Maybe China can improve its environment in 2016

Comments on Kerry Brown "China’s challenges in 2016", 4/02/2016

On the foreign policy front, the formal launch of the Asia Infrastructure Investment Bank should also qualify to be a very significant achievement.

The bilateral summit meeting between China and Taiwan, while highly symbolic, is questionable in terms of foreign policy achievement, particularly in the context of the anticipated change in the governing party from the Nationalist Kuomintang Party (KMT) to the Democratic Progressive Party (DPP) in Taiwan and the subsequent confirmation in the January election. It was and still is unclear what purpose and effect of a meeting with a losing party.

While China, in 2016, faces the same very challenging task in term of rest its slowing economic growth in this year as in the last two years did, given the not so promising world economy and domestic rebalancing, maybe it is having a reasonably good opportunity to do something in improving the environment, particularly air quality when it forces the closure of some inefficient and high energy consuming plants in the steel and other industries. But the deficit in environment is so large, it would be difficult for people to feel it probably.

China probably needs a bit more active fiscal policy to arrest the slowing economic growth rate, although any fiscal stimulus must be well targeted.

While it has been a big thing inside China when it set up the Shanghai Free Trade Zone, it is unclear to me what that can really achieve, particularly in the context of economic rebalancing. It may improve the efficiency of importing, but that could also be a drag to domestic growth, as imports are subtracted from growth.

External orientation still the way to go despite external headwinds

Comments on Alok Sheel "China, India and global headwinds", 25/08/2015

The GFC and its aftermaths exposed some weaknesses of high exposure of those economies to external demand/trade through external shocks in economics weakening. Due to the weakening of many industrial economies and their desire to get out of the weaknesses, the so called imbalances became very fashionable, because some industrial economies with trade deficits could get a boost if their trade deficits were reduced. China was a big target or a case of the imbalances.

Willingly or not, trade imbalances may have been reduced over the past few years. Adjustments of trade imbalances may or may not be optimal to the world economy as a whole or any pair of countries which have bilateral trade imbalance. For example, Australia is generally a capital importing country and trade deficits may be needed to balance its capital needs.

Even in a country that my not always need external capitals, from time to time it may be beneficial to use external capitals. In such cases, trade deficits may de desirable.

Furthermore, differential technical changes and productivity rises between countries may cause trade imbalance that may need a period of optimally transitional adjustment that can take relatively long time to complete.

The lessons from the GFC and its aftermaths is not turning to inward looking and deliberately reduce external trade. The lessons should be explore every part of demands, both internal and external to boost growth. It would be a costly mistake to give up external orientation in the age of globalisation and economic integration and to only focus on internal demand. Any reduction of trade to GDP ratio should be based on fully explore both internal and external demand, as opposed to purely internal orientation.

Chinese authorities should be wiser now

Comments on Peter Drysdale "The problems for Asia’s growth", 17/08/2015

China's slowing economic growth is probably greater than the Chinese leadership team expected and adds to the potential that it may fall into the so called middle income trap. There are a number of factors that combined to result in the excessively slowing of the Chinese economy. Surely the prolonged weakening in economic growth in major international economies including the US, and particularly in Europe has been one of the external factors.

The appreciation of the Chinese Renminbi, the yuan, against many currencies as it pegged to and rose together with the US dollar is another headwind as far as external factors are concerned. It has rendered the Chinese exports as a whole uncompetitive. The Chinese authorities were probably too concerned about the pressure from the US to call currency manipulator and didn't act early enough to mitigate its appreciating currency. The recent move by the Chinese authorities to allow greater movement/depreciation against the US dollar indicates how strong the downward pressure of its economic growth rate.

The third factor is the rapid rises in wages in China that contributed to both external and internal problems. Externally it further reduced its international competitiveness so added to the slowing export growth. Internally it may added to the tightening of the labour market due to population growth and demographic change and reduced the employment growth than otherwise.

