Category Archives: economy

“China inequality causes unease – Pew survey”

Pew has a new survey out, asking Chinese about a whole lot of things. The results confirm what a lot of us have sensed about China:

A slowdown is particularly troubling for Xi because, as China prepares for its once-in-a-decade leadership transition, a Pew Global Attitudes survey conducted there this year finds that its citizens are also increasingly worried about a variety of other domestic issues, especially corruption, inequality and consumer protection.

In the economic realm, while standards of living have improved for the vast majority of Chinese, and the country’s middle class has expanded tremendously, there is nonetheless a widespread belief that not everyone is enjoying their fair share. And as consumers, many Chinese feel at the mercy of a system that cannot guarantee the safety of life’s basic necessities.

Half say corrupt officials are a very serious problem in China, up from 39% in 2008.

Second, there is a consensus that some people are being left behind by China’s rapid growth – 81% of those polled agree that today the “rich just get richer while the poor get poorer”. Nearly half (48%) describe the gap between rich and poor as a very big problem, up from 41% four years ago.

And in another sign that many do not see a level economic playing field, less than half (45%) agree with the statement “most people can succeed if they are willing to work hard”.

Roughly four-in-ten (41%) now consider food safety a very big problem, up from just 12% in 2008.

During that same time period, concerns about the safety of medicine have more than tripled, from 9% to 28%. Similarly, the percentage saying they are very worried about the quality of manufactured goods has jumped from 13% to 33%.

These are important points, and I think they’re very telling for the crisis of confidence the Party is facing. Xi needs to seriously change course if he wants these numbers to stop climbing.

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“Inflated Notions”

Patrick Chovanec has been writing posts defending comments he made on Bloomberg News last week, essentially calling China’s official growth numbers into question. From his most recent piece:

My first assertion is that the decrease in China’s consumer inflation rate (CPI) — 3.6% in March, down from a peak of 6.5% last July — does not seem to accord with my own daily experience of rising prices in China. On Bloomberg I offered, as a counterpoint, the fact that the price of the fresh milk I have delivered to my home had, just that weekend, risen by 33%, from 6 yuan/bottle to 8 yuan/bottle.

Now I want to be clear that I am not claiming consumer inflation in China is actually running at 33%. I’m simply offering an example of the kind of head-turning price hike that remains an all-too-frequent experience despite the government’s declared “success” in getting inflation under control.

Some have suggested that the price increases I’m seeing reflect a higher rate of inflation in Beijing than elsewhere in China. That’s certainly possible, but it doesn’t help reconcile them with official figures. According to the official CPI numbers for February, inflation in Beijing stood at 3.5%, barely above the national figure of 3.2% for that month.

None of this necessarily means the National Bureau of Statistics (NBS) is lying, or making up numbers out of thin air. CPI is calculated based on a basket of goods, the exact composition of which is not disclosed by Chinese authorities, although some analysts have done a decent job of trying to re-engineer it. I’m sure you could come up with a basket that shows consumer inflation at 3.6%. Whether that reflects what consumers are actually feeling, though, is another matter. The picture is complicated by the fact that the government knows what is in the basket and can target those items for price controls and other forms of intervention. That keeps the prices for the select items — and the index — down, for a while at least. But it doesn’t solve price pressures, it only distorts their impact on the economy.

Now that the monetary expansion has peaked, and China’s investment boom is slowing (more on that in a moment), one would not be surprised to see prices dropping — even collapsing — as a result of the inflationary bubble popping. In fact, that is precisely what we are seeing in property and property-related inputs. The -0.3% drop in the Producer Price Index (PPI) matches up well with the the industrial slowdown I’m seeing. We may yet see a downturn in wages if that slowdown continues or deepens. But for a number of reasons, including people cashing in inflated assets, as well as the bottled-up pressure from earlier price controls, the everyday cost of living continues to rise. That suggests that inflation is turning into stagflation, a problem that places serious constraints on the Chinese government’s ability to pump money in to reignite growth.

