Economics

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Oct 12, 2015 Anatole Kaletsky

ЛОНДОН – Один вопрос доминировал в дискуссиях на годовом собрании Международного валютного фонда, прошедшем в этом году в Перу: вызовет ли экономический спад в Ките новый финансовый кризис, причем как раз в тот момент, когда мир начал успокаиваться после предыдущего? Однако лежащее в основе этого вопроса предположение, будто Китай сейчас самое слабое звено в мировой экономике, в высшей степени сомнительно.

Конечно, Китай пережил турбулентное лето, что было вызвано тремя факторами – ослабление экономики, финансовая паника и политическая реакция на эти проблемы. Хотя ни один из этих факторов не может сам по себе представлять опасность для мировой экономики, угроза возникла из-за взаимно усиливающегося взаимодействия между ними. Слабые экономические показатели привели к финансовому хаосу, ставшему причиной ошибочных политических решений, которые, в свою очередь, усилили финансовую панику, ещё больше ослабили экономику и способствовали новым политическим ошибкам.

В 2008-2009 годах мир осознал, что такая накручивающая сама себя реакция финансового рынка является намного более мощным переносчиком глобальной экономической инфекции, чем обычные коммерческие или торговые риски глобальной экономики. Вопрос сейчас в том, будет ли негативный цикл, начатый этим летом в Китае, раскручиваться дальше.

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0 Comments on this paragraph, 19 Comments on this article

Venkatraman Anantha Nageswaran Oct 19, 2015

It is too soon to draw conclusions on this. Mr. Kaletsky is skating on thin ice. The government is prioritising growth over reforms. Credit growth in September exceeded expectations. 'Capital Economics' - no China bear - itself concedes that economic growth began to be juiced up when the threat of official growth target being missed began to rise.
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Venkatraman Anantha Nageswaran Oct 19, 2015

Simple. China government's statistics in this aspect are backed up by private sector information and what we see in other statistics. But, retail sales headline figures are not backed up by more micro and granular data.
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xin xin Oct 18, 2015

this is a big topic, but the author has provided very little meat to convince readers but quite a bit of generalities instead. i wish he could have done more. also, the title word "collapsing" seems like a strawman. i am not aware of many commentators and analysts saying that china is on the brink of "collapse". slowing down to 2% is not a collapse. japan did worse and has not collapsed. the us went into a long and deep crisis and recession and did not collapse. so, a collapse theory has no appeal and not many writers have use of it. for china going into a middle income trap is a distinct possibility though, and already shown to be not impossible given her growth rate went from 14%+ to below 7% in 7 years and still ahs momentum. but still it would only be a stunted growth, not collapse. so i don't know what the author is getting at.
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Edward Campbell Oct 18, 2015

Kaletsky's note on growth of a $10.3T economy vs $2.3T makes me chuckle at the incompetence of the Talking Head ANALysts we are saddled with on US television. In general, there isn't the slightest perception of simple arithmetic affecting their babble.

Rather, they look to the Establishment press to learn what the official White House line is. And that is still mired in Cold War ideology.
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James Mboya Oct 15, 2015

