China’s ondoorgrondelijke contractie

Oct 3, 2014 Kenneth Rogoff

CAMBRIDGE – Terwijl praktisch elk land ter wereld zijn groei probeert aan te jagen, probeert de Chinese overheid deze te vertragen tot een houdbaar niveau. Nu China verschuift naar een meer door binnenlandse vraag gedreven op services georiënteerde economie is een transitie naar een lagere groeitrend zowel onvermijdelijk als wenselijk. Maar de uitdagingen zijn immens en niemand moet zomaar van een zachte landing uitgaan.

Omdat de Chinese economie groeit relatief tot die van zijn handelspartners moet de doeltreffendheid van zijn door export geleide model onvermijdelijk minder worden. En als gevolgtrekking daarvan zullen de opbrengsten van enorme infrastructuur-investeringen, waarvan er veel gericht zijn op het ondersteunen van de exportgroei ook verminderen.

De consumptie en kwaliteit van leven moeten groeien, zelfs nu de Chinese luchtvervuiling en watertekorten op veel terreinen acuter worden. Maar in een economie waar de schuld geëxplodeerd is tot meer dan 200% van het bbp is het niet makkelijk om de groei geleidelijk te beteugelen zonder een wijdverspreide mislukking van ambitieuze investeringsprojecten te veroorzaken. Zelfs in China, waar de regering diepe zakken heeft om de val te verzachten, zou een bankroet van Lehman Brothers-omvang tot grote paniek kunnen leiden.

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Kenneth Rogoff

Writing for PS since 2002
204 Commentaries

Kenneth Rogoff, Professor of Economics and Public Policy at Harvard University and recipient of the 2011 Deutsche Bank Prize in Financial Economics, was the chief economist of the International Monetary Fund from 2001 to 2003. He is co-author of This Time is Different: Eight Centuries of Financial Folly and author of The Curse of Cash.

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Kir Komrik Oct 12, 2014

Well said and I think I am in rare agreement with someone who sees economic fundamentals much as I do. I've been saying for the last 4 years that China is not the droid you're looking for; meaning, I was never that bullish on China for a few fundamental reasons.

Lack of a long-term, viable petroleum option (which directly underpins electric power consumption - coal won't cut it), a massive consumption curve ahead of them with little indication of foreseeable increases in efficiency and an aging demographic and a large population with a sub-par standard of living were key long-term indicators to me. This, coupled with a not especially representative form of governance, meant that PRC would not scale well in the future.

Particularly salient for PRC, and I won't expand on why, is the very large liability that a large, dense population of persons with a limited public health system will bring to bear on the overall outlook for China. India faces similar challenges though they are not as diverse in kind and type. I am actually quite concerned about those two and wish the best, but I'm afraid China will not land gracefully. I hope I'm wrong.
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Pablo Guadix Oct 10, 2014

Mr. Rogoff - I missed more data to this article. A contraction is something measurable and more or less predictable with data. It is not rigurous to rely just on:
- Economy's debt over 200% GDP. It is a falacy not to consider net debt and worse not to quickly explain how you measure the economy's debt (in US it rangs between c.100% to c.700% according to concepts included).
- Falling of house price. True last month is down according to your quotation, but not YoY.
One thing is to think that the Chinese model is close to an end and another, completely different, to speak about contraction.
There are robust data around worth to consider: slow down of industrial production, less car registrations, higher inventories, etc.
Please, more data and less effort to try to discredit Chinese economy.
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douglas ungredda Oct 9, 2014

The problem with Mr Rogoff's assertion about the perception that China’s growth rate remains perched at a very high level, so there is a great deal of room to fall. is that financial markets amplify the negative trends, converting small variations into multiple downsides across the fulll asset spectrum, affecting all markets wholesale. The potential vulnerability lies within of Western financial markets which inmediately factor in asset prices any perceived corrections in China growth and form there to global recession is just one step.
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Jose araujo Oct 7, 2014

In my limited knowledge of China, I thought China has a massive surplus in the trade account and massive level of reserves.

How does this tie to the arguments of Rogoff, especially to the massive explosion of debt in the country. First let’s start by clearing that 200% GDP debt is nothing special, and that Debt level should be compared to assets, not GDP, but OK. Putting it into perspective, if you have a mortgage you for sure will have debt far superior to 200% of your income….

But more important is to say that China’s debt is of a different nature. Let’s just think a little bit, starting with the basic equality of Savings=Investments…. Or that all Savings have to be transformed into DEBT, so the massive debt growth can be tied to the massive growth of savings, and it only shows that China is transforming into trade surplus into internal demand. Basically they diverted part of the external loans to internal loans.

China is a communist country, with limitations to the private property. So what’s the consolidated balance sheet of the Chinese government? I would be very surprised if the Chinese Government isn’t a creditor, instead of a debtor like it’s suggested by Rogoff.