More importantly from policy point of view, the Chinese authorities were probably too relaxed in its economic management and didn't use enough expansionary policies, in the hope that its consumption may pick up the economic slacks to drive the economy. That policy stance was a combination of the result of the previous huge stimulus in the wake of the GFC and the desire to deleverage. Of course that policy stance became problematic in the context of both external and other internal problems as mentioned.

That policy stance, in the hope of the market would come to rescue, even would not work well in well functioned markets such as the industrialised countries, not to mention in China where the market is not as perfect as those in advanced economies.

The Chinese authorities have probably realised the country's economic problems and have taken actions to stimulate its economy, although it may have been too late and too little. Nevertheless, it is a useful lesson and if they have learned that lesson well, it should be conducive to getting future policies right. That in turn is likely for China to avoid the middle income trap and graduate as early as possible to high income ranks. Hope that is a price paid with a dividend.

China can beat deflation if it really wants to

Comments on Yu Yongding "Can China beat deflation?" 23/07/2015

As this post suggested China may face an extended period of deflation with a negative impact on economic growth, amid its structural reforms.

It seems sensible to have expansionary of both monetary and fiscal policies to head off potentially very serious deflation and excessively slowing in the economic growth, as the author has called for, that "China must do whatever it takes to avoid falling into the debt-deflation trap".

Structural reforms should, in the short term, be done in the context of stimulating economic growth and combating deflation. There should be enough room in China for it to invest, given that China's capital stocks are still low in not only infrastructure in many locations with the need of continued urbanisation, but also in the short components of its structural imbalance. Understandably, China is still far from a high income country and it will take many years and decades to catch up with the levels of high income industrialised countries. Capital labour ratio in China is arguably still equally low as its per capita income. That indicates the needs for increasing its capital stocks not only in aggregate sense, nut particularly in the under balanced areas of its economy.

It is, however, important to channel the monetary and fiscal expansions into the right areas of the real economy and prevent any excessive flow to its stock market for speculative activities.

Although the housing market in China has seen very high property prices and the authorities have tried to dampen its further growth, the housing construction sector still have room to expand.

Furthermore, its services sector has plenty of room to expand and its growth can be combined with the Chinese leadership's push for innovation and promoting enterprenourship.

In summary, China needs expantionary fiscal and monetary policies to stimulate the growth of the economy and address deflationary pressures. Structural reforms and adjustments, in the short to medium terms, need to be done in that overarching context. In both the short and long terms, China should not loose sight that its income is low, so is its capital labour ratio. The main focus of structural adjustments, particularly in the short term, should be on expanding infrastructure (including housing in cities and towns where further urbanisation will see a rapid increase in resident population and the capacities of the services sector.

GDP and employment both are important

Comments on Rajiv Kumar "Job growth not GDP growth matters for India", 8/07/2015

I find the title interesting.

While it is important to have a focus on employment growth, it does not mean that GDP growth is unimportant. Only focusing on GDP without attention to employment is not right, particularly in terms of inclusive growth and equity or income inequality. Equally problematic is that only focusing on employment without due attention to GDP growth. Neither is good for economic policies.

I am not familiar with the Indian economy and its statistics, if the author is correct in relation to GDP and employment growths, it may mean that the GDP growth was not enough to boost employment more significantly.

Alternatively, it reminds us about the US economy back a few years ago when it was labelled as jobless recovery. If that is the case, it may mean that it is only a matter of time for growth in employment to catch up with GDP growth.

Endogenous economic growth and China's one child policy

Comments on James Morley "Economic theories that have changed us: endogenous growth", 22/06/2015

While the exposition of endogenous growth in this article is useful, the use of China's one child policy as an example for lowering economic growth is, unfortunately, problematic and misleading.

It does not accord well with the story of Chinese economic growth both before and after that one child policy was introduced. China's economic transformation after that policy was introduced is regarded as phenomenal and the argument that it would/could have been more rapid if the one child policy had not been in place is hardly convincing.

While China's economic growth before that policy was not too bad, there is a qualitatively and quantitatively difference between the growth in that period and the period since then. There is no need to say which period had better growth.

