

China has, in effect, adopted its own version of credit easing. It just works through the balance sheets of the state banks rather than through the balance sheet of the central bank. Andrew Batson:

By some indicators, credit in China is even looser than in the U.S., where the Federal Reserve has extended unprecedented support to private markets. … China’s methods for pumping cash into the economy are quite different from those of other major economies. Its banks, almost all of which are state-owned, made more than three times as many new loans in the first quarter as a year earlier. Central banks in the U.S., Europe and Japan lack such control over lending, and have instead used extremely low interest rates and direct purchases of securities to support credit.

Two. China’s fiscal deficit will be closer to 5 percent of GDP rather than 3 percent of GDP. That’s cause for celebration in my book. Last fall I was worried that the desire to limit the fiscal deficit to three percent of GDP would mean that there was less to China’s stimulus than met the eye (or hit the presses). I was wrong. If the likely future losses on the rapid expansion of bank credit are combined with the direct fiscal stimulus, China almost certainly produced a bigger stimulus program than any other major economy.

Three. China’s current account surplus is now projected to fall in 2009. Exports still haven’t picked up — and we now have data through the first five months of the year. Imports by contrast are starting to pick up. That shows up clearly in a chart of real imports and real exports, a chart that draws on data that that the World Bank’s Beijing office generously supplied me:

china-world-bank-q2-09-1

Some of that is commodity stockpiling and thus not a reflection of underlining demand. And some stockpiling sounds a lot like simple speculation. But let’s set those debates aside for a bit.

In dollar terms, China’s 2009 current account surplus will be a bit smaller than its 2008 surplus (The World Bank assumes that China’s trade surplus in the last half of 09 to be significantly smaller than its surplus in 08, as the surplus was up in the first five months of 09). And since the fall in commodity prices would be expected to push the surplus up, all other things being equal, that indicates a real shift in net exports. Net exports, according to Dr. Kuijs of the Bank’s Beijing office, will subtract about 2.5% from China’s overall GDP growth in 2009.

The not-so-good news:

One. It isn’t clear that China has put in place policies that will bring about a sustained rise in domestic consumption. The stimulus has worked by pumping up investment, especially state investment. And investment already loomed large in the national accounts. Olivier Blanchard:

“In response to the crisis, China has embarked on a major fiscal expansion, with a focus on investment rather than on consumption. This was the right policy given the need to increase spending quickly, but this increase in investment can only last for a while. The question is whether, as time passes, China will allow an increase in consumption.”

Two. The negative drag from net exports stems from a faster fall in real exports than in real imports, not a rise in real imports that exceeds the rise in real exports. For the year, real exports are forecast to fall by 10% and real imports by almost 5%.

If China’s exports fall faster than global demand, that opens up space that allows others to cut back less. The alternative — fast Chinese export growth amid a shrinking global economy — would be a sure source of trouble. But China still isn’t really acting as a locomotive for overall global demand growth.

Three: Real imports of manufactured goods are still down 16% y/y. The rebound in Chinese imports has been driven entirely by the rise in commodity imports; real imports of primary products were up 17% (y/y) in April.

china-world-bank-q2-09-2

Back in 2003, when China was going through another lending boom, real imports of all kinds were up way more than they are now. Of course, back in 2003, China’s export sector was also booming and that pulled in imports for the “processsing trade.” The comparison isn’t perfect. But it does highlight how different China’s current lending and investment boom is from past lending and investment booms.

Part of the explanation for the weak rebound in Chinese demand for manufactures is no doubt weak demand for exports, and thus weak demand for imported components.

And part of it is that there is plenty of spare capacity in China to meet a surge in Chinese demand. For say cars. Chinese auto sales may top US auto sales this year – and China seems able to meet that rise in demand without importing a lot of finished cars or auto parts.

But part of it seems to be that Chinese consumers are less interested in Western — or even Korean and Japanese– brands. Maybe Chinese consumers concluded that if foreign banks weren’t better than Chinese banks, they shouldn’t assume that foreign goods were better than Chinese goods.

And China’s government also seems particularly keen on making sure China’s stimulus is spent in China. Jamil Anderlini reports: “Beijing said government procurement must use only Chinese products or services unless they were not available within the country or could not be bought on reasonable commercial or legal terms.”

Kind of risky for a country that still exports way more than it imports.

But it shouldn’t be a total surprise. The usual argument for why China would keep its exchange rate undervalued even though the undervalued exchange rate meant that China was overpaying for foreign assets and thus would eventually take losses was that China needed to keep up Chinese employment, and this was a way to do so. And don’t forget, the undervalued renminbi has encouraged jobs through import substitution – not just the expansion of China’s export sector. China’s hasn’t been interested in undistorted trade; it has been interested in using trade to support domestic activity in China. It isn’t a huge jump then to see why China might want to make sure that its domestic stimulus creates, in the first instance, as many Chinese jobs as possible.

But it does suggest that China’s commitment to say the G-20 is limited. Just giving China a seat at the international negotiating table won’t necessarily change China’s policies.

All in all, I would say the good trumps the bad. But real problems will come if China’s buy China policy is still holding down Chinese demand for the world’s goods when global demand for Chinese goods returns; rising exports and still stagnant manufacturing imports from the world’s biggest surplus country wouldn’t be terribly popular globally.

58 Comments

  • Posted by imapopulistnow

    China is simply following the golden rule…”He who has the gold, rules.”

    Of course China is discouraging imports, encouraging exports, not playing by international expectations of fair trade. It is in their best interests to do so and their is not much that we can do about it.

  • Posted by Cedric Regula

    It’s not very good news, for the short term or long term, that increasing Chinese consumer demand means lots more Chinese cars and lots more Asian drivers.

    I was hoping for a more benign outlet for consumer activity, but people do seem to love cars.

  • Posted by Bob_in_MA

    There seems to be a convincing amount of evidence that much of the new lending is being used for speculation in property, equities and commodities. And most of the rest is being invested in expanding industrial capacity, at a time when there is a huge glut of global capacity.

    Meanwhile, here the government-backed lending is being used to for things like FHA guaranteed mortgages of up to $700,000 with as little as 3% down, subsidized further by an $8,000 tax rebate.

    What if U.S. (and world) consumer spending takes another leg down? The U.S. economy weakens further, home prices fall another 20% and Chinese exports fall another 10-15%.

    Then we have people walking away from one-year-old FHA mortgages that are 15% underwater, commodity and equity prices tumble, and Chinese property falls precipitously.

    I think you’ll have as hard a time explaining why the jump in lending was a good thing as Krugman has of explaining his call for a housing bubble. (It’s very amusing, see: http://www.nytimes.com/2002/08/02/opinion/dubya-s-double-dip.html )

  • Posted by yoda

    looking at the chart, china export has been steady decline. and 2008, everything collapsed. where they have trade surplus to support dollar and dollar denominated asset?

