Comments on Editors, East Asia Forum"China’s two big challenges", 29/03/2016
While I agree with almost all major points in this editorial, some points seem to be a little contentious. Firstly, the Singapore experience among those experiences points out some diversity in the road to rich, at least it is not that high degree of universality in terms of political freedom. One might argue that was an exception as opposed to a rule, but nevertheless it existed.
Secondly, while the size of the Chinese economy may present some challenges for specialisation to be an option on the road for it to be rich, it could also mean some opportunities. For example, it may mean if China can focus on it economy better, that will be probably and comparatively enough for it to go rich. In other words, a price setter, as opposed to price taker, is relatively less affected by external factors purely because of its price setter status.
So if China can manage its own economy well, perhaps modelled on those economies ahead of it (and taking into account emerging technologies and trends), it is advantageous to be a price setter.
In that context, I would recommend caution in planning too grandiose international schemes, given the difficulties for any country to make good decisions, let along many countries to make the right decisions at the same time, where China has little control of them.
Finally, the so called middle income trap is as much a challenge as a myth. Some of the countries that have fallen into that trap can perhaps all find its fundamental causes, particularly some Latin American countries which may have coincided with the Oil Crisis and subsequent change in the world economic structure including high inflation and high interest rates when those countries were having high debt associated with their exploration of their natural resources.
One should not be too pessimistic about the potentials for countries to develop and to join the ranks of the rich in the world.
Having said that the continued slowing of the Chinese economy may have reinforced the pessimism. But I hope the Chinese leaders will wake up to the potential dangers of excessively slowing of its economy.
Showing posts with label Chinese economy. Show all posts
Showing posts with label Chinese economy. Show all posts
2015-09-30
China's economic luck unlikely to run out
Comments on Ilan Alon "Is China’s economic luck running out?" 30/09/2015
I would argue that the presence of corruption in China had rose rampantly by 2013 but has fallen since the current leadership took over in 2013. Obviously, President Xi’s anti-corruption campaign has captured some former corruption officials including some very high ranked ones.
The recent financial market turbulances reflect the inexperience and the lack of understanding of financial markets by the current leadership. It has been reported they encouraged people to buy into the market that propelled the Chinese financial markets to about 150% rise in a year. Of course, that kind of exuberance cannot last for ever and sooner or later the valuations would cause corrections: that was exactly what happened in the Chinese stock markets.
Is China’s economic luck running out? It is unlikely in the medium to longer run, even though in the short run, it seems every factor seems to work against China’s economic luck. The Chinese leadership cannot afford to let the economy to slow too much and for too long, as they work out successful strategies to have the Chinese economy back on track to the so called medium to high growth. The Chinese government was for some time reluctant to use fiscal stimulus, but has probably realised it has to use some sort of stimulus before its economic transformation into an innovative and service focused takes shape. It is understandable they were very cautious in using fiscal stimulus given the impact and consequences of the last huge stimulus following the GFC. But it will not be optimal to move from one extreme to another extreme.
Personally, I think the Chinese government should set a target of about 7.2% for the next two decades so it can double in ten years and double again by 2035. That would mirror what Japan did in its “income-doubling plan”.
It will not be easy, but it should be achievable if China can upgrade its economy to greater value-added in the international economic value chain. Of course, if it will help and make it easier should China be successful in taking advantages of the current digital technological and economic disruption and in becoming an innovative economy as its Premier has been calling for. But that will certainly take time. So in the short term, traditional policy tools have to be used. No economy can suddenly become from a traditional to an innovate economy over night. One has to be realistic.
I would argue that the presence of corruption in China had rose rampantly by 2013 but has fallen since the current leadership took over in 2013. Obviously, President Xi’s anti-corruption campaign has captured some former corruption officials including some very high ranked ones.
The recent financial market turbulances reflect the inexperience and the lack of understanding of financial markets by the current leadership. It has been reported they encouraged people to buy into the market that propelled the Chinese financial markets to about 150% rise in a year. Of course, that kind of exuberance cannot last for ever and sooner or later the valuations would cause corrections: that was exactly what happened in the Chinese stock markets.
Is China’s economic luck running out? It is unlikely in the medium to longer run, even though in the short run, it seems every factor seems to work against China’s economic luck. The Chinese leadership cannot afford to let the economy to slow too much and for too long, as they work out successful strategies to have the Chinese economy back on track to the so called medium to high growth. The Chinese government was for some time reluctant to use fiscal stimulus, but has probably realised it has to use some sort of stimulus before its economic transformation into an innovative and service focused takes shape. It is understandable they were very cautious in using fiscal stimulus given the impact and consequences of the last huge stimulus following the GFC. But it will not be optimal to move from one extreme to another extreme.
Personally, I think the Chinese government should set a target of about 7.2% for the next two decades so it can double in ten years and double again by 2035. That would mirror what Japan did in its “income-doubling plan”.
It will not be easy, but it should be achievable if China can upgrade its economy to greater value-added in the international economic value chain. Of course, if it will help and make it easier should China be successful in taking advantages of the current digital technological and economic disruption and in becoming an innovative economy as its Premier has been calling for. But that will certainly take time. So in the short term, traditional policy tools have to be used. No economy can suddenly become from a traditional to an innovate economy over night. One has to be realistic.
2015-07-15
Are Chinese authorities scared of the economy and stock market?
Comments on Peter Drysdale "No need for China’s leaders to lose nerve over market", 15/07/2015
Some may also argue that the rapid slowing in the growth of the Chinese economy would have been a major piece of evidence of poor handling of or leadership in the economy on the authorities behalf, even though the phrase of the so called "new normal" was probably the authorities attempt to prepare the public for the slowing.
The problem is that the slowing may have been or still be too much for comfort for the authorities.
Of course, should the over slowing of the Chinese economy and the panic in dealing with the stock market may, in turn, have implications for the pace of reforms. Some in the authorities may be really nervous now, so their confidence in reforms may be affected. In a Chinese saying "惊弓之鸟“ - the birds scared of bows.