There is no way to definitively prove that prices in China have risen, and continue to rise, faster than official CPI indicates. One could, of course, devise a transparent basket of one’s own and collect independent price data from cities across China. But the Chinese government strongly discourages such projects, to put it mildly. Absent an alternative measure, we are left with impressions and pieces of data.

More as he posts them.

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“Is Prosperity Strengthening Beijing’s Iron Grip?”

The New York Times on how success is making the Chinese government stronger in some ways, leading to worse human rights conditions:

This is the historic price and promise of industrialization: It is no fun, but it is better than subsistence living back on the farm. And, modernization theorists like Seymour Martin Lipset have argued, as people get richer thanks to dismal jobs like those at Foxconn, they are able to demand more rights.

That is a powerful argument, and it has been true not only in the Western developed world, which industrialized first, but also in 20th-century stars like Japan and South Korea. But Daron Acemoglu, an economist at the Massachusetts Institute of Technology, warns that we should not assume that the happy connection between prosperity and democracy will automatically hold true for China. That is because China is industrializing in the age of Apple — in an era of globalization and the technology revolution.

The result, Mr. Acemoglu argues, is that China is able to deliver strong economic growth without transforming its domestic political and social institutions.

But globalization and the technology revolution mean that China’s authoritarian rulers have been able to deliver strong economic growth without surrendering political and social control: “Instead of having to develop an entire industry, an emerging market economy can house just some of the tasks such as assembly and operation. This not only enabled China to grow very rapidly by relying on world technology and leveraging its cheap and abundant labor force, but has also mollified demands for structural, social and institutional changes that previous societies undergoing catch-up growth had experienced,” he writes.

Mr. Acemoglu sees a powerful, and worrying, paradox at work. It is the triumph of the open society in the West, with its focus on individual rights, independence and iconoclasm that created the technology revolution. But the impact of those discoveries on the world’s mightiest dictatorship may be to prolong its reign.

They didn’t share many of the details of his argument, but parts of that seem undeniable. As prosperity grows in China, the government dedicates more and more resources to repressing the people, and simultaneously uses increasingly sophisticated techniques. Are we sure this stage of development has only one possible outcome?

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“China Data, Part 2: Slowing Growth”

Chovanec has yet more analysis on the Chinese economy over here. Go read the entire thing, it’s not toooo long but makes a pretty solid case for how serious the challenges facing China’s economy really are. His introduction:

As China enters 2012, concerns that its economy may face a “hard landing” have entered the mainstream. In recent weeks, Paul Krugman (“Will China Break?” in the New York Times) and Robert Samuelson (“China’s Coming Slump?” in the Washington Post) both penned hand-wringing op-eds warning of an impending Chinese downturn. It’s interesting to see the rest of the world starting to wake up to the worrying trends we’ve been discussing on this blog for some time now.

When people talk about a “hard landing,” they’re usually talking about a sharp deceleration in GDP growth, which brings with it both business failures and unemployment. In two earlier posts (Parts 1 and 1A), I examined a variety of data points that suggest China’s real estate market is in the midst of a serious downturn. In this post, I want to take the next step beyond this and explore the impact of collapsing property prices on the pace of broader economic growth, and the prospects of a “hard landing”.

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“Wu Jinglian: China must move on reform”

CMP has a translation of Chinese economist Wu Jinglian’s article here, claiming that economic and political reforms are both vital to China’s future:

What drives the gap between rich and poor? I believe there are two things, the first being corruption and the second being the monopolization [of riches, resources and opportunity]. Both of these have to do with government power. The type of monopoly we have [in China] is not the outcome of free economic competition but has been generated instead by political power. Chen Tonghai (陈同海), the former CEO of Sinopec Corp, China’s most profitable enterprise in 2009, was subsequently arrested for taking bribes, and it was later found that he had on average personally used 40,000 yuan (US$6,350) of public funds a day. This should not happen according to economic reforms as they were originally intended. But inadequate reforms created this situation.