  • Posted by DOR

    Has anyone read Derek Scissors’ “Deng Undone” article in Foreign Affairs (May/June 2009)? Long lists of how policy isn’t changing, and then the conclusion that economic liberalization is in reverse. One of the least impressive pieces I’ve ever read in that journal.

  • Posted by bsetser

    DOR — i haven’t read scissors, but in some ways, there is little doubt that china was repressing parts of the financial sector (before the 09 lending boom) to help sustain the exchange rate regime. administrative curbs on the banks were ratcheted up in 03/04 and stayed high; the rise in china’s loan to deposit ratio wasn’t a market outcome (nor was the buildup of dollar assets by chinese residents). i tend to be more irritated by reports on china that suggest an unending series of steps toward a us style economic system than by any report that suggests that china’s state still controls most of the economies commanding heights. my view is that china cannot liberalize the financial sector, keep its exchange rate regime and avoid a lot of inflation. and so far it has chosen to square than circle with increasing adminsitrative guidance to the financial sector –

  • Posted by Twofish

    I’m not particularly irritated by reports that the Chinese state intervenes heavily in the Chinese economy. I am irritated by reports that the Chinese state intervenes heavily in the Chinese economy, and it is automatically a bad thing. The Derek Scissor’s article was a pretty bad article since it assumes American support for an economic model that I don’t think most Americans support right now.

    The Chinese government *does* borrow a lot of ideas from the US economy, and right now there are parts of the economy in which is *is* rapidly liberalizing (private equity), but there are also parts of the neo-liberal model which it does reject. It all makes sense if you recognized that the Chinese government is neither pro-liberalization or anti-liberalization, but rather pro-whatever-keeps-the-economy-growing-and-the-Communist-Party-in-power.

    I’m also less concerned about a trade backlash. If China’s actions do cause trade concerns in other countries (and I think that Brad consistently overestimates the degree to which that will happen), then people will just meet at WTO to negotiate how to deal with it. The US has some pretty weak grounds for objecting to Chinese restrictions on government procurement of US goods, since they are basically a carbon copy of the restrictions that were imposed on the government procurement of Chinese goods and services by Obama’s stimulus.

    What I think is going to happen is that WTO is going to become a forum in which governments negotiate trade restrictions rather than a forum for liberalizing trade policy.

  • Posted by Twofish

    bsester: i haven’t read scissors, but in some ways, there is little doubt that china was repressing parts of the financial sector (before the 09 lending boom) to help sustain the exchange rate regime. administrative curbs on the banks were ratcheted up in 03/04 and stayed high; the rise in china’s loan to deposit ratio wasn’t a market outcome (nor was the buildup of dollar assets by chinese residents.

    And in hindsight, there are people that argue that this is exactly what the United States should have done. What people call “financial repression” (which is a fun marketing term since “repression” is a bad thing) is pretty much the same thing as “prudent regulation” and most of the administrative curbs on Chinese banks were to prevent them from excessive loans in construction and real estate, which the Chinese banking authorities feared would cause (and in the US did cause) massive non-performing loans.

    Stating that Chinese actions causes much less lending and different types of lending than a “laissez-faire” market outcome is something that is true. Saying that this is a *bad thing* is something that is debatable, and the Chinese authorities in 2003 did what they did precisely because they were terrified that what happened in the United States would happen in China.

  • Posted by --Andrew

    Brad, out of curiosity, is there any similar historical analogy to what China is doing? I can’t imagine that this is the first time a surplus country has deal with a combined economic downturn/trade collapse by boosting investment/production capacity and requiring/encouraging their people to “buy local” — which to me seems to be essentially holding their breath and waiting for the crisis to blow over. Did the U.S. (or any other country) do something similar in the early parts of the Great Depression? I’m just wondering if there might be some (albeit imperfect) historical guidance you are aware of on what happens when imbalances are not allowed to unwind by one or more of the players.

  • Posted by Twofish

    One other thing, just because a policy is good for 2009, doesn’t mean that a policy is good for 2003. The Chinese economy in 2009 is vastly different than the one in 2003.

  • Posted by Twofish

    imapopulistnow: Of course China is discouraging imports, encouraging exports, not playing by international expectations of fair trade. It is in their best interests to do so and their is not much that we can do about it.

    With 1.2 billion people, part of what China does is part of international expectations. We are long past the point where “international” meant “what the United States and Europe” think.

    Also, the trade restrictions that China has put in place aren’t that much more objectionable than the ones the US and Europe have in place. That’s why I think that there is going to be much less objection to Chinese trade restrictions then one might suppose, since a lot of these things are going to be resolved by gentlemen’s agreement in which the US doesn’t complain about Chinese restrictions on trade if China doesn’t complain about US restrictions.

    WTO makes a good forum for these sorts of things, because WTO can only act if someone raises a complaint, and one of the huge barriers to raising a complaint on something is the person you are suing will definitely raise a counter-complaint, and you have to figure out if the amount of gain you get if you are successful at a complaint is worth the loss if you lose the counter-complaint.

  • Posted by Dennis Redmond

    One additional reason to be hopeful: China’s leadership has finally recognized the depth and seriousness of the ecological crisis. They’re putting serious money into green jobs, renewable energy, and mass transit (especially rail and mixed modal). If they supplement this with some serious social spending — and the signs are also looking good on this issue, too — the recovery should have some legs.

  • Posted by Rien Huizer

    Brad,

    “It isn’t a huge jump then to see why China might want to make sure that its domestic stimulus creates, in the first instance, as many Chinese jobs as possible.
    But it does suggest that China’s commitment to say the G-20 is limited. Just giving China a seat at the international negotiating table won’t necessarily change China’s policies.”

    What is wrong with that? Countries are not (supposed to be) altruistic. And we all seem to agree that China’s (that is, the Chinese state’s) self interest is to maintain legitimacy and domestic stability by substituting state-made domestic demand for foreign. No matter what the theoretical welfare gains from alternative policies might be

    Keep in mind that accomodating foreigners (or even appearing to do so) is not what makes people popular in Chinese history books.

    So China deserves a place at the G20 because of its weight, takes part in the discussions and seeks advantage doing so. Pretty much what I would my government (or any government) expect to do. Not every country defines “advantage” in the same way.

  • Posted by DJC

    There are also indications of potential trouble from Rest of World (ROW) flow analysis. ROW holdings declined for Agency/GSE-backed securities, Open Market Paper, US Time Deposits, Inter-bank Assets, Corporate Bonds, and Loans to Corporate Business. Meanwhile, Treasury holdings expanded SAAR $636bn during the quarter to $3.341 TN. Our foreign creditors may be content to recycle dollar flows back into Treasuries, but they are thus far in no mood to return to financing our business or household sectors. This may prove a major factor contributing to an altered flow of finance throughout the US economy. It can also be read as a warning that the crucial process of dollar recycling rests increasingly on market perceptions of the soundness of one single market – US Treasuries.

    http://www.atimes.com/atimes/Global_Economy/KF23Dj02.html

  • Posted by bsetser

    Rien — the same logic (spending the stimulus on goods made at home in the first instance generates more jobs) applies to other countries as well, and if other countries followed china’s example, it would hurt china’s exports — and undercut the relatively open trading system that china has relied on to help support its development. if every country defines its nat’l interest narrowly, the int. economy will be much less open.

    maybe that isn’t as much of a problem as some thing — i have long argued that folks defending an open global economy have turned a blind eye to large distortions in the global economy. But i would rather see fewer distortions than less openess. and China — a big surplus country – it is a very very dangerous game. See Pettis!