Having said that, the piece today titled "China’s challenges drive experiment-driven reforms" from Andrew Sheng and Xiao Geng, provides some timely encouragement to Chinese economy observers, particularly overseas ones. And that is reassuring, indeed.
Some may also argue that the rapid slowing in the growth of the Chinese economy would have been a major piece of evidence of poor handling of or leadership in the economy on the authorities behalf, even though the phrase of the so called "new normal" was probably the authorities attempt to prepare the public for the slowing.
The problem is that the slowing may have been or still be too much for comfort for the authorities.
Of course, should the over slowing of the Chinese economy and the panic in dealing with the stock market may, in turn, have implications for the pace of reforms. Some in the authorities may be really nervous now, so their confidence in reforms may be affected. In a Chinese saying "惊弓之鸟“ - the birds scared of bows.
Having said that, the piece today titled "China’s challenges drive experiment-driven reforms" from Andrew Sheng and Xiao Geng, provides some timely encouragement to Chinese economy observers, particularly overseas ones. And that is reassuring, indeed.
An encouraging side of the Chinese economy
Comments on Andrew Sheng and Xiao Geng "China’s challenges drive experiment-driven reforms", 15/07/2015
In the mist of gloom and concerns about the potentially excessive slowing of the Chinese economy, this piece presents some encouraging and more positive perspectives to be reassuring. Having said that, it is very important for the Chinese authorities to pay close attention to economic growth to ensure the world’s second largest economy not to fall off the rail.
I am particularly delighted to know “that China would produce four of the top ten global internet companies (by number of visitors) — Alibaba, Baidu, Tencent, and Sohu — as well as innovative multinationals like Huawei and Xiaomi.” Of course, they reflect also the fact of China’s large population (still the world largest one) as the users (market force) to be one of the key factors.
It is also very exciting to know “It was the combination of broad-based education, openness to science and innovation, investment in advanced telecommunications infrastructure, and knowhow in manufacturing smartphones that fuelled China’s rapid advancement in the e-tail and internet industries. This openness to innovation — along with what some say is lax regulation — also allowed platforms like Alibaba to integrate payments and logistics before many Western players did.”
The Alibaba story and the smartphone producers story are excellent examples which may point to the way ahead for the Chinese economy that is likely to overcome the so called middle income trap. Innovations will play an important role in that process.
I thank the authors for their work that made me a little happier today.
In the mist of gloom and concerns about the potentially excessive slowing of the Chinese economy, this piece presents some encouraging and more positive perspectives to be reassuring. Having said that, it is very important for the Chinese authorities to pay close attention to economic growth to ensure the world’s second largest economy not to fall off the rail.
I am particularly delighted to know “that China would produce four of the top ten global internet companies (by number of visitors) — Alibaba, Baidu, Tencent, and Sohu — as well as innovative multinationals like Huawei and Xiaomi.” Of course, they reflect also the fact of China’s large population (still the world largest one) as the users (market force) to be one of the key factors.
It is also very exciting to know “It was the combination of broad-based education, openness to science and innovation, investment in advanced telecommunications infrastructure, and knowhow in manufacturing smartphones that fuelled China’s rapid advancement in the e-tail and internet industries. This openness to innovation — along with what some say is lax regulation — also allowed platforms like Alibaba to integrate payments and logistics before many Western players did.”
The Alibaba story and the smartphone producers story are excellent examples which may point to the way ahead for the Chinese economy that is likely to overcome the so called middle income trap. Innovations will play an important role in that process.
I thank the authors for their work that made me a little happier today.
2015-07-13
Ma has a good point on Chinese monetary policy
Comments on Guonan Ma "A compelling case for Chinese monetary easing", 13/07/2015
It is regrettable that the deleveraging process earlier on and the response to the possibly excessive fiscal in the wake of the GFS took a rather mechanical approach in China, particularly in the global context of extremely easing monetary policies in the major economies as Dr Ma has mentioned. That mechanical approach reflected either inexperience or some silly ideological approach by some advisors or policy makers.
Further there was a weaker external demand and macro policies should have been aimed at stimulating domestic demand, including either or both of monetary and fiscal policy tools. I have elsewhere argued that there is an issue of optimisation even when dealing with excess capacities, as opposed to simply tightening in both monetary and fiscal policies.
On one point, though, I would not necessarily agree with Dr Ma, that is, the role of the PBoC in credit allocation. It appears that China's approach to financing housing market with a differential approach to first and other residential properties is commendable.
On the contrary, in most west advanced economies, there is a lack of monetary tools apart from the economy wide and market agent wide tool, that is, one interest rate for all, reflecting the weakness of their approach to monetary policy of being unable to deal with the requirement of more than one tasks. In that regard, China's differential approach is superior in my view.
We need more tools to deal with more tasks. The Chinese approach, in principle, is in the right direction. Of course, there is a degree or limit to that approach and one cannot expect all problems can be solved through monetary policies.
Having said that, the exact way the Chinese authorities has managed its stock market over the past year or so has created the problem of moral hazard and is not commendable at all. It should not have intervened as it has done, creating a bubble and then trying to sustain the bubble.
It is regrettable that the deleveraging process earlier on and the response to the possibly excessive fiscal in the wake of the GFS took a rather mechanical approach in China, particularly in the global context of extremely easing monetary policies in the major economies as Dr Ma has mentioned. That mechanical approach reflected either inexperience or some silly ideological approach by some advisors or policy makers.
Further there was a weaker external demand and macro policies should have been aimed at stimulating domestic demand, including either or both of monetary and fiscal policy tools. I have elsewhere argued that there is an issue of optimisation even when dealing with excess capacities, as opposed to simply tightening in both monetary and fiscal policies.
On one point, though, I would not necessarily agree with Dr Ma, that is, the role of the PBoC in credit allocation. It appears that China's approach to financing housing market with a differential approach to first and other residential properties is commendable.