In recent years there has been a tendency in thinking that easily misleads the public, and that is that the polarization of rich and poor has resulted from the market economy. But the root of resentment against the rich (仇富) is in fact anger over corruption (仇腐). I believe entirely that certain people have willfully redirected the target, deflecting the disgust people feel toward corruption onto the shoulders of run-of-the-mill rich. Some who are rich have amassed their wealth through diligence and hard work, because they are good at what they do. Others have relied on power and position, turning public power to private advantage. Diverting public anger onto the shoulders of the wealthy not only does a disservice to general prosperity, but also has serious social consequences.

If we want to allow ordinary Chinese to prosper, moving the country in the direction of democracy, civilization (文明) and harmony means relying on economic reform, but also on political reform. We must realize the proposals made by Comrade [Deng] Xiaoping, who said in the 1980s: “Political reform and economic reform should be interdependent and coordinated. If we seek economic reforms but do not seek political reforms, then economic reforms will not work out.”

Further, I would like to emphasize the importance of building a nation of rule of law. This issue has come up against certain difficulties of late, whether one is talking about the legislative side or the judicial side. On the question of democracy and constitutionalism, we must find a path forward. The first order of business on this front is enabling a fair environment for discussion. Not only do we need to allow ordinary Chinese to seek prosperity — we must also give ordinary Chinese the courage to speak.

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China: Collapsing in 2012?

Probably not? I don’t think that we have enough evidence to make a statement like that, but Gordon Chang, writing in FP, is doing just that- despite having been proved wrong last year:

Many analysts assume this growth streak can continue indefinitely. For instance, Justin Yifu Lin, the World Bank’s chief economist, believes the country can grow for at least two more decades at 8 percent, and the International Monetary Fund predicts China’s economy will surpass America’s in size by 2016.

Don’t believe any of this. China outperformed other countries because it was in a three-decade upward supercycle, principally for three reasons. First, there were Deng Xiaoping’s transformational “reform and opening up” policies, first implemented in the late 1970s. Second, Deng’s era of change coincided with the end of the Cold War, which brought about the elimination of political barriers to international commerce. Third, all of this took place while China was benefiting from its “demographic dividend,” an extraordinary bulge in the workforce.

Today, social change in China is accelerating. The problem for the country’s ruling party is that, although Chinese people generally do not have revolutionary intentions, their acts of social disruption can have revolutionary implications because they are occurring at an extraordinarily sensitive time. In short, China is much too dynamic and volatile for the Communist Party’s leaders to hang on. In some location next year, whether a small village or great city, an incident will get out of control and spread fast. Because people across the country share the same thoughts, we should not be surprised they will act in the same way. We have already seen the Chinese people act in unison: In June 1989, well before the advent of social media, there were protests in roughly 370 cities across China, without national ringleaders.

So will China collapse? Weak governments can remain in place a long time. Political scientists, who like to bring order to the inexplicable, say that a host of factors are required for regime collapse and that China is missing the two most important of them: a divided government and a strong opposition.

At a time when crucial challenges mount, the Communist Party is beginning a multi-year political transition and therefore ill-prepared for the problems it faces. There are already visible splits among Party elites, and the leadership’s sluggish response in recent months — in marked contrast to its lightning-fast reaction in 2008 to economic troubles abroad — indicates that the decision-making process in Beijing is deteriorating. So check the box on divided government.

And as for the existence of an opposition, the Soviet Union fell without much of one. In our substantially more volatile age, the Chinese government could dissolve like the autocracies in Tunisia and Egypt. As evident in this month’s “open revolt” in the village of Wukan in Guangdong province, people can organize themselves quickly — as they have so many times since the end of the 1980s. In any event, a well-oiled machine is no longer needed to bring down a regime in this age of leaderless revolution.