  • Posted by a

    “There seems to be a convincing amount of evidence that much of the new lending is being used for speculation in property, equities and commodities.”

    This is Andy Xie’s take (via Naked Capitalism).

  • Posted by bsetser

    twofish — interesting point about a gentleman’s agreement. we shall see. tis very much at odds though with the official line coming out of the G-20, which is about maintaining openness not ignoring deviations from it …

    as for financial repression, i don’t think most in the US advocate severe loan to deposit limits (the focus is on more capital) and certianly not driving the laon to deposit ratio down via administrative caps on bnak lending. I’ll grant you that these restrictions limited china’s risk of a domestic banking crisis. but they also had — together with the exchange rate regime — a lot to do with the emergence of china’s current account surplus. and buying unneeded dollars at a loss may turn out to be more costly than bailing out China’s banks; estimates of the annual loss china incurs as a result of its incremental reserve growth vary but they aren’t small. and sum put the cost at a similar size, relative to China’s GDP, that the cost of the US TARP. and that’s every year not a one off. plus, in my view china’s financial repression generated surpluses and dollar inflows that helped lay the ground work for the global crisis — one that was costly to others (negative spillovers) and ultimately rebounded in ways that have challenged China.

    andrew — yes, pettis has noted that the US was running a substantial surplus when it enacted the smoot-hawley policies in the 30s.

  • Posted by yoda

    looking at $usd and $usb chart, it is weak and in downtrned -> short it until is not

  • Posted by D Gross

    You are right- China is not changing its model. China has little interest in switching from mercantilism and state influenced fixed investment (the only thing worse than having too many Dollars might be losing control over your Dollars and seeing them leave the country to pay for imports or due to lack of confidence). They just want their model to operate on a more sustainable basis, say 8-9% GDP growth rather than 10%+, and at the same time they want their debtors to focus more of their efforts on making sure China can get paid. I am not sure that is what the IMF had in mind.

    At least the US (not by choice) is taking some of the IMF medicine, as consumers de-leverage and spend less. Sadly, this is temporary- there is no evidence that US politicians want to change the US’ model. Politicians like a happy consumer and continue to campaign and rule using “free lunch” fiscal policies. Current FHA lending standards are as bad as Countrywide’s were during the bubble. The US won’t permanently change its model until it is forced to, and unfortunately the policy mix being implemented now (Europe 1974) will make the eventual adjustment even more painful. The US will go into its crisis three or five years hence looking like a statist emerging market country (huge deficits and interventionist policies oriented around consumer vote buying and payoffs to interest groups). Everyone knows what happens when your voters are local and your creditors are global.

    Back to China- they are doing what works. In a crisis it is easier push the usual buttons (mercantilism/over-investment) than it is to teach your consumers, companies and cadres new tricks. And, as with Mr. Obama and GM, there is the added benefit of being able to direct your spending and lending to politically connected groups. As a short-term fix, I think China’s stimulus is admirable (massive and quick hitting). But in the long-term, does anyone think China needs more empty factories, steel mills, coal plants, condo towers and cadre speculators? China’s old model (relying on investment for a good portion of its GDP growth) worked during a global credit and real estate bubble but I don’t see it working going forward. Once we get beyond the current crisis there are only two exit scenarios

    1) The US takes the “German medicine” (what every Buba head has been telling the US at G7 since the Reagan era): consume less, borrow less, raise taxes, cut entitlements. This will require a long, painful adjustment- (5 to 7 years). I don’t see China ever growing at 9% under that scenario without changing its model to a consumer/service-driven economy.

    or

    2) The US spends freely to artificially support GDP and consumer spending. Taxes will be raised “later” to pay for it all, but probably not before we see some combination of inflation, a currency crisis and a debt crisis. Under this scenario, China’s growth will look good for a few years, and then their reserves will be partially wiped out. This might not be a bad alternative. The average Chinese citizen won’t feel the loss of the reserves (until it is time for the Chinese government to bail out its state-owned banks), and there are steps the Chinese could take to mitigate the risk to reserves leading up to the crisis. They could hold only the highest quality securities, they could diversify out of Dollars where possible, and where not, use Dollars to purchase hard commodities, industrial stockpiles and foreign companies.

    Hmmm

  • Posted by Indian Investor

    Dr. Setser, I’d like to acknowledge your courage in admitting your mistake in insisting that China’s fiscal stimulus was too small. However, it’s easy to see that Olivier Blanchard’s – and your – concern about the sustainability of growth through expansion of construction and capital investment is misplaced. The central problem of a developing country is the inadequate level of investment in infrastructure and capital equipment, which makes the process of manufacturing and construction extremely labor intensive, and largely manual. Low productivity of labor due to indequate use of equipment results in low real wages in most sectors. On the back of comparitively low real wages, export industries based on wage arbitrage – such as manufacturing in China and services in India have prospered. Even if China were not to intervene heavily in the foreign exchange markets, Chinese labor would still be much cheaper, both in real and nominal terms, than labor in the traditional industrial countries.You stress on the policies of the Chinese regime as encouraging exports and discouraging imports; and your expectations are for an adjustment of trade imbalances through increased exports to China, presumably from the traditional industrial countries.
    Why not pay more attention to the basic tenets of Keynesian analysis – that is largely predicated on analysis of real wages. Unless the overall level of capitalization of the BRIC economies improves substantially, the local real productivity of labor, and in turn the local real wages – will not adjust. As long as real wages in one geography are much lower than in another – policy choices about exchange rate, and fiscal deficits are largely cosmetic, rather than fundamental – to the process of development of trade imbalances.

  • Posted by Twofish

    bsetser: i have long argued that folks defending an open global economy have turned a blind eye to large distortions in the global economy.

    And this blindness is hardly accidental. People who defend an open global economy do so because they stand to make lots of money from an open global economy, and if you run into a situation in which rhetoric conflicts with making money, the easiest thing to do is to ignore it.

    bsetser: But i would rather see fewer distortions than less openess.

    I usually start with what is politically possible and what economically works. I really don’t have much an ideological reason to support “few distortions” and “more openness.”

    bsetser: China — a big surplus country – it is a very very dangerous game. See Pettis!

    I think that the game that China is playing is not particularly dangerous for a number of reasons not the least of which is that the major economic issues are not US vs. China but rather different interest groups in US and China versus other interest groups in US and China. There are *lots* of interest groups in the US that benefit from the trade surplus.