On the contrary, in most west advanced economies, there is a lack of monetary tools apart from the economy wide and market agent wide tool, that is, one interest rate for all, reflecting the weakness of their approach to monetary policy of being unable to deal with the requirement of more than one tasks. In that regard, China's differential approach is superior in my view.
We need more tools to deal with more tasks. The Chinese approach, in principle, is in the right direction. Of course, there is a degree or limit to that approach and one cannot expect all problems can be solved through monetary policies.
Having said that, the exact way the Chinese authorities has managed its stock market over the past year or so has created the problem of moral hazard and is not commendable at all. It should not have intervened as it has done, creating a bubble and then trying to sustain the bubble.
2015-07-06
Some issues of China's economy
Comments on Peter Drysdale "Has China’s transition to ‘new normal’ growth stalled?" 7/07/2015
There is, arguably a measurement issue of total factor productivity in terms of inputs, particularly capital (investment). Some investment, for example, does not become capital immediately at the time of investment. Then there is a capital utilisation issue. Given Chinese government's structural adjustment/transition, some capital has been made idle or obsolete that should probably no longer be included as capital.
While clearly China has probably seen a limit on its labour supply, I remember that Professor Meng Xin mentioned at last year's China Update that there was still large amount of un-utilised labour in China, that cast some doubt on the argument of China has already at or past the Lewis point. If Professor Meng was correct, then one needs to look at the labour market in China differently and there is an issue for government policy to release idle or un-utilised labour into more productive use.
The more rapid increases in wage may be as much as the so called short supply in labour force as the Chinese government policy to force wage to rise more rapidly to ensure social stability.
Another point regarding the structural adjustment, there may, arguably, be a dynamic optimisation issue and whether the Chinese government's policies such forced closure of many plants of higher energy use or low efficiency ones, have been optimal or not is a question. For example, an alternative would be to more rapidly accelerate the service sector more as opposed to force a reduction in manufacturing activities.
But in China, the government is all powerful and much more powerful than most western countries' in terms of its relationship with the other agents in the economy.
Another point is the interpretation of the meaning of the "new normal" by the Chinese leadership. The simplest may be that it means a growth from high to "medium high" or "medium to high". Whether other adjustments are part of the "now normal" or not is a question, because one may interpret those adjustments as reforms under the "new normal" meant by the Chinese leadership.
Perhaps another way to put the dynamic optimisation in a more abstract form in terms of proportions is as the following:
when there is a structural imbalance: one adjustment is to reduce the excesses components to have the structure more balanced. Alternatively, another adjustment would be achieved through expanding the components that are in shortage, so the structure is moving towards to more balanced.
There is, arguably a measurement issue of total factor productivity in terms of inputs, particularly capital (investment). Some investment, for example, does not become capital immediately at the time of investment. Then there is a capital utilisation issue. Given Chinese government's structural adjustment/transition, some capital has been made idle or obsolete that should probably no longer be included as capital.
While clearly China has probably seen a limit on its labour supply, I remember that Professor Meng Xin mentioned at last year's China Update that there was still large amount of un-utilised labour in China, that cast some doubt on the argument of China has already at or past the Lewis point. If Professor Meng was correct, then one needs to look at the labour market in China differently and there is an issue for government policy to release idle or un-utilised labour into more productive use.
The more rapid increases in wage may be as much as the so called short supply in labour force as the Chinese government policy to force wage to rise more rapidly to ensure social stability.
Another point regarding the structural adjustment, there may, arguably, be a dynamic optimisation issue and whether the Chinese government's policies such forced closure of many plants of higher energy use or low efficiency ones, have been optimal or not is a question. For example, an alternative would be to more rapidly accelerate the service sector more as opposed to force a reduction in manufacturing activities.
But in China, the government is all powerful and much more powerful than most western countries' in terms of its relationship with the other agents in the economy.
Another point is the interpretation of the meaning of the "new normal" by the Chinese leadership. The simplest may be that it means a growth from high to "medium high" or "medium to high". Whether other adjustments are part of the "now normal" or not is a question, because one may interpret those adjustments as reforms under the "new normal" meant by the Chinese leadership.
Perhaps another way to put the dynamic optimisation in a more abstract form in terms of proportions is as the following:
when there is a structural imbalance: one adjustment is to reduce the excesses components to have the structure more balanced. Alternatively, another adjustment would be achieved through expanding the components that are in shortage, so the structure is moving towards to more balanced.
2014-02-12
A point on capital account liberalisation in China
Comments on Daili Wang “Taking the middle road to capital
account liberalisation in China”, 12/02/2014, http://www.eastasiaforum.org/2014/02/06/taking-the-middle-road-to-capital-account-liberalisation-in-china/
I share some agreement with the following argument by Daili
Wang: "Capital account reforms should be accompanied by the introduction
and the enforcement of an adequate degree of regulation and supervision.
Inflows of foreign direct investment are broadly considered to result in net
benefits. Nevertheless, this investment has potential negative effects, such as
inhibiting local entrepreneurship and causing irreversible environmental
damage. Authorities must create regulation and supervision about the type of
inward investment that will maintain China’s competitiveness and guard its
national interests."The same spirit may also apply to outward capital flows.
However, it is important to balance the daily efficiency of capital markets and the prevention of potentially large destabilisation and/or destruction of speculative forces and in the case of panic. This is no different to banking where government may need to step in at times of crisis, say for deposit guarantee, but it may take a quite different form.
Such a balance requires well designed provisions in capital account regulation that has some built in mechanisms to prevent crises but does not affect daily operation of the capital account.
2013-10-25
Further reforms needed in China
Comments on Susan Shirk "Can China’s leaders harness support for change?", 25/10/2013, http://www.eastasiaforum.org/2013/10/23/can-chinas-leaders-harness-support-for-change/
My feel is that it should be fairly easy to have the support of the vast majority of the Chinese people for further and sensible economic reforms, perhaps easier than it was 3 decades ago, when it was so difficult for people to struggle between the planning system and a market system, so that Deng invented the phrase “cross rivers through touching stones” and used that gradual approach to carry out reforms.