The introduction of that policy, rightly or wrongly, was based on the thinking that the natural population growth (without the intervention using family planning) was too much relative to economic growth, so not only that the living standard was not improving rapid enough, but also that it may not be able to feed everyone.

One of the key factors in endogenous economic theories is not how large the population is, per se. Rather it is the quality or skills of the population.

Just consider a country with a very large population like China or India before their respective rapid growth started. Why had they low growth and why were they poor, given their very large population if large population would naturally be linked to higher growth?

One of the objectives of the child policy in China was to improve the quality of the population. To that objective, that policy has probably had a positive effect.

Further, a developing country's catch up may not necessarily be dependent, to a very significant degree, on  endogenous growth in the sense they produced new ideas or new technologies/techniques. It is their successful application of the existing technologies in the economically more advanced countries, as well as more rapid accumulation of physical capitals.

Time will tell if there is a China model

Comments on David Dollar "What institutions do Asian countries need to keep growing?" 31 May 2015

The next decade or two may prove one way or another whether there is a China model or not. While Dollar argues historical evidence is likely to be against China’s authoritarian system for its next stage of development, the current indication is that China is unlikely to say goodbye to it any time soon. As a result, we will likely to see either a China model with authoritarian government that successfully defy the historical evidence that Dollar relies, or China falls into the middle income trap including possibly a scenario where the authoritarian government is forced to give up its power in favour of the traditional democracy.

China, however, has a unique feature that is lacking in many other countries, that is, it has the largest population and it’s economy will soon be the largest in the world. Can China create a new way, that is a new model? That is a question no one can answer with absolute certainty, but will be fascinating to see for many over the next decade or two.

Rely more on productivity rather than population growth for economic growth

Comment on David Gruen "Asia’s economic challenges and policy choices", 12/03/2014, http://www.eastasiaforum.org/2014/03/11/asias-economic-challenges-and-policy-choices/
Gruen states that “Much of Northeast Asia is facing a period of demographic ageing. China, Japan and South Korea are already rapidly ageing societies, which in China’s case is a direct consequence of its one-child policy. This will detract from future growth, yet Northeast Asia has been unwilling or unable to adopt more open immigration policies like those that enabled Australia and the United States to partially replace ageing working age populations.”
Many Asian countries have very different conditions to Australia’s, so they are unlikely to embrace open immigration programs as Australia or some other countries do.
Further, while there is an issue in terms of inter-generational balance and/or transfer, growth relies on population growth is likely to mask the importance of productivity growth.
Even though sometimes demographic dividends may contribute to economic growth and possibly productivity growth, it is by no means a certainty that a growing world population is naturally optimal to the welfare of the people of the world as a whole.
China adopted the one child family planning policy in the belief that it was, rightly or wrongly, good for the country. Of course, its one child policy has not necessarily been the best family planning policy, even if one accepted that it is desirable to limit population growth. China now seems to be changing its one child policy, albeit very slowly.
It is important to carefully consider how population growth may or may not contribute to productivity growth and based on that to make informed discussion on the role of population growth in economic growth.

'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.

Understand why and how productivity has slowed in recent years

Comments on John Freebairn "Evolution of the productivity pariahs", 2/08/2012 https://theconversation.edu.au/australias-productivity-problem-why-it-matters-8584 and
http://www.businessspectator.com.au/bs.nsf/Article/productivity-australian-economy-private-sector-pub-pd20120802-WS2RU?OpenDocument

I think governments, businesses and economists probably need to have more realistic expectations and understand where the most important constraints to productivity improvements are and how to go about them to help raise productivity.

It probably means quite a number of new points or more creative thinking.

For example, the improvement in the terms of trade, as a luck gift to many Australians including Australian businesses, may mean they don't want to work that hard to raise productivity in the comparative sense, so they are happy to enjoy the life with better living standards. Alternatively, they need to be given greater incentives to work as hard as they did in the of no improvements in the terms of trade to produce the same improvement in productivity.