    The thing about WTO and things like the strategic dialogue is that it gives the US and China a forum to scream at each other, and it’s really hard for me to imagine a situation where things get out of hand.

  • Posted by K T Cat

    “China is growing, thanks to China’s government.”

    Truly, were it not for the government, China’s shopkeepers, factory owners and workers would be outside digging for tubers with sticks.

  • Posted by Twofish

    bsetser: i don’t think most in the US advocate severe loan to deposit limits (the focus is on more capital).

    Capital reserve requirements the same thing as loan/deposit limits. As with a lot of things, a lot depends on what you call it, which is a political/marketing issue. If you want to kill an idea in the US, call it “Chinese socialist financial repression” and it’s dead. But if it’s a good idea, you can find a better politically correct name for it. I leave that for other people.

    Something I find amusing is how the US is rapidly copying parts of the Chinese financial system, whereas no one publicly admits to doing this (although everyone privately admits that is what is going on).

    bsetser: Buying unneeded dollars at a loss may turn out to be more costly than bailing out China’s banks

    That’s debatable especially since TARP is only one small part of the bailout. The problem is that if you have a bad banking system you are going to have to do a bailout anyway, and you are going to have to do it in an uncontrolled manner, in which people are about to riot in the streets.

    It’s not necessarily the total cost that matters than who pays and when. From the Communist Party’s point of view, hiding the cost so that people don’t know that they are paying for something and hence don’t riot, is part of the calculation.

    bsetser: The cost at a similar size, relative to China’s GDP, that the cost of the US TARP.

    And the problem with TARP isn’t the total cost, but rather than it was doing in an ad-hoc, uncontrolled manner in which the world financial system almost fell apart. The broken banking system in the US caused the ruling party to lose power, which is something the Communists are trying to prevent in China.

    The problem with what happened in the US is less the total cost, than the fact that the fire engines were on fire. Once you have a broken banking system, then you find it very difficult to pump money into the system.

    I don’t think that there is much disagreement over the ultimate cost of Chinese exchange rate policy, but thus far, that cost is in a form that is less painful than the alternatives.

    bsetser: plus, in my view china’s financial repression generated surpluses and dollar inflows that helped lay the ground work for the global crisis

    And I disagree. If China hadn’t been around, you would have still had a crisis. If the US government had had policies more similar to Chinese policies such forcing banks to maintain huge capital reserves, you wouldn’t. If you have a financial system that can’t deal with having lots of money dumped on it, then something is wrong, and you are screwed whatever happens externally.

    bsester: one that was costly to others (negative spillovers) and ultimately rebounded in ways that have challenged China.

    But at the end of the day, Chinese banks didn’t go bust, and American banks did.

  • Posted by Twofish

    D Gross: But in the long-term, does anyone think China needs more empty factories, steel mills, coal plants, condo towers and cadre speculators?

    Absolutely, yes. You look at current urbanization and capitalization rates, and this is exactly want China needs right now. It won’t be what China needs in thirty years, but evolving from an investment driven economy to an innovation driven economy is something that shouldn’t and quite frankly can’t happen in a year, and shifting Chinese economy is something that needs to be decoupled from what happens in the current crisis.

    Moving eight hundred million people from farms to cities means a lot of condos need to be built.

    D. Gross: China’s old model (relying on investment for a good portion of its GDP growth) worked during a global credit and real estate bubble but I don’t see it working going forward.

    It worked for Japan and the Soviet Union for about thirty to forty years.

  • Posted by guest

    Andrew, Indian investor

    Your concern on misalocation of resources is shared.
    In the 1995 + exports to China was a difficult endeavour as import substitution was a mantra.The states banks were as well mobilised in funds and in sectorial priority as a mean to counterbalance the nascent economic slowdown.
    The aftermath of this policy (1998 2000)required heavy capital injection from the states in the state owned banks,an assistance from the WB to the state owned banks.Balance sheets had to be deleveraged, Banks financial investment to be earkmarked at lower value.

  • Posted by Glen M

    TwoFish: I think that the game that China is playing is not particularly dangerous for a number of reasons not the least of which is that the major economic issues are not US vs. China but rather different interest groups in US and China versus other interest groups in US and China. There are *lots* of interest groups in the US that benefit from the trade surplus.

    As job losses continue to increase, the special interest in the US that is most effected becomes the government itself. Since they make the laws, the distinction is not academic.

  • Posted by D Gross

    Twofish- China certainly needs continued investment and would in particular benefit from it in areas such as environmental control, rural infrastructure and transportation. Moreover, better regulation, establishment of property rights and rule of law, and broadening economic opportunities beyond cadres (in terms of getting loans, opening businesses and securing development rights) would help to develop a true service sector in China and perhaps slow the rural to urban migration (or at least provide jobs or new business opportunities for the displaced/idled workers hurt by the manufacturing slowdown).

    However, the investment boom in China over the last decade was not about providing housing to low income migrants from poor areas. It was somewhat akin to what the US experienced in Miami and Vegas.

    Housing and farms for the poor were destroyed to make way for condo towers for wealthy cadres, for HK and Taiwanese investors and for domestic speculators. Poor migrants were not the focus of this investment. Manufacturers walked out on their leases to move to newly-built factories backed by CP officials and their bankers. And doesn’t every second rate town needs its own steel mill and coal plant? I disagree with your response of “absolutely yes”, and so does the Chinese government.

    China tried to restrain investment through tough bank reserve ratios. However, banks and local authorities still found ways to lend, Chinese companies used their cash on hand and retained earnings to speculate, hot money and overseas investors were not constrained by Chinese banking rules and private sector savers directly financed many local residential and commercial developments through informal means.

    The fact that China tried to slow and direct investment shows that their leadership felt there was too much investment, going into the wrong places. I agree. This is not surprising as this was the story of the ’00s globally.

    We can see the consequences of the bursting bubble and guess the future for places such as the US, Spain, Russia, the Baltics. What amazes me are the people who think that the collapse of a global credit bubble will not radically change the environment and prospects for China, a country dependent on investment and exports for a large percentage of its growth.

    Before the bubble burst, China was looking for ways to punish the speculators and focus more on rural investment and rural aid (safety net). Some of the Shanghai clique were purged or prosecuted and there was (briefly) a turn toward helping the poor. However, once the bubble burst it became necessary to keep cadres and their businesses and property developments afloat with government-directed lending, though “green” and rural investments are also being made.

    I am not optimistic about the next 10 years in China (though very bullish on the next 25 or 50). Comparing China to post-war Japan or the former Asian Tigers is legitimate (in that they all followed mercantilist policies and relied heavily on savings and investment), though I am not sure China’s story will unfold the same way. China is too large as a percentage of world GDP to follow the strategy of a Singapore or Taiwan or even post-world Japan for as long as they did, and the needed development of a consumer/service/small business sector will not occur successfully without property rights, rule of law and the expansion of business and borrowing opportunities to the non-politically connected.

    This, plus the challenge of being an investment-driven, mercantilist economy in a slower growing world will be China’s big problem over the next 10 painful years.