China is definitely not collapsing, and, is better positioned than the rest of the world to contain any financial crisis that it may face. Be that as it may, I wanted to talk about a more important subject: It regards monetary policies. That's because monetary policies should be preferred than fiscal policies because they are more effective and efficient.
Regarding the on-going debate whether Economics, as a discipline, is more science than art, I would like to say that I believe it is more science than art because the purpose of science is to discover and disseminate knowledge so that humanity can be advanced, while the purpose of art is to create utility or value in individuals. Having said that, we should note that too much math and statistics in Economics should be taken with a grain of salt, because their importance is to create models that Economists can use to solve the prevailing conditions. However, since Economics is unlike the natural sciences, the principles of which are clear-cut across all sections, the laws and principles of Economics depend on the variances that people add to a prevailing condition. Therefore, there's a need to discover more models that can fit as many scenarios as possible so that general Economic principles can be derived from them. That's the importance of math and statistics in Economics. But, the stated math and statistics should not replace Economics because the science of Economics is more philosophical than physical (physics). Therefore, the science of Economics is harder to master than that of the natural sciences and/or pure mathematics.
For this reason, I would like to urge central bankers all over the world to re-calibrate their monetary policies as follows: When the Fed believes that it is time to tighten policy by raising interest rates, they should tighten by increments of 1/40 or 0.025%. This may not seem significant enough but, when you take 0.025% of an $18 trillion economy like the United States, that small 0.025% translates into $4.5 billion into or out of the economy (just for the United States). Then, when you add the money multiplier of a factor of 2.5, the $4.5 billion turns into $11.250 billion into or out of the United States economy. That is an amount that can be controlled and evaluated. If it's too much, the Fed can let the economy absorb that shock by not raising interest rates until when it's time to do so. Also, if it turns out that the rate is too small, the Fed can increase another 2.5 basis points, in 30 days. But, there's no prudent Economic law that says that the Fed must always adjust with 25 basis points (i.e. 0.25%) or more, every time that monetary policy needs to be adjusted. Finally, because there are too many people who are not participating in the labor force (people who would like to work but have given up because there are no jobs, or, those working part-time but, would like to work full-time), the natural rate of unemployment would be around 4.5% to 4.7%. That's when the Fed should start to tighten the economy by raising rates with 0.025%.
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Krzysztof Kwiatkowski Oct 14, 2015

first of all, I would urge mr Anatole Kaletsky to do some research around indicators that he is describing. For that example lets look at PMI. The 50 threshold is a "border" between expansion and contraction in the manufacturing/services sectors. Apart from that it also focuses on the coming 3 months, so comparing the current index with current developments in the manufacturing sector (like industrial production) doesn't make sense.

In my opinion slowdown in economic activity in China is not the biggest problem. I agree that right now China is a major consumer of different natural resources and will probably remain the biggest one for some time now, even despite slowing growth. I think that the best example of what China might do in the future (and how to contribute to global growth) is to look at the oil consumption per capita. It is very low compare to the Western countries and I would see it as an another trigger for the global growth, even if China growth drops to 2%.

I think however that the biggest problem is that there is not even one person outside Chinese government, that knows exactly what is happening in the country. I would believe that many numbers are cooked up just to keep investors in, and that many markets are just inflated like balloons. That is the real risk, and if these bubbles will burst, then the global economy might see a shock that it had never experienced before.
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Shawn Sean Oct 14, 2015

Excellent article
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Emilio Zuniga Oct 14, 2015

Excellent comment on China views By the financial world. Most of them with poor training and experience in emerging markets. The reflexivity concept of Soros does work out as explained in a number of occasions. Just recall the criticism of China intervention in its stock market bubble. They complained because they wanted the market to go on in free fall. The same complain when the US Government intervined to rescue its big banks. These true belivers of free market, it nore the function of a central bank or a treasury power in modern monetary economy. Most of them, manage billions of cash and there recides its danger.
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Mr Econotarian Oct 13, 2015

The big problem in China is not low growth, but underperforming loans from real estate asset bubbles (what happened to the US a few years ago as well). Fitch noted earlier this year that 40% of Chinas credit exposure is effectively carried off balance sheet in China’s banking sector, making it difficult to assess the extent to which banks are exposed. Despite low number of officially non-performing loans, UBS estimates that total bad debts in the "shadow" system amount to around 11 per cent of GDP.
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Yoshimichi Moriyama Oct 13, 2015

Every China, Han, Tang, Song, Mongolian Yuan, Ming, Manchurian Ching, and CCP China, was on the verge of collapsing but it lasted a long time; and ultimately it broke down.
Perhaps CCP China will go on in spite of its tremendous challenges because it has a tremendous means of controling the people and society, a means which no other country has and exercises, namely gigantic authoritarian political power. No country can let its people drink such polluted water, breathe such suffocating air, eat such poisonous food grown in such contaminated earth or leave bankrupted people in misery without being finacially aided, but Chinese leaders can. This is the secret of each Chinese dynasty's longevity. In China economics cannot be separated from politics as in many other countries.