Nowadays, the market system has been almost fully embraced by the nation (apart from perhaps some of the monopoly state owned firms) and many people are currently the victim of monopolies as well as some economic policies including macroeconomic policies that give preferential treatment of the state monopolies at the expense of the vast majority of the people, such as low deposit rate and high lending rate with state owned firms treated favourably, the restrictive household registration system, the monopolistic pricing by state owned firms, etc.
Given there are high ranking officials in or associate with some state owned firms under investigations or prosecutions for corruptions or bribery or some misbehaviours, the resistance from vested interests in state owned big firms may not be as strong as many people thought.
There should also be real decentralisation in fiscal powers from the central to local governments, and at the same time to move the ocal government away from excessively relying on revenue from land sales and the use of grey banking for their finance.
However, any further reforms must have a focus of economy wide benefits and national interests that may mean starting with lifting
any restrictions for domestic players as the first step.
My feel is that it should be fairly easy to have the support of the vast majority of the Chinese people for further and sensible economic reforms, perhaps easier than it was 3 decades ago, when it was so difficult for people to struggle between the planning system and a market system, so that Deng invented the phrase “cross rivers through touching stones” and used that gradual approach to carry out reforms.
Nowadays, the market system has been almost fully embraced by the nation (apart from perhaps some of the monopoly state owned firms) and many people are currently the victim of monopolies as well as some economic policies including macroeconomic policies that give preferential treatment of the state monopolies at the expense of the vast majority of the people, such as low deposit rate and high lending rate with state owned firms treated favourably, the restrictive household registration system, the monopolistic pricing by state owned firms, etc.
Given there are high ranking officials in or associate with some state owned firms under investigations or prosecutions for corruptions or bribery or some misbehaviours, the resistance from vested interests in state owned big firms may not be as strong as many people thought.
There should also be real decentralisation in fiscal powers from the central to local governments, and at the same time to move the ocal government away from excessively relying on revenue from land sales and the use of grey banking for their finance.
However, any further reforms must have a focus of economy wide benefits and national interests that may mean starting with lifting
any restrictions for domestic players as the first step.
2013-10-22
Shanghai Free Trade Zone - Benefits likely outweighed by costs
Comments on Bo Chen "Pilot free trade zone in Shanghai to build open economy", 20/10/2013, http://www.eastasiaforum.org/2013/10/19/pilot-free-trade-zone-in-shanghai-to-build-open-economy
While there may be some merits in experimenting a FTZ in China and Shanghai is certainly a good place to do it, many in China may equally feel whether it would create another venue of corruption for officials and people in power positions given the rampant and widespread corruption in China including many high level officials who are exposed and the likelihood more are on the way.
China needs not and should not be concerned by the TPP at any time soon. It is unlikely to achieve what the US has been trying to do, given the diversity of its members and the different ability to wear the shocks of the US approach. As a result, there is no need to be fearful of it.
There are better ways in China to further economic reforms than a free trade zone with special policies that are always inevitably taken advantage by people seeking rents to profit from it.
Internal banking and finance reforms to reflect the costs and benefit of finance, deposit and loans and to allow private banking and finance firms to compete and to bring the grey or semi grey banking into open and give those legitimate roles, for example, will go a long way for better resource allocation.
More than 3 decades of economic reforms and open door policies should be ripe enough to see the benefits of widespread and nation wide reforms as opposed to generating differences and fragmenting the national market.
A FTZ is now more likely to serve as a new source of resource misallocation rather than to improve it.
While there may be some merits in experimenting a FTZ in China and Shanghai is certainly a good place to do it, many in China may equally feel whether it would create another venue of corruption for officials and people in power positions given the rampant and widespread corruption in China including many high level officials who are exposed and the likelihood more are on the way.
China needs not and should not be concerned by the TPP at any time soon. It is unlikely to achieve what the US has been trying to do, given the diversity of its members and the different ability to wear the shocks of the US approach. As a result, there is no need to be fearful of it.
There are better ways in China to further economic reforms than a free trade zone with special policies that are always inevitably taken advantage by people seeking rents to profit from it.
Internal banking and finance reforms to reflect the costs and benefit of finance, deposit and loans and to allow private banking and finance firms to compete and to bring the grey or semi grey banking into open and give those legitimate roles, for example, will go a long way for better resource allocation.
More than 3 decades of economic reforms and open door policies should be ripe enough to see the benefits of widespread and nation wide reforms as opposed to generating differences and fragmenting the national market.
A FTZ is now more likely to serve as a new source of resource misallocation rather than to improve it.
2013-10-05
Balanced and unbalanced growth again
Comments on Edward Oughton "Connecting China’s broadband ambitions to development",5/10/2013,http://www.eastasiaforum.org/2013/10/03/connecting-chinas-broadband-ambitions-to-development/
Balanced economic growth perhaps needs s clear definition. This is because it is not clear how the idea of balanced growth needs to be reconciled with comparative advantage theory in international trade.
To illustrate the point, if every country has the same economic structure, is that a balanced or unbalanced world economy?
Secondly, if comparative advantage theory has relevance (as I suppose it does), it means a country’s economic structure is to a large degree determined by its comparative advantage. Then it follows that the balanced growth must be consistent with this path of growth along the lines of changing comparative advantage.
PS: These comments seem to be at odd with the title, this is because the article started with the following: "Premier Li Keqiang recently stressed at the World Economic Forum that structural economic reform is pivotal if China is to achieve a sustainable economic growth trajectory.
China evidently needs to balance its economy to avoid overreliance on its manufacturing base. The government’s latest plan to invest $US323 billion in expanding fixed-line and wireless broadband connectivity will bring it one step closer to this goal by helping to spur the development of its service sector."
It seems people are so with balance and imbalance and it is very fashionable.