  • Posted by Indian Investor

    Dr. Setser: I’m not sure you agree with my last conclusion on yesterday’s post. In a scenario where China is able to peg to the dollar without increasing its outstanding Treasuries, the US has little choice but to issue Treasuries in foreign currencies.

    guest – my point was that China is a long way away from having the levels of investment its economy should have.

    D Gross: Earlier China curbed its state owned banks to restrict credit growth as a %age of China’s GDP. Now o/s credit is growing in China. China’s stimulus is heavily focused on infrastructure, construction and rural consumption – and that’s helping to rebalance local demand growth against the fall in exports. So all is well and China is on the path to recovery.

  • Posted by bill j

    What makes you say it will be a slower growing world?
    China’s dollar GDP quadrupled between 2000-2008, let’s say that its most dynamic days are past it (a moot point I might add), its specific weight in the world economy is now much larger than it was at the turn of the millennium, so even relatively less slow growth will have a bigger impact.
    And the point is its not just China, but the whole of East Asia that its pulling behind it.
    I’m with 2fish, unlike all of the developed Western countries, as China grows it urbanises the rural poor, transforms them from subsistence farmers with no relationship (effectively) to the market, to workers and consumers generating big profits as it does so. Certainly plenty large enough profits to pay off any bad debts arising from the latest banking splurge.

  • Posted by guest

    Indian investor

    http://www.ritholtz.com/blog/2009/05/china-consumer-spending-vs-savings/

    When looking at this chart I do not see a rebalancing through domestic consumption neither do I see a long trend in investment through the hoarding of foreign treasury bills.

  • Posted by bill j

    True it doesn’t show up in that chart. But that only shows unproductive consumption. Productive consumption in fixed asset investment for example is surging ahead.
    The rebalancing of the world economy is principally a result of the growth of China’s domestic investment, while unproductive consumption has grown very fast it has been slow relative to the growth of the economy as a whole and as a result its proportion of the economy has declined.

  • Posted by Cedric Regula

    Indian:”Dr. Setser: I’m not sure you agree with my last conclusion on yesterday’s post. In a scenario where China is able to peg to the dollar without increasing its outstanding Treasuries, the US has little choice but to issue Treasuries in foreign currencies.”

    We already know they will announce more QE. It will be done to reduce the need for foriegn investment and also avoid any possibility of the Fed “crowding out” other lending in the domestic markets.

    This will be done to stimulate the domestic economy.

    They will continue to do that until it stops “working” somehow.

  • Posted by Indian Investor

    guest – by local demand growth above I meant aggregate demand in China, including investment.

    Cedric – China seems to be the ordinary American’s best friend, in good times and in bad. Now the US can’t follow a policy to reflate the credit bubble at China’s expense, and have more people more indebted locally. If the US doesn’t issue bonds in foreign currency, reduced Chinese demand for Treasuries and higher QE will ensure increased rates. If they do, they’ll have to bear the currency risk if they fail to hike rates and control inflation later.

  • Posted by Yoda

    $BKX in trouble again, anytime now, bankers go back to Geithner and cry for more TARP asistance?

  • Posted by Yoda

    lets violate taxpayer again, eminent systemic collapse needs TARP fund pass thru congress prompto. everyone wait in line, here is money to Goldman again, Wells Fargo, blabla…

    sweet :)

  • Posted by don

    “Real imports of manufactured goods are still down 16% y/y. The rebound in Chinese imports has been driven entirely by the rise in commodity imports; real imports of primary products were up 17% (y/y) in April.”
    Such commodity purchases are equivalent to the old ‘export unemployment by devaluing your currency’ strategy China ghas depended on for growth up to now. For example, gold purchases are quite close in effect to currency purchases. To assess the effects on employment in the rest of the world from China’s policies, it would probably be more accurate to look at its net trade balance excluding commodities, rather than merely at the net trade balance.

  • Posted by bsetser

    2fish: interesting comments, as usual. i wouldn’t discount the risk tho that if us imports from china start rising, china is adopting buy china polciies and us unemployment remains high, sino-american trade relations would increase dramatically. obama didn’t want to start his admin (best i can tell) with a major fight with china over econ policy given his general desire to improve us relations with the world, but pressures here could build rapidly.

    indian investor – tis a bit hard to argue that china is investing too little in a flow sense with investment a huge share of chinese gdp. rapidly growing economies can absorb a lot of investment when they have low capital to labor ratios, but still — the surge in chinese investment has been huge. that is the amazing thing about china’s current account surplus; it came even as investment to gdp was rising (normally that would tend to reduce the current account surplus).

    moreover, there is a strong case that the problem with china’s current growth is that it has been too capital intensive and thus hasn’t generated much labor demand, which is why employment growth hasn’t been as impressive as gdp growth and why labor income’s share of GDP has fallen. I am all for finding creative keynesian ways of pushing up real wages/ internal demand by the way — one of my criticisms of china’s exchange rate policy is that it led china to adopt internal policies that were quite restrictive (tight fiscal, lending curbs) to avoid having the stimulus from the undervalued exchange rate spillover into prices and thus produce a real appreciation via inflation. that was bad keynesian policy …

    one good thing about the crisis is that in this respect china’s policy seems to have changed in a much more keynesian direction. on the other hand, the surge in global spare capacity suggests that private chinese investment will fall — which is a drag that the keynesian expansion inside china will need to offset before the expansion spills over to the rest of the world.

    finally, i have never argued that chinese real wages aren’t lower than us real wages. given the gaps in the productivity of the two economies that will remain the case for some time. what i have argued is that this gap is bigger than it otherwise would be b/c cihna intervenes to hold its exchange rate down, keeping a real wage gap that should be closing rapidly wide and in effective subsidizing capital that is invested in china’s tradables sector by holding chinese real wage growth in usd (and eur) terms down. that is a policy of favoring capital over labor (and investment over consumption) that got taken way too far.

  • Posted by Mari

    Brad: Menzie Chinn at Econbrowser “http://www.econbrowser.com/archives/2009/06/the_global_savi.html” just threw out a challenge to you – saying “US current account deficit really was much more a function of a typical capital inflow boom driven by an unsustainable fiscal policy”
    Any rebuttal?

  • Posted by bsetser

    i’ll take up the issues menzie raises in a later post. tis hard to argue that fiscal policy drove the rise in savings in e. asia the gulf after 04 tho, as the fiscal deficit was falling. the lax regulatory story has more plausibility …

  • Posted by q

    @twofish – Capital reserve requirements the same thing as loan/deposit limits.

    not really. capital reserve requirements are requirements for equity capital, and loan/deposit limits are (if i understand the term) limits on the ratio of loans to deposit accounts. capital reserve requirements are used as a loss buffer. loan/deposit limits are used generally important to keep banks from a bank run, though if i understand the pettis paper properly (i’m about 1/3 through it) china is using them to limit the size of the loan book.

  • Posted by DOR

    Twofish,
    WTO settling trade disputes? That would be a first!