So this kind of work/leisure choice must be taken into account in analysing our productivity to really understand the true underlying factors on productivity in Australia.

However, I do share Professor Freebairn's view that government has important roles in raising productivity. Freebairn mentioned two of them: government policies such as taxation and government supply of services, like education, law and order.

Another important area the government has an important role is to ensure consumers get the maximum benefits from adequate competition, including from competition from overseas through trade policy.

It has been reported that Australians are charges much higher prices for many products or services than their overseas counterparts. This is not only detrimental to the welfare of Australians, but also is unconducive to competition and productivity.

The government must examine why that has been the case and develop the most appropriate policies to change it.

It is a mystery why the government hasn't done such work for so long.

Economic models and a China model?

Comments on Shaun Breslin “Rethinking the ‘China model’”, 30/2/2011, http://www.eastasiaforum.org/2011/12/29/rethinking-the-china-model/

I think this is a very important piece of analysis with objectivity as opposed to ideology and Professor Breslin should be highly commended for that.

I am particularly and deeply impressed by the argument that the process of the Chinese economic development in the last 3 decades has been experimental as opposed to a grand design, a gradual reformist process as opposed to big bang theoretical approach, a process of seeking what works as opposed to following blindly textbook economics.

In that respect, the criticism of its relying too heavily on exports and investment could perhaps be put into a proper perspective and an appropriate place. That is, it worked at that time/stage, as opposed to a theoretically well balanced model that could be applied all stages of economic development.

That point of view is in essence no difference to an argument that most industrialised economies are post industry/manufacturing and they had a imbalanced economy in their industrialisation stage that they should not have had!

Isn't that a nonsense?  

PS: the link of the Chinese economic development of the past 3 decades to the East Asian developmental models is very useful, especially in light of the experimental nature of the Chinese development process and the history of rapid growth of some East Asian economies prior to the Chinese process.

China needs a new national culture

Comments on Yao Yang “From production-oriented to welfare-oriented government in China”, 24/10/2011, http://www.eastasiaforum.org/2011/10/23/from-production-oriented-to-welfare-oriented-government-in-china/

While it may be ideal to have a good social welfare system, China cannot afford moving away from high economic growth any time soon.
There will be a stage for China to move from the current state of low, unequal and incomplete of welfare to a state of comparable social welfare to most other countries, but it relies heavily on its high economic growth to address many of its urgent tasks.

Clearly there are some who would feel as victims of increasing inequality, a slower growth may generate its own problems.

If a tax reform in Australia would require government revenue available to compensate the losers, China's high economic growth has a similar role to address many social problems. Without adequate growth prematurely before its income becomes largely comparable to middle to high income countries, the Chinese government would face the issue of the legitimacy of its one party rule.

This issue will be especially important when the Chinese society has increasingly lost historical and cultural heritages and in need of seeking a new national culture.

The Chinese government needs to lead in this endeavour, otherwise people would move ahead of it.

Imbalanced growth and possible stagflation

Comments on Olivier Blanchard “When it comes to the commodity crunch”, 12/04/2011, http://www.businessspectator.com.au/bs.nsf/Article/oil-inflation-commodities-IMF-Blanchard-pd20110412-FTSM4?OpenDocument&src=sph

A couple of comments.

First, on balanced or imbalanced growth.

The article starts with the following:

"The world economic recovery is gaining strength, but it remains unbalanced.

Three numbers tell the story – we expect the world economy to grow at about 4.5 per cent a year in both 2011 and 2012, but with advanced economies growing at only 2.5 per cent, while emerging and developing economies grow at a much higher 6.5 per cent."

Although Olivier Blanchard clearly has a point here, but some of the message masks the trend in the past two decades or so, that is a converging trend characterised by much higher growth in emerging economies especially the larger ones like China and India on the one hand, and the lower growth of most industrialised economies, even in the event of over consumption in some of the latter countries.

So, the unbalanced growth will continue and has been normal and will continue to be normal for some time to come, although Olivier Blanchard means the below potential low growth in industrialised economies.