Balanced economic growth perhaps needs s clear definition. This is because it is not clear how the idea of balanced growth needs to be reconciled with comparative advantage theory in international trade.
To illustrate the point, if every country has the same economic structure, is that a balanced or unbalanced world economy?
Secondly, if comparative advantage theory has relevance (as I suppose it does), it means a country’s economic structure is to a large degree determined by its comparative advantage. Then it follows that the balanced growth must be consistent with this path of growth along the lines of changing comparative advantage.
PS: These comments seem to be at odd with the title, this is because the article started with the following: "Premier Li Keqiang recently stressed at the World Economic Forum that structural economic reform is pivotal if China is to achieve a sustainable economic growth trajectory.
China evidently needs to balance its economy to avoid overreliance on its manufacturing base. The government’s latest plan to invest $US323 billion in expanding fixed-line and wireless broadband connectivity will bring it one step closer to this goal by helping to spur the development of its service sector."
It seems people are so with balance and imbalance and it is very fashionable.
2013-10-01
China's growth: how unbalanced is it?
Comments on Yukon Huang "Understanding China’s unbalanced growth", 1/10/2013, http://www.eastasiaforum.org/2013/09/30/understanding-chinas-unbalanced-growth/
Yukon Huang provides an interesting and fresh analysis of the causes of the Chinese aggregate economic composition and the link to the past transitional experiences of Japan and Korea is particular insightful.
It is difficult if not impossible to achieve fast rapid economic growth and rapid urbanisation for a long and sustained period in a huge country like China with high consumption and low investment, because urbanisation by nature requires huge investment in housing and infrastructure.
The notion of imbalance between investment and consumption in the China case is itself confused with the so called external balance particularly when major industrialised countries have been struggling in the wake of the GFC.
External balance, however, can be more easily understood because there is an external demand constraint.
The so called investment and consumption, however, is harder to understand in theory as Huang mentioned. That is because as long as investment is supported by savings particularly when there is demand for investment like housing and infrastructure associated with urbanisation, it is hard to call it imbalance.
People including economists should not simply apply the aggregate proportion norms in the mature and industrialised economies to rapidly industrialising and urbanising countries.
It is a wrong approach.
Yukon Huang provides an interesting and fresh analysis of the causes of the Chinese aggregate economic composition and the link to the past transitional experiences of Japan and Korea is particular insightful.
It is difficult if not impossible to achieve fast rapid economic growth and rapid urbanisation for a long and sustained period in a huge country like China with high consumption and low investment, because urbanisation by nature requires huge investment in housing and infrastructure.
The notion of imbalance between investment and consumption in the China case is itself confused with the so called external balance particularly when major industrialised countries have been struggling in the wake of the GFC.
External balance, however, can be more easily understood because there is an external demand constraint.
The so called investment and consumption, however, is harder to understand in theory as Huang mentioned. That is because as long as investment is supported by savings particularly when there is demand for investment like housing and infrastructure associated with urbanisation, it is hard to call it imbalance.
People including economists should not simply apply the aggregate proportion norms in the mature and industrialised economies to rapidly industrialising and urbanising countries.
It is a wrong approach.
2013-09-17
Reforming China's monetary system
Comments on Sara Hsu and Andrew Collier "China’s shadow banking tug of war", 17/09/2013, http://www.eastasiaforum.org/2013/09/16/chinas-shadow-banking-tug-of-war/
Shadow banking as well as the prevalence of ‘illegal fundraising’ in China reflects the severe deficiency of its monetary policy and management system. Given the role of money and credits in the economy, reforming the banking and finance system and its monetary management system in China should be a top priority.
From monetary policy point of view, a number of areas should be reformed. Firstly, monetary authority should not control both deposit and lending rates and should adopt the general practice of most central banks in the industralised countries.
Secondly, neither the government nor the central bank should force any banks to lend state owned entities at lower than the market rates to distort the banking system and monetary policy. This not will create a fair competition between the SOEs and other entities in the market place but also reduce the risks for banks.
Thirdly, China needs to transform the shadow banking into the formal banking and finance system and allow more entries of the private sector into the banking and finance system if they can meet regulation requirement.
Once the previous step is taken, it should strengthen its management of the banking and finance sector.
Reforming its banking and finance system will also have the added benefits of reducing corruption and organised crimes such as money laundering.
A better functioning banking system in China will also reduce the need for the Chinese people to physically store and carry a lot of cash.
The most important benefit is to allow much more efficient allocation of economic resources.
Shadow banking as well as the prevalence of ‘illegal fundraising’ in China reflects the severe deficiency of its monetary policy and management system. Given the role of money and credits in the economy, reforming the banking and finance system and its monetary management system in China should be a top priority.
From monetary policy point of view, a number of areas should be reformed. Firstly, monetary authority should not control both deposit and lending rates and should adopt the general practice of most central banks in the industralised countries.
Secondly, neither the government nor the central bank should force any banks to lend state owned entities at lower than the market rates to distort the banking system and monetary policy. This not will create a fair competition between the SOEs and other entities in the market place but also reduce the risks for banks.
Thirdly, China needs to transform the shadow banking into the formal banking and finance system and allow more entries of the private sector into the banking and finance system if they can meet regulation requirement.
Once the previous step is taken, it should strengthen its management of the banking and finance sector.
Reforming its banking and finance system will also have the added benefits of reducing corruption and organised crimes such as money laundering.
A better functioning banking system in China will also reduce the need for the Chinese people to physically store and carry a lot of cash.
The most important benefit is to allow much more efficient allocation of economic resources.
2013-09-15
Pettis is wrong about China's growth for the next decade
Comments on Pettis "Why China faces four per cent growth: Pt. 2", 14/09/2013, http://www.businessspectator.com.au/article/2013/9/13/china/why-china-faces-four-cent-growth-pt-2
I made a comment on Friday and now Pettis' second half is out so I would make a little more.