    I think what most annoyed me about Scissors’ piece is that he was looking at outcomes and (in addition to projecting both US and PRC intentions) assuming the underlying causation. When China failed, for so many years, to slow the economy below 8% growth, the administrative tools were reluctantly taken out of the tool chest once again. Big internal discussion as to whether that would cause more harm than good, but eventually, the tinkering mechanics won out over the theoretical engineers.

  • Posted by Twofish

    bsetser: i wouldn’t discount the risk tho that if us imports from china start rising, china is adopting buy china polciies and us unemployment remains high, sino-american trade relations would increase dramatically.

    First all, this “buy Chinese” thing is just one newspaper article that has been blown way out of proportion.

    Also, I think this underestimates the complexity of the current trade situation. For example, right now China auto sales are one of the only parts of General Motors that is making money. So if China hypothetically limits imports of Japanese cars, and promotes “buy Chinese” this may increase GM sales in China and help fund UAW buyouts.

    That is hypothetical, but if you look at “how makes money and when” this makes the trade picture radically more complex than it was in 1985. I don’t see much in the way of tension, if China feels the need to raise semi-protectionist measure, it can reduce trade friction by not complaining about US semi-protectionist measures.

    bsetser: obama didn’t want to start his admin (best i can tell) with a major fight with china over econ policy given his general desire to improve us relations with the world, but pressures here could build rapidly.

    Obama didn’t want to start his administration with a major fight with China because none of the groups that got him elected wanted to start a major fight with China over economic policy. Also, it’s very difficult for me to see how pressures could build rapidly. Complaints over Chinese trade have typically been industry specific, and the US has been able to placate industries by targeted tariffs (textiles and steel). Once a particular industry has been placated, then no one in that industry cares about the rest of the deficit.

    Also there is the “bombing rubble” issue. The largest trade deficits come from industries that no longer exist in the US. No one complains about American electronic assembly jobs going to China, because all of the jobs have already gone to China. It may be that if you put in trade restrictions, that you end up with new industries in the US, but non-existent industries don’t have lobbyists.

    bsetser: moreover, there is a strong case that the problem with china’s current growth is that it has been too capital intensive and thus hasn’t generated much labor demand.

    I think that case is very weak. If you look at the composition of Chinese employment what has happened is that manufacturing doesn’t generate net new jobs, but as manufacturing generates more wealth, it creates lots of new service jobs.

    The problem with just generating employment is that if you just create employment, but you aren’t increasing productivity or increasing incomes, then what’s the point? If you just want employment, just let people keep farming.

    bsetser: which is why employment growth hasn’t been as impressive as gdp growth and why labor income’s share of GDP has fallen.

    In the early 1990′s, the wages and jobs that people were holding were unsustainable, and the only way that China could keep it’s factories afloat was by massive non-performing loans to the SOE’s.

    To get to something sustainable required a massive economic restructuring, and the success of China has been that the costs of restructuring ended up being a moderate decrease in GDP rather than hyperinflation and massive unemployment as was the case in Russia.

    I think that there is a basic contradiction in neo-liberal theory here. The standard neo-liberal critique of governments is that they are too reluctant to take actions that result in mass unemployment so it seems odd to come back and complain about policies that case wage/GDP ratios to go down. Somehow the costs of economic restructuring has to be paid, and paying it out of GDP increases seems pretty sensible.

    Also the difference in wages/GDP went into the bank so to speak. Unlike US companies, which operate on the edge, and have to have mass unemployment the second things fall apart, SOE’s have enough cash reserves to drag people through a rough patch.

    There’s also the political element. People don’t care what fraction of GDP they get. They care about what they got in comparison to last year. If someone gets a 10% y/y wage increase, they end up being quite happy, and ignore the fact that someone else might be pocketing 3%. Conversely, if their real wages are negative, they will end up on the streets, not withstanding the fact that the entire economy is collapsing.

  • Posted by bsetser

    2fish — a major part of obama’s coalition is labor, and they still deeply believe that china’s currency peg gives china an unfair advantage. right now they have other priorities — the auto bailout is one, health care is another. plus with us imports from china falling, it is hard to argue chinese imports are leading people to lose jobs. but there are decidedly parts of obama’s coalition that aren’t keen on the current pattern of us china trade.

    sure, there are offsetting voices too. but there was a reason why obama took the position he did in the campaign.

    as for the “no complaints if an industry is already offshore point” it has an element of truth. but there are many sectors that do compete with china — auto parts makers for one. furniture makers for another. soon aircraft manufactures too (tho they are conflicted as they also want china’s gov as a customer). auto makers may soon compete with china too — and gm’s us workers may have different interests than gm’s owners or gm’s chinese workers. and while there isn’t a constituency in the us for it, some electronics manufacutring now done in asia might otherwise be done in mexico —

    be careful not to oversimplify. there are sectors of the us that do compete with china directly, even now. and even when us firms produce in china, us workers may have somewhat different interests

  • Posted by Twofish

    D Gross: Moreover, better regulation, establishment of property rights and rule of law, and broadening economic opportunities beyond cadres (in terms of getting loans, opening businesses and securing development rights) would help to develop a true service sector in China and perhaps slow the rural to urban migration (or at least provide jobs or new business opportunities for the displaced/idled workers hurt by the manufacturing slowdown).

    The big employment shift in Chinese employment over the last thirty years has been from agriculture to services. Also the “broadening economic opportunities beyond cadres” I think misstates how the Chinese economy actually works. It’s not a Soviet or Indonesian style kleptocracy.

    I don’t see how you can (or should) slow down the rural->urban migration. Also the Chinese banking system is biased toward large companies, but it’s really hard to create a system that provides good SME lending. It’s a five to ten year project (which China has been in the process of doing) rather than a five month project, and it’s one of those things that’s better done slowly since the if you mess up SME lending, you can end up killing the banks.

    D Gross: Housing and farms for the poor were destroyed to make way for condo towers for wealthy cadres, for HK and Taiwanese investors and for domestic speculators.

    First of all farmers in China have a guaranteed right to farmland and housing, so if a farmer loses land to a real estate project, they still are legally entitled to another house and farm. Second, in most situations, farmers did get pretty well compensated for loss of farmland.

    D Gross: Poor migrants were not the focus of this investment.

    But they did get lots of benefits from it. The big land wars happened in rich provinces, and the farmers that get their land seized to build factories in Guangdong, aren’t particularly poor. No one is interesting in building luxury apartments in Gansu.

    D Gross: Manufacturers walked out on their leases to move to newly-built factories backed by CP officials and their bankers.

    Not really. Most of the export factories in southern China were financed by HK/Taiwan money. The problem here is that you are trying to fit everything into a simple good guy/bad guy story and the reality is quite a bit more complex.

    D Gross: And doesn’t every second rate town needs its own steel mill and coal plant?

    A “second rate town” in a Chinese context is a metropolis of a million people.