Finally to say that I think it’s silly to use the Western market models in the Chinese economy. Soft landing in the Chinese economy seems like an absurd proposition, why would you be concerned with landing at this stage of the Chinese economy?
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Robert Snashall Oct 7, 2014

I really don't think China has the political infrastructure to really continue high growth rates for that much longer. They've done the capital led expansion phase, which throughout history only requires a moderate level of inclusive institutions, but getting further than that, I think you need to see a modicum of democratic movement. I can't think of a country that advanced past the middle income point, that didn't at least even have an opposition party. Singapore, Korea, Japan never had such concentrated authoritarian power. Even Russia has an opposition party.
What does this mean? The forces of creative destruction cannot work when the people in power also indirectly own the industry that is being competed against. And that is how long term growth happens.
- Barry McHugh Oct 7, 2014
  
  Fair enough although I'm noting that
  * each urbanised worker triples his average disposable income, with multiplier effects-more, and this is definitely a play by the government: See July 2014 Urbanisation Feature in China Daily ["Old urbanization" has led to millions of migrant workers living in heavily-polluted giant cities without equal social security. Many things need to happen in order to remove different obstacles so that new styles of urbanization could be fast approaching. Everyone, including the government and various industries, is included in this and therefore need to take an active part in this new growth process].
  * I haven't been able to understand the associated monetary supply expansion play WITH that urbanisation, which is probably going to be ASSOCIATED with an emerging, sizeable domestic wholesale and retail sector, both adding growth. However, that assumes that WAGES BE ALLOWED TO GROW TO SUPPORT SPENDING, but the wages are hitting up against too high import price growth. Thanks Kenneth and Robert for the quality copy.
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captainjohann Samuhanand Oct 6, 2014

China is investing in Asia, Africa wisely so that consumerism comes into these countries. It is developping ports, rail and road connection from manufacuring areas in China to consumption areas in Asia and beyond. The real problem for western thinkers may be the uncorruptible Chinese top political leadership unlike others in Asia and africa and latin america. The export led growth to third world will continue while the affluent Chinese go for European quality goods.
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Milton Kotler Oct 5, 2014

With great respect for Kenneth Rogoff, I question his premise about the sustainability of Chinese export to underpin China's economic growth targets. Chinese export in August 2014 grew 9.5% over the previous year; in July it grew 14.5%. Export growth in 2013 was 10% over the previous year; 2012 growth was 8% over 2011; and 2011 export growth was 20.3 % over 2010. From 2000-2010 export growth was 124%.

One may dispute Chinese numbers, but we have no alternative U.S. numbers for China exports. We are stuck with their numbers. inorder to make an intelllgent assessment. we have to have numbers!.

China export contniues to grow and will probalby grow faster with any growth in West.

With a 50% savings rate, Chinese policy makers are reasonablyh sceptival about a rebalalncing of growth based on consumption growth. Consumer spending grows, but not fast enough to hit Chinese GDP targets nad displace export.

To promote export from the world's manifacturer, China invests wisely in infratructure for new market development in Africa, SE Asia, Central and Spouth ASia, Latin America and elsewhere to create new city region markets to absorb Chinese exports.

This is a logical strategy for the enormous trade, consumption and investmenty potential of the demographic behometh of the emerging world.

Working in Chins for 16 years, I look at data not econmic theories. Rogoff is wrong.

Milton Kotelr

with great respect for Kenneth Rogoff, I question his premise about the sustainability ofg Chineer esport . aBOUT
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Nathan W Oct 5, 2014

Funny, for communists who should eschew such material obsessions to consider 6% growth as a contraction.

Anyways, the transition to consumption-led domestic growth will surely be beneficial to balance in the world economy.
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Joshua Ioji Konov Oct 5, 2014

"President Xi Jinping’s aggressive anti-corruption campaign might be seen as preparation for political resistance to further economic liberalization." WELL, IT IS OBVIOUS TO WHOM SUCH THEORIES AND STATEMENTS SERVE, HOWEVER, IF CORRUPTION IS CONSIDERED PRO BUSINESS AND PRO GROWTH, AS IT HAS BEEN, WHAT KIND OF GLOBALIZED MARKET IS MR. ROGFF'S IMAGINING?
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Procyon Mukherjee Oct 4, 2014

The statement "Electricity demand has fallen sharply", may be a mis-statement, since 2008 the demand and growth both have slowed and has been below 4%, in 2013 it was at 3.7% growth, so now in the first 8 months of 2014 it is below 4% isn't a great shift. The "severe distress" in the coal industry that the next paragraph says may be one more miss, as the coal industry, which has grown to 4 Billion Tons of output naturally cannot grow at the same frenetic pace at roughly four times U.S. output in coal.

Yes, the prices of most commodities have seen finally a structural shift, given the slowing appetite in China; that is a different problem.
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