Firstly, are the two examples of painful adjustment that Pettis used, namely the US in the 1930s and Japan in the 1990s applicable to China at all? The 1930s was or was in the wake of the great depression world wide but particularly in the US following the stock market crash in 1929 and the 1990s for Japan were the first of Japan's two lost decades following the burst of its financial bubbles. Further, both countries at the respective times were at world economic frontier with one of the highest income in the world. Is China in those situations? No, any person with a common sense would understand China isn't. China is only probably about 20% of the per capita income of that of either the US or Japan. China may have some bubbles, but definitely not as severe as to hurt its real economy. There is plenty room for positive growth and the degree of uncertainties on its growth is not as high as those in the economic frontier given the room to further catch up. By any measure, China would not allow bubbles to burst to such a damage degree.
Secondly, as long as China's saving rate is high to sustain its investment and net export, there is no need to artificially to adjust its domestic consumption at a damaging speed. Its financial market and hosing market are unlikely to depress its economy, given its huge foreign reserves and high savings.
The argument of a decade low growth of 3-4% for China is fanciful and delusional to the extreme.
All the scenarios Pettis listed in the table is real growth rate and no inflation is included. In all likelihood, inflation in China is likely to be between 3-4% a year on average for the next decade or so, as indicated by the current 3.6% target for a real GDP growth target of 7.5% for this year.
If inflation is included I would assume that China can maintain 8-9% real GDP growth that means nominal growth will be around 12-13% or more higher. For a nominal growth of 12% a year, according to the Pettis table (by extension, roughly 2% higher for all variables), the investment growth can be as high as 9-10.5% a year and consumption growth 16-18%.
Would be that healthy economically? I don't see a problem with that. Of course, there is no need to adjust between investment and saving/consumption as rapidly as Pettis argues and a longer adjustment, possibly 20 years or more is more likely given that consumption growth is that high and people would still have enough incentives to maintain high savings. Most people would be happy with that outcome.
I made a comment on Friday and now Pettis' second half is out so I would make a little more.
Firstly, are the two examples of painful adjustment that Pettis used, namely the US in the 1930s and Japan in the 1990s applicable to China at all? The 1930s was or was in the wake of the great depression world wide but particularly in the US following the stock market crash in 1929 and the 1990s for Japan were the first of Japan's two lost decades following the burst of its financial bubbles. Further, both countries at the respective times were at world economic frontier with one of the highest income in the world. Is China in those situations? No, any person with a common sense would understand China isn't. China is only probably about 20% of the per capita income of that of either the US or Japan. China may have some bubbles, but definitely not as severe as to hurt its real economy. There is plenty room for positive growth and the degree of uncertainties on its growth is not as high as those in the economic frontier given the room to further catch up. By any measure, China would not allow bubbles to burst to such a damage degree.
Secondly, as long as China's saving rate is high to sustain its investment and net export, there is no need to artificially to adjust its domestic consumption at a damaging speed. Its financial market and hosing market are unlikely to depress its economy, given its huge foreign reserves and high savings.
Thirdly, Pettis has a automatic adjustment factor, that is, the net export and government consumption. Contrary to Pettis assumption, this factor can accommodate a higher savings/low consumption and high investment if and when needed.
So, Pettis is wrong in his conclusion that China is facing a decade of 3-4% growth.
Further, Pettis got the cause effect wrong. The painful adjustments in the US in the 1930s and in Japan in the 1990s were the results of low economic growth. During the relevant periods, their investments fell and their consumptions didn't grow. It's not the adjustments that caused low growths. Rather, it's the low growth that caused painful adjustments.
China won't have that painful adjustment and as a result there won't be automatic low growth flowing from that painful adjustment. And if there is no low growth, there won't be painful adjustment in consumption and investment.
China's new leadership government has already stated that it will sustain reasonable growth in the process of economic adjustment. It seems its limit of low growth is likely to 7.5% and it is unlikely to allow growth below that for any long period.
The argument of a decade low growth of 3-4% for China is fanciful and delusional to the extreme.
All the scenarios Pettis listed in the table is real growth rate and no inflation is included. In all likelihood, inflation in China is likely to be between 3-4% a year on average for the next decade or so, as indicated by the current 3.6% target for a real GDP growth target of 7.5% for this year.
If inflation is included I would assume that China can maintain 8-9% real GDP growth that means nominal growth will be around 12-13% or more higher. For a nominal growth of 12% a year, according to the Pettis table (by extension, roughly 2% higher for all variables), the investment growth can be as high as 9-10.5% a year and consumption growth 16-18%.
Would be that healthy economically? I don't see a problem with that. Of course, there is no need to adjust between investment and saving/consumption as rapidly as Pettis argues and a longer adjustment, possibly 20 years or more is more likely given that consumption growth is that high and people would still have enough incentives to maintain high savings. Most people would be happy with that outcome.
2013-04-17
China is not an average country!
Comments on The Economist's Analects - China: "The post-industrial future is nigh", 17/04/2013, http://www.economist.com/blogs/analects/2013/02/services-sector
This argument in this piece relies heavily on the chart by Messrs Ghani and Kharas that is based on the so called world normal using econometric estimate.
The problem, or at least a potential problem with this kind of approach is that the average approach is itself problematic in a very diversified world and the huge differences between countries in many respects of their situations, including their primary productive factors endowment, their education level, their entrepreneurship, theirs sizes, land and so many factors.
Just ask a reverse question: should China follow the average approach how could it be able to achieve its extraordinary economic transformation with such a different speed from the average?
Once one understands this question and its implications, it will not be difficult for one to understand the problem with the average approach.
This argument in this piece relies heavily on the chart by Messrs Ghani and Kharas that is based on the so called world normal using econometric estimate.
The problem, or at least a potential problem with this kind of approach is that the average approach is itself problematic in a very diversified world and the huge differences between countries in many respects of their situations, including their primary productive factors endowment, their education level, their entrepreneurship, theirs sizes, land and so many factors.