    D Gross: I disagree with your response of “absolutely yes”, and so does the Chinese government.

    Well, then you both are wrong. Also, the “Chinese government” is hardly a monolith. I can probably without too much difficulty find a dozen officials that agree with me and about a dozen officials that disagree with me.

    D Gross: However, banks and local authorities still found ways to lend, Chinese companies used their cash on hand and retained earnings to speculate, hot money and overseas investors were not constrained by Chinese banking rules and private sector savers directly financed many local residential and commercial developments through informal means.

    Absolutely true, but the banking restrictions meant that when the bubble burst, the banks were in good shape. Since people that lost money could afford it, it meant that you didn’t have a domino effect. If a company funds construction out of retained earnings, and the construction goes bust, then it’s just lost a lot of money, and the story ends there. If it used borrowed money, then you have a big problem.

    Also, just because administrative restrictions will be circumvented, doesn’t mean that they are absolutely useless. If you set the speed limits at 100 km/h, people will drive at 110, and if you set the speed limits at 110, people will drive at 120.

    D Gross: What amazes me are the people who think that the collapse of a global credit bubble will not radically change the environment and prospects for China, a country dependent on investment and exports for a large percentage of its growth.

    It will but not in a bad way. Most Chinese investment came from retained earnings, and if you do something stupid with your own money, you dust yourself off and promise not to do it again. If you do something stupid with other people’s money, then you have a big problem.

    D Gross: Before the bubble burst, China was looking for ways to punish the speculators and focus more on rural investment and rural aid (safety net).

    And after the bubble burst, there is likely to be more of that, and the rural investment and safety nets are likely to take the form of massive state-directed investments.

    D Gross: Some of the Shanghai clique were purged or prosecuted and there was (briefly) a turn toward helping the poor.

    You still have this good/bad distinction that is clouding what is actually going on. The Shanghai clique has been out of power for about eight years.

    D Gross: However, once the bubble burst it became necessary to keep cadres and their businesses and property developments afloat with government-directed lending.

    No. Since the property developments were funded from retained earnings, once the bubble burst, the people doing the investments don’t need new lending. They just eat the loss out of retained earnings. Also, with a few exceptions like shipping, the SOE’s weren’t hit that hard with the bubble popping.

    The big lending has to do with generating lots of jobs for migrant workers.

    D Gross: Needed development of a consumer/service/small business sector will not occur successfully without property rights, rule of law and the expansion of business and borrowing opportunities to the non-politically connected.

    I don’t think so. First of all consumer/service/small business *is* developing. Pretty much all of the new economic growth over the last ten years has been in the non-state sector. SOE’s just aren’t hiring more people, and the Chinese government has been trying to be SME friendly because that’s what has soaked up a lot of the jobs from SOE’s. So talking about China as if it doesn’t have a vibrant SME sector just doesn’t match current the current economy.

    I think talking about lack of political connections is a non-starter. One thing that I’ve noticed in the United States is that there is no such thing as not being politically connected, and if you are not politically connected, you are ignored. The important thing is *how* people end up being politically connected. In the US, the most politically connected people are the middle class, and the least politically connected people are the poor who no one really cares about.

    In China, migrants have a huge amount of political power, because they can and do demonstrate, because they really have nothing to lose, and most of the time the government rewards people that make some trouble.

    Also, I think property rights and rule of law tend to be overrated for small businesses. If you are a small business and you have to sue someone to get something done, you just are going to die, and rule of law can often benefit big companies that can afford lawyers.

    Just talking about “property rights” and “rule of law” in general I think is pointless since China has long past the point where these are blocking issues for SME’s. The big blocking issues are institutional. Basically, the big banks have no idea how to lead to small companies, and small companies are quite a bit riskier than big companies. Poor people have bad credit, and you have to be really careful in how you lend to small businesses, because otherwise you end up with the subprime situation all over again.

  • Posted by Twofish

    bsester: a major part of obama’s coalition is labor, and they still deeply believe that china’s currency peg gives china an unfair advantage.

    I don’t think this holds up at all once you look at the details. A lot of the unions such as the Pacific longshoremens and Teamsters are very much pro-China trade. Others such as service and public employees are neutral. That leaves the manufacturing unions, and with the exception of textile workers most of them really don’t care much about the peg, because it does them no good if Chinese jobs move to Mexico.

    bsetser: there are many sectors that do compete with china — auto parts makers for one. furniture makers for another. soon aircraft manufactures too

    With the exception of textiles, none of these really do compete with China. They compete with “not the United States.” If China were to revalue, and those jobs move to Mexico, then it’s not going to help them.

    This means that what they really want are protective tariffs, not just revaluation, and once they get protective tariffs for their industry, they don’t care if everyone else goes to hell.

    bsetser: gm’s us workers may have different interests than gm’s owners or gm’s chinese workers.

    Under the current bankruptcy package, the UAW is going to end up owning a large chunk of GM. Right now, it seems to me that the big interest in GM’s US workers is to make sure that their buyouts and pensions are fully funded which means that they are interested in having GM do well in China.

    Also, this isn’t unintentional. You can structure things so that interests either align or conflict. Having a situation in which GM’s US workers would object to massive GM expansion in China is just going to kill GM.

    It’s pretty obvious that GM is going to end up with all its manufacturing outside of the US eventually, and what the UAW has been trying to do is to make sure that the US auto worker ends up with a gracefully, dignified, and profitable exit package. It’s not that different from what the SOE’s did in the early 1990′s.

    bsetser: while there isn’t a constituency in the us for it, some electronics manufacutring now done in asia might otherwise be done in mexico

    Which explains why China and Mexico end up screaming at each other over WTO. But none of this has anything to do with US politics.

  • Posted by bsetser

    2fish: “It’s pretty obvious that GM is going to end up with all its manufacturing outside of the US eventually”

    ummm, no.

    tell what the us would sell to the world to cover its imports of autos, oil and (many) electronics? if oil is $100, the oil import bill is around $500b. If auto production shifted abroad, that bill too could head up to that levels. $1 trillion is real money — so either the US has to export a lot of some other good, or sell a lot of debt. and if imbalances are going to correct, it cannot just sell debt.

    if you look at how the 80s deficit came down, the migration of auto production back to the us as german and japanese companies that had taken market share from the big three increased their us production by setting up transplants(reducing us imports) was actually a major part of the adjustment process. and the economic incentive for such a shift came from moves in the exchange rate.

    history doesn’t repeat itself, but it does suggest that it isn’t at all obvious gm (and others) will stop making cars in the us. At the end of the day, trade flows have to roughly balance (i.e. it is a real trade of one good for another, or a service for another) otherwise one country simply ends up running up deficits and ultimately debt in a way that isn’t sustainable.

  • Posted by bsetser

    p.s. there is pretty good data showing that swings in the dollar do lead to higher exports, a smaller trade deficit and more US jobs in the tradables sector. and if china moved its exchange rate, it probably wouldn’t move alone v the US. it isn’t just gonna be a shift toward other producers. we can actually look at what happened from 05-08 (and especilly from 06-08) after the USD depreciation of 03-04. with a lag, exports rose … and the non-oil trade deficit came down.