Secondly, on effects of high commodity prices on different economies, Olivier Blanchard may have ignored the effects of higher prices of exports from emerging to advanced economies as a result of the high commodity prices.

I see that in conjunction with the direct effects of commodity prices will be the main sources of stagflation in some industrialised economies, should that occur over the few years to come.

BCA should be clear about economic growth

Comments on Ben Packham “CEOs say Australian lifestyle is under threat without moderate population growth”, 28/02/2011, http://www.theaustralian.com.au/national-affairs/ceos-say-australian-lifestyle-is-under-threat-without-moderate-population-growth/story-fn59niix-1226013441955

It should be no surprising that BCA is calling for this, because it is in business interests to do so. After all, BCA represents businesses.

However, it can be an entirely different matter for the Australian public at large.

For the latter, it is per capita that matters more and also there is a distribution of the nation's wealth between business owners and the general public. They can have very different implications.

The argument that a 36 million population by 2050 is a "sensible" target that will strengthen the economy and improve communities lacks convincing factual backup, if the current lack of infrastructure and the consequential deterioration of real living standard taking that into account is used as a guide.

Growth without productivity means little to the majority of the Australian public. Most residents would prefer higher productivity or higher per capita growth than lower productivity growth and lower per capita growth with a larger population.

BCA should not confuse the public with weasel words like economic growth, because it means very differently to different people. It must be upfront with the Australian public on what it means too.

Globalisation fruits

Comments on Michael Stutchbury “Globalisation's fruits sweet and sour”, 1/02/2011, http://www.theaustralian.com.au/business/opinion/globalisations-fruits-sweet-and-sour/story-e6frg9p6-1225997666249

In Australia we talk about the two speed economy associated with the mining boom.

The mining boom is a result of the two world speed economy, one booming large developing economies and the more industrialised economies.

The world economy is and will continue to display very different dynamics over the next two decades as Asian economies continue to achieve high growth.

This world economic dynamism has just caused a re-alignment of world prices including wages, but its impact on that process will be increasingly greater and accelerated over the coming years.

It is likely to be a significant change in wealth allocation in the sense that some developing countries will be able to buy assets world wide more cheaply while most industrialised countries will have to pay comparatively more for their needs.

The euro zone will pay a greater price for its inflexible monetary system than if it were not a monetary union of fiscally independent countries.

There will be larger labour movement from more problematic countries to more sound economies in the euro zone. That movement could be smaller under a more flexible monetary arrangement. That forced larger labour movement will cause more dislocation of other resources that is why it is suboptimal financial arrangement.

However, even if the euro zone can overcome this crisis without too much damage on itself, then in the longer run, its member countries will be forced to be more prudent in their individual fiscal affairs and possibly more coordination between the members.

Tasmania will be just fine

Comments on Tony McCall “Old enmities cloud Apple Isle's future”, 25/01/2011, http://www.theaustralian.com.au/news/opinion/old-enmities-cloud-apple-isles-future/story-e6frg6zo-1225993845801

The following statement is half correct at best"

"Tasmania faces significant employment losses in the forestry sector and in GST revenue at a juncture when the federal government, squeezed by flood reconstruction priorities, will be reluctant to hand out yet more funds to compensate forestry companies, employers and employees exiting the sector."

Tasmania's GST revenue will not decrease. How could it decrease?

Tasmania now has a very strong leverage on the Gillard minority federal government because of the Independent MP from Tasmania. So how will it not use that advantage is beyond belief and common sense, just as it did during Senator Harradine’s time.

There is little immediate and excessive budgetary pressure for Tasmania now. No point now to frighten the first time female and new premier.

As for the intermediate and longer terms, Tasmania needs to take advantages of its natural environment and natural resources, and relatively lower costs of living.

It needs to deepen value-adding to resource uses. it should increase the efficiency of transport within the island. It needs to lower travel costs between it and the mainland Australia to attract more and younger people, including international immigration, to Tasmania.