Just ask a reverse question: should China follow the average approach how could it be able to achieve its extraordinary economic transformation with such a different speed from the average?
Once one understands this question and its implications, it will not be difficult for one to understand the problem with the average approach.
2012-12-19
'New normal' for China growth?
Comments on Yiping Huang “The ‘new normal’ of Chinese growth”, 19/10/2012, http://www.businessspectator.com.au/bs.nsf/Article/Central-banks-US-England-BoE-monetary-fiscal-polic-pd20121219-34SAC?OpenDocument&src=sph&src=rot
China's high economic growth will come down to lower growth sometime in the future, although the timing may be complicated by the GFC and its continuous effects given that the world is still struggling to get out of it and the once in a decade leadership transition in China.
Yiping's assessment may be indicative for the likely growth of the Chinese in the coming two decades.
A factor needs to be considered very carefully is that the Chinese income level is still around $5000 while the income levels in the advanced countries could be 10 times of that. Even assuming a growth differential of 7.2% per annum on the per capita terms, it would still mean more than 30 years for China to catch up with the developed levels.
A growth differential of 7.2% per annum would require 9 to 10 per cent real growth on China's part.
I would interpret the current calm or "policy paralysis" by government as a practical response to the combination of the leadership transition and the deteriorating external economic environment with continued threat of euro zone meltdown and painfully slow economic recovery in the US. Setting a low growth expectation will be undoubtedly good for the coming leadership: if the growth is low, then it will have been expected, but if they can make the growth higher it will make the new leaders look better.
China's high economic growth will come down to lower growth sometime in the future, although the timing may be complicated by the GFC and its continuous effects given that the world is still struggling to get out of it and the once in a decade leadership transition in China.
Yiping's assessment may be indicative for the likely growth of the Chinese in the coming two decades.
A factor needs to be considered very carefully is that the Chinese income level is still around $5000 while the income levels in the advanced countries could be 10 times of that. Even assuming a growth differential of 7.2% per annum on the per capita terms, it would still mean more than 30 years for China to catch up with the developed levels.
A growth differential of 7.2% per annum would require 9 to 10 per cent real growth on China's part.
I would interpret the current calm or "policy paralysis" by government as a practical response to the combination of the leadership transition and the deteriorating external economic environment with continued threat of euro zone meltdown and painfully slow economic recovery in the US. Setting a low growth expectation will be undoubtedly good for the coming leadership: if the growth is low, then it will have been expected, but if they can make the growth higher it will make the new leaders look better.
2012-10-26
Net creditor is not a cause of alarm for lower trade GDP ratio
Comments on Yu Yongding "China’s rebalancing act: between exports and domestic demand", 25/10/2012, http://www.eastasiaforum.org/2012/10/24/chinas-rebalancing-act-between-exports-and-domestic-demand/
I don’t have a problem with a fall, a rise or no change in the ratio of trade to GDP in China. However, I cannot see why it is necessarily that being a large net creditor means being in the worst position in today’s global economy when faced with ‘infinite quantitative easing’.
The question is how to use that credit. It does not necessarily have to be used in holding US government bonds. The US stock market has boomed following the QEs. The US housing market is still low and there are values there. A move from government bonds to equities would not only keep the value of credits, but also increase its value.
And it is not necessary for all those reserves to be held in government hands. Why not transfer some to private holders?
It is not the credits but only the limitations of fixed thinking that is the problem for China.
I don’t have a problem with a fall, a rise or no change in the ratio of trade to GDP in China. However, I cannot see why it is necessarily that being a large net creditor means being in the worst position in today’s global economy when faced with ‘infinite quantitative easing’.
The question is how to use that credit. It does not necessarily have to be used in holding US government bonds. The US stock market has boomed following the QEs. The US housing market is still low and there are values there. A move from government bonds to equities would not only keep the value of credits, but also increase its value.
And it is not necessary for all those reserves to be held in government hands. Why not transfer some to private holders?
It is not the credits but only the limitations of fixed thinking that is the problem for China.
2012-07-26
Academic scholars in Australia shouldn't be Chinese-scholars bashing on climate change
Comments on Justin Norrie "Rich nations should do more on climate, say Chinese" 26/07/2012,
https://theconversation.edu.au/rich-nations-should-do-more-on-climate-say-chinese-8417#comments
It seems the tone of this article appears a little biased against China and Chinese scholars.
For example, the article states "It (China) produced 8.3 billion tonnes of carbon dioxide in 2010 – an increase of 15.5% on the previous year".
Readers with a rational mind would naturally be surprised how an increase of that magnitude could occur in China at the current economic environment and at the current high level of emissions.
Then you have the more obvious first and second paragraphs:
"Greenhouse gas cuts pledged by developed countries will not be enough to stop temperatures rising by 2 degrees by 2100, according to Chinese researchers who argue wealthy nations should bear greater responsibility for tackling climate change.
The controversial assertion is contained in a paper published today in the US Proceedings of the National Academy of Sciences. The paper, produced by 37 Chinese climate scientists and statisticians, says that two types of modelling show developed nations were responsible for 60% to 80% of the global temperature rise, upper ocean warming and sea-ice reduction until 2005."
Why is that argument or viewpoint a controversial assertion? Is that because it was made by Chinese scholars?
Why in academic fields like the Conversation should people bash China and Chinese scholars?
For example, the article states "It (China) produced 8.3 billion tonnes of carbon dioxide in 2010 – an increase of 15.5% on the previous year".
Readers with a rational mind would naturally be surprised how an increase of that magnitude could occur in China at the current economic environment and at the current high level of emissions.
Then you have the more obvious first and second paragraphs:
"Greenhouse gas cuts pledged by developed countries will not be enough to stop temperatures rising by 2 degrees by 2100, according to Chinese researchers who argue wealthy nations should bear greater responsibility for tackling climate change.
The controversial assertion is contained in a paper published today in the US Proceedings of the National Academy of Sciences. The paper, produced by 37 Chinese climate scientists and statisticians, says that two types of modelling show developed nations were responsible for 60% to 80% of the global temperature rise, upper ocean warming and sea-ice reduction until 2005."