  • Posted by Twofish

    bsetser: tell what the us would sell to the world to cover its imports of autos, oil and (many) electronics?

    Management services, design, and technology. The autos would be designed in the United States and manufactured overseas for the China market. The Chinese auto market is now larger than the US auto market and growing rapidly. Manufacturing cars in Shanghai for the Chinese car market, makes is possible to pay people in Detroit.

    Also I said that General Motors will end up overseas, I didn’t say that US auto manufacturing will end up overseas. Toyota and VW can open plants in non-union states in ways that GM can’t.

    bsetser: At the end of the day, trade flows have to roughly balance (i.e. it is a real trade of one good for another, or a service for another).

    They really don’t. International trade is taking on the characterstics of intra-state trade, and there is no particular reason that trade flows between say Michigan and California have to balance. Especially since all the money is in cyberspace anyway.

    bsetser: Otherwise one country simply ends up running up deficits and ultimately debt in a way that isn’t sustainable.

    If the money is recycled in a way such that the debt produces higher returns than the real interest payments on the debt, then you have a situation that is sustainable, and that’s not terribly difficult since the long term returns on Chinese reserves is negative.

    For Chinese exports to grow 30% y/y is quite unsustainable, but there is a level of trade deficit that the US can run with the rest of the world that is sustainable,

  • Posted by Glen M

    TwoFish: Management services, design, and technology. The autos would be designed in the United States and manufactured overseas for the China market. The Chinese auto market is now larger than the US auto market and growing rapidly. Manufacturing cars in Shanghai for the Chinese car market, makes is possible to pay people in Detroit.

    That is the most ridiculous idea I have ever heard. China has no interest in creating any sort of employment opportunities for any other nation. China won’t pay a premium for the design of an iPhone, they will just make the HiPhone (look it up). They want to ‘invest’ in Canada’s oil sands, but use Chinese labour. Have a look at how well Chinese ‘investment’ in Africa is doing, where they import labour into countries that have 40% unemployment……..

    http://www.theglobeandmail.com/news/world/the-dark-underside-of-chinese-building-boom-in-africa/article1192825/

  • Posted by Thomas

    I recently spoke to a guy from Angola who said he can sort of understand why China sends its workers there. In his words: “They really work. Our people just want to loaf around. Preferably with good benefits, but if none are forthcoming, simply loafing around will do nicely.”

  • Posted by Thomas

    @twofish

    if I’m not mistaken, nearly all the design and research work for all mid- and small-sized GM models is currently done in Germany.

    Might not stay that way going forward, but it certainly isn’t the current core competency of GM US.

  • Posted by Thomas

    Regarding the drop in China’s imports:

    The Q1 country breakdown of Germany’s exports has finally come out. Exports have plummeted to all destination countries worldwide. Except exports to China, which dropped by a mere 3 % yoy.

    Seems to partially support the assumption that the import drop is mainly due to imported components for processing (imported from other East Asian coutnries) and lower commodity prices.

  • Posted by Glen M

    Thomas,

    I have read some reports that it is prisoners that are being sent to work. I don’t know if I believe it though. If so, is it any wonder they work so hard? There is also the issue of compensation. For 35 cents per hour there time would be better spent foraging for food.

    http://ipsnews.net/news.asp?idnews=46935

  • Posted by D Gross

    http://www.nst.com.my/Current_News/NST/Tuesday/Columns/2589079/Article/index_html

    Interesting op-ed in the Straights Times

    “Gloss cannot hide China Rot”

  • Posted by DOR

    Straights [sic] Times . . . interesting choice as a source of “information.”

    Read Zhao Ziyang’s memoirs, Prisoner of the State, for an insight into how hard it was for China to actually move onto the modernization and liberalization path. Put it in context.

    .

    When huge portions of US trade are within companies, the bilateral trade balance losing a lot of meaning. Sure, those few (9% of employed people, in straight-line decline since 1943) manufacturing workers still left would like to continue to live their old lifestyles. But, if they haven’t increased their productivity at a pace that compensates for their pay and benefits, they just have to do better.

    .

    Where’s the US consumers’ union in all this China trade talk?

  • Posted by Twofish

    Glen M: That is the most ridiculous idea I have ever heard. China has no interest in creating any sort of employment opportunities for any other nation.

    China has an interest in doing whatever is good for China. Having research and development done in the US ends up being good for China because a lot of the R&D that gets done in the US is or will be done by Chinese companies (see Lenovo) and by Chinese (see any graduate department of any American university).

    Glen M: China won’t pay a premium for the design of an iPhone, they will just make the HiPhone (look it up).

    Which is getting nowhere. You can’t have an innovation driven economy copying other people. You don’t build your economy by just copying designs, what the “big plan” is is to send your people to the best US universities and companies, and then after a few years they learn enough to help you. Given the number of Chinese engineers that work for Apple and live in California, China is getting a lot more supporting Apple than Hiphone.

    Glen M: They want to ‘invest’ in Canada’s oil sands, but use Chinese labour.

    The article quoted someone that was pretty clueless about the oil industry, this ain’t going to work. Canadians know more about oil sand than Chinese do.

    Glen M: Have a look at how well Chinese ‘investment’ in Africa is doing, where they import labour into countries that have 40% unemployment……..

    Which is a general problem with oil industries. Oil tends to be very capital and knowledge intensive, which means that if you are a third world country with oil deposits, surprisingly few people get hired. Look at Nigeria and see how many people are Nigerians. Then look at Norway and Alberta.

  • Posted by Glen M

    TwoFish:China has an interest in doing whatever is good for China. Having research and development done in the US ends up being good for China because a lot of the R&D that gets done in the US is or will be done by Chinese companies (see Lenovo) and by Chinese (see any graduate department of any American university).

    Yes, until doing so is no longer necessary. And as long as Michael Pettis is teaching in China, no one can ever say that a good education in economics is not available in China.

    TwoFish: You can’t have an innovation driven economy copying other people. You don’t build your economy by just copying designs, what the “big plan” is is to send your people to the best US universities and companies, and then after a few years they learn enough to help you. Given the number of Chinese engineers that work for Apple and live in California, China is getting a lot more supporting Apple than Hiphone.

    Conversely you can’t have a healthy economy when circumstances make it impossible to do nothing but design things.

    The Chinese labour for the oil sands comes from another article quoting a Chinese official.

    TwoFish: Which is a general problem with oil industries. Oil tends to be very capital and knowledge intensive, which means that if you are a third world country with oil deposits, surprisingly few people get hired. Look at Nigeria and see how many people are Nigerians. Then look at Norway and Alberta.

    It’s not just the oil industry.

  • Posted by Thomas

    @GlenM

    one of my wife’s university classmates works in Angola. He appears to be quite happy and is well paid (by Chinese standards). But of course he’s “management”, not “workforce”.

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