"The world has learned since 2008 how dangerously finacial expectations can interact with policy blunders, turning modest economic problem into major catastrophe, first in the US and then in the eurozone" and then in Japan. Has the world learned it? I guess not.
- Yoshimichi Moriyama Oct 16, 2015
  
  mr,
  I sent two comments to www.yaleglobal.yale.edu/, one on June Teufel Dreyer/China's Tianxia: Do All Under Heaven Need One Arbiter? and the other on Orville Schell/Why Is Prosperous China So Anxious?
  I hope they will make my reply to you.
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- m r Oct 14, 2015
  
  But it CAN change- from today onwards..
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Adam West Oct 12, 2015

The author asserts that due to a higher-stock of "GDP", China will of course "absorb more natural resources than ever before". The example is a 2$ trillion dollar at 10% growth will buy much less resources than a 10$ trillion one at 6% or less growth.

Yet I disagree.

China's leaders have vocally moved away from the heavy investment in physical capital growth model -- bridges, roads, apartment blocks, commercial districts, and so on. Instead, new growth is in things like retail sales, restaurant meals, gym memberships, etc.

If we look at global commodity markets, there is turmoil, and much of this turmoil is due to commodity producer-nations that bet on continued high-growth in China's imports of raw materials -- oil, bauxite, inputs for steel, and others.

So despite the larger stock of GDP, China does not necessarily need more apartment blocks and high-speed trains; in fact, a large amount of the physical capital sits unoccupied, in disrepair, but all owned and "profitable" because of how loans work in a state-ran banking system.

So China will keep growing, the author is correct, but the heyday of fast growth and high consumption of natural resources are over. The New Chinese Normal will be about services and consumer goods, not bridges and heavy industry.

Commodity producers beware.
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Robbie Jena Oct 12, 2015

China is Not Collapsing - but others are...simply because others did not follow the path of China...not even a close one. I know, I provided for Advise in Industrial Ecosystems for China and no other group listened to it including USSR, Tanzania and USA....oh..well..
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Alisdair Hamilton-Wilkes Oct 12, 2015

An excellent argument well made by the author, as always.

However, China’s planning approach and fairly chauvinistic foreign investment policies have lead in the last decade or so to Chinese firms investing heavily across the world in mineral extraction with a focus on maximising production over profit. This means many client countries with large primary industries are right to be worried that their export income will be depressed for years.
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lt lee Oct 12, 2015

"It would be ironic if China’s Communist leaders turned out to have a better understanding of capitalism’s reflexive interactions among finance, the real economy, and government than Western devotees of free markets."
Not a matter of communist or democratic. China has more people and hence more smart people. Given China's long history of meritocracy, many of these smart and now educated people are in position to make smart decisions.
- Mr Econotarian Oct 13, 2015
  
  Pol Pot studied radio electronics at the EFR in Paris. You can be a very intelligent person, yet utterly deceive yourself (and others) about reality.
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Walter Gingery Oct 12, 2015

Nice try, but I ain't convinced.

(1) The opacity of economic data out of China makes any analysis suspect; still, you might be right, except that

(2) You fail to account for what Michael Pettis terms the "inverted" nature of Chinese balance sheets. That is, the structure of the balance sheets amplifies both upward and downward movements. And it's not yet evident how "inverted" Chines balance sheets are, and therefore how sensitive the economy is to downward pressure.

Is it enough to cause a collapse? Pettis himself is of the opinion that the Chinese authorities can manage a "landing," that is, not a collapse.

Stay tuned. This promises to be one of the most interesting and consequential stories of the year.
- lt lee Oct 12, 2015
  
  "Inverted" balance sheet contributed to the feedfordwardness described by Soro's reflexivity. But by itself not an insoluble problem.
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