Why is that argument or viewpoint a controversial assertion? Is that because it was made by Chinese scholars?
Why in academic fields like the Conversation should people bash China and Chinese scholars?
2012-02-24
A point of logic on a Lardy analysis
Comments on Nicholas Lardy “China’s
rebalancing will not be automatic”, 22/02/2012,
http://www.eastasiaforum.org/2012/02/22/china-s-rebalancing-will-not-be-automatic/
While I am highly likely to be in no
position to analyse the various data and/or studies to support
different and often opposing argument, I wish to make a point on
perhaps one small aspect explicit or probably more implicitly in
Lardy's post, on a logic or reasoning basis.
It seems to me that Lardy's implicit
underlying logic foundation is on "equilibrium level" or
"purity" in terms of balance and imbalance. In another
word, if it is not in the balance at the equilibrium level, it poses
a problem. Fundamentally, it relies on equilibrium and statics.
That kind of logic can be contrasted
with a change concept, that is, a gradual improvement or moving
towards something, say equilibrium.
In physics or mechanics terms, he
emphasises much more on the level of "speed", and much less
so on the change in speed or "acceleration".
There is no need for me to say too much
more on this, given that most readers would be familiar with these
concepts and the relationship between speed and acceleration.
So in my view he is both correct and
incorrect, depending how one looks at the issue.
Having said that, I seem to remember
that Lardy is an accomplished US scholar on the Chinese economy and
my comments is by no means to discount his contributions in this
area.
2011-10-28
A hard call by Roubini, maybe
Comments on Andrew Burrell and David Uren “'Hard landing' coming in China, warns Nouriel Roubini”, 26/10/2011, http://www.theaustralian.com.au/business/economics/hard-landing-coming-in-china-warns-nouriel-roubini/story-e6frg926-1226176718241
China is in a much better position to weather another downturn in many of the world's advanced economies.
There are a number of reasons for such optimism about the Chinese economy. Firstly, its central government debt is much more manageable compared to many of the advanced economies.
Secondly, the Chinese government has a higher degree of control of its economy, largely as a legacy of its incomplete transition from its past planned economy.
Thirdly, it's domestic demand is large and there is considerable room to invest in infrastructure and housing due to its urbanisation process.
Fourthly, while another downturn in the advanced economies would reduce their aggregate external demand for each of them, it does not necessarily mean China's exports to them as a whole will be reduced to the same degree. To the contrary, China's exports may replace some of the trade between those economies including some of their domestic outputs.
So if one really understands the Chinese economy and its dynamics including its experience from the last GFC, one will certainly be optimistic about its growth over the next decade or so.
However, a good growth may not necessarily mean more growth in demand for raw materials over the next decade at the same speed as in the past decade or so.
The "material intensity" of the Chinese economy is likely to fall gradually at first and then more rapidly in a few years' time.
That is determined simply by its stage of economic development.
China is in a much better position to weather another downturn in many of the world's advanced economies.
There are a number of reasons for such optimism about the Chinese economy. Firstly, its central government debt is much more manageable compared to many of the advanced economies.
Secondly, the Chinese government has a higher degree of control of its economy, largely as a legacy of its incomplete transition from its past planned economy.
Thirdly, it's domestic demand is large and there is considerable room to invest in infrastructure and housing due to its urbanisation process.
Fourthly, while another downturn in the advanced economies would reduce their aggregate external demand for each of them, it does not necessarily mean China's exports to them as a whole will be reduced to the same degree. To the contrary, China's exports may replace some of the trade between those economies including some of their domestic outputs.
So if one really understands the Chinese economy and its dynamics including its experience from the last GFC, one will certainly be optimistic about its growth over the next decade or so.
However, a good growth may not necessarily mean more growth in demand for raw materials over the next decade at the same speed as in the past decade or so.
The "material intensity" of the Chinese economy is likely to fall gradually at first and then more rapidly in a few years' time.
That is determined simply by its stage of economic development.
Euro solution, sustainability concept, long term and logic
Comments on James Kirby “The Nouriel Roubini CHOGM show”, 26/10/2011,
http://www.businessspectator.com.au/bs.nsf/Article/Nouriel-CHOGM-sovereign-debt-OWS-recession-pd20111026-MYQHA?OpenDocument&src=sph&src=rot
I think a better solution for Europe is that certain countries leave the euro but still remain in EU and receive some help from EU with the flexibility of own currency and monetary policy.
The claim of EU disintegration is overdone, although it is better for some euro members to leave to make their adjustments less painful and more effective and efficient.
In terms of the sustainability of the Chinese economy, one needs to understand stages of economic development and changes in economic structure along the path of development, especially rapid catching up.
It is just like a person grows in weight and height before maturity.
In that analogue, it is correct to say that growth in weight and height is not sustainable in the long term, but very few people would say it and would feel it laughable if someone says
that.
If one understands that analogue, one would not be too fixated on using the sustainability argument, especially when it is combined with in the long term!
http://www.businessspectator.com.au/bs.nsf/Article/Nouriel-CHOGM-sovereign-debt-OWS-recession-pd20111026-MYQHA?OpenDocument&src=sph&src=rot
I think a better solution for Europe is that certain countries leave the euro but still remain in EU and receive some help from EU with the flexibility of own currency and monetary policy.
The claim of EU disintegration is overdone, although it is better for some euro members to leave to make their adjustments less painful and more effective and efficient.
In terms of the sustainability of the Chinese economy, one needs to understand stages of economic development and changes in economic structure along the path of development, especially rapid catching up.
It is just like a person grows in weight and height before maturity.
In that analogue, it is correct to say that growth in weight and height is not sustainable in the long term, but very few people would say it and would feel it laughable if someone says
that.
If one understands that analogue, one would not be too fixated on using the sustainability argument, especially when it is combined with in the long term!
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