State taxation and competitiveness

Comments on Christian Kerr “High tax hurts the laggard states”, 10/01/2011, http://www.theaustralian.com.au/news/high-tax-hurts-the-laggard-states/story-e6frg6n6-1225984687845

A few questions:

1. Are the GSP growth rates listed in the table at the beginning real or nominal? They appear to be nominal. If nominal, then do changes in prices especially mining products affect the real growth rates?

2. Do different industrial structures have different implications on tax regimes or taxation revenue as a proportion of the GSP?

3. What about per capita growth by states? Do they have the same or a different pattern?

4. What about real per capita growth by states? Do they have the same or different implications for the relationship between the taxation regimes and growth identified by the author?

It seems the study may have possibly created biases due to use of an incorrect comparison methodology.

If that is so, then a more sound study is needed to derive reliable conclusions.

Convergence in income and divergence in growth

Comments on Martin Wolf “In the grip of a great convergence”, 5/01/2011, http://www.businessspectator.com.au/bs.nsf/Article/China-US-economy-inflation-interest-rates-pd20110105-CT3VY?OpenDocument&src=sph

I think the divergence and convergence story should bring benefits to all nations, just like voluntary and free trade is beneficial to all trade partners involved.

So, while the currently advanced economies may be in a relative decline, they will also benefit from the relative and absolute rise of the large and rapidly industrialising economies.

This should strike a key note on all nations.

And it is in this win-win outcome that all should embrace and celebrate the convergence of income.

PS: I share Wolf's view that the current information and communication technologies mean that China and India can acquire the knowledge base that has underpinned the industrialised economies; and there are unlikely events that will stop the current convergence trend for the foreseeable future.

Marginal stagflation in China

I was asked the following question: 有人说中国将进入高通胀，低增长时代，老百姓要吃苦几年了，您怎么看？

 

The following is my reply:

I am at work and have to use English.


I think it is possible, given the amount of money in the system and the slow recovery of the west economies.

China will have to adjust its economic structure to use both trade and domestic demand as the combined source of growth for the future, say the next decade or so, then to move to rely mostly on domestic demand as the main source.

In such a period of transformation, growth may not be as fast as that in the past which had the world demand as the key source of growth until China can manage the growth of its domestic demand. It requires a fine balance of the relationship between capital and labour on the one hand, and the economic structure to meet the domestic demand.

But, China should encourage its citizens and firms to look at overseas to acquire assets as a tool to manage its domestic demand to release its demand pressure and to increase their wealth, which will make the management of the economy easier than otherwise.

There are many overseas assets market depressed and they represent opportunities. But it needs well managed as well.

To answer your second point, it will depend. The government should encourage labour are paid appropriately. Instead of appreciating the RMB to balance external trade that may damage employment, it should look at the export price side as a result of better paid labour. If labour wages increase, then it should not be too bad as long as inflation is under reasonable control.

But in terms of exchange rate regime, I think it is better to peg to a basket of key currencies, including $US, euro, Yen and others, based on trade relations.

There is a question of what to do with the $US assets.

PS: Yiping Huang has a post on marginal stagflation in China:
http://www.eastasiaforum.org/2010/11/12/is-china-entering-a-period-of-marginal-stagflation/

Immigration issue complex

Comments on Paul Kelly “Battle of ideas that will make or break this nation”, 18/08/2010, http://www.theaustralian.com.au/national-affairs/commentary/battle-of-ideas-that-will-make-or-break-this-nation/story-e6frgd0x-1225906535690
Paul, the point on immigration can be misleading.

It could be interpreted that the migrant intake has been driven by economic and labour-market needs. Alternatively it could be interpreted as a failure in government policy in education and training, as well as in welfare policy regarding the unemployed.

Further, it could also be interpreted as a subsidy to business profits and a tax to labour already within Australia, because it increases business profits and lowers wages – a typical political economy between labour and capital.

Of course, there are also other externalities such as infrastructures and the living environment.

It is a complex issue than most commentators think it is.

The argument for headline GDP or economic growth is a big problem.

The battle of ideas is an important point, in the sense of this complex context.