Not long ago, everything was going well for the mandarins in Beijing. Now, nothing is. So, yes, my prediction was wrong. Instead of 2011, the mighty Communist Party of China will fall in 2012. Bet on it.

Do I have to? Because while I’m still sticking with the general belief that the Communist Party won’t live out the decade (at least in its current form), this year seems like a pretty tall order. Fear of a Red Planet has a good response:

I agree that all the indicators look bad at the moment, but the fundamentals that have kept the Chinese economy chugging forward – most notably a cheap, well-educated workforce – are still there. Even the relatively pessimistic forecasts show an average per capita GDP growth rate of 5% year-on-year by 2016 – something that is far from a disaster.

More to the point though, Chang’s prediction of collapse of the Chinese government within the next year has several conceptual problems that need examining:

-Firstly, if China is due for a “a Japanese-style multi-decade decline”, then this does not at all mean that a massive crash of the kind that would shake the government will occur next year.
-Secondly, countries with communist political systems such as mainland China’s have weathered very harsh economic crises without the government falling. Cuba and North Korea in the wake of the collapse of the USSR are stark examples of this, but we also see examples in Central Europe – Poland during the 1970’s being one.
-Thirdly, even if serious unrest does occur, the Chinese state has overcome such movements in the past and would stand every chance of doing so again. In 1989 there was essentially no limit to the willingness of the Chinese leadership to use force to suppress opposition, even if great bloodshed resulted, and there is every reason to believe that the leaders due to take power next year are of the same temperament.

Put simply, whilst I do think pessimists like Chang may have a point and that at some point their predictions may come true (hence the title) I don’t think it will be any time soon, at least not in the next year.

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“More on Property Downturn”

Chovanec is still on a roll:

First, two on-the-ground reports about the property bubble bursting in 2nd-tier cities. Bloomberg offers this report on Sanya (on China’s southern island province of Hainan) where the frenzy to pick up vacation villas has taken a nosedive, with home prices dropping 28% year-on-year in November and sales volume off 52%. Steve Dickinson, based in Qingdao (in the northeast coastal province on Shandong) reports on ChinaLawBlog.com that developers there are regularly offering 30-50% discounts and that construction on uncompleted projects has slowed. He says “the collapse in the real estate market has already occurred” and the only remaining question is how the government will pick up the pieces. In a related post, he relates the story of a Qingdao couple who now find themselves deep underwater after going into debt to buy a unfinished apartment at the peak of the market. Events in Sanya and Qingdao reinforce my point that China’s property bubble — and its consequences — is really a nationwide phenomenon, by no means limited to Beijing and Shanghai.

Caixin offers this report on the huge stress that plummeting land sales are putting on local government finances. As one expert declares, “The land market is basically deadlocked” as developers enter “winter mode” and stop buying land for new construction projects — a description eerily reminiscent of my own warning, at The Economist China Summit last month, that “winter is coming.” Again, the problem is even more serious in 2nd and 3rd-tier cities (Dalian’s revenue down 50%, Wuxi’s by 34%, Nanjing by 29%, Wuhan by 21%) than in Beijing (down 14.4%)and Shanghai (down 13%). The revenue shortfall is making it hard for some cities to pay for basic services like police and hospitals, much less repay the massive amount of debt they borrowed for stimulus projects – which, according to this report from Bloomberg, may be much larger than official statistics suggest. Interestingly, Caixin reports that some city governments are forcing local developers to continue buying land whether they want to or not — which makes local efforts to loosen up lending look less like real economic stimulus and more like a dangerous game of pass-the-buck.

Finally, I just have to remark that I find it a real hoot when I read officials claiming — and credible media reports repeating the claim – that plummeting property prices across China are evidence that the government’s top-down “cooling” measures are “taking effect” and ”working.” Keep in mind, the central government started putting its most prominent administrative controls, such as purchase restrictions, into effect in April 2010 — nearly two years ago — and began trumpeting their success a mere two weeks later. The reason we are where we are now is because property developers ignored those measures and piled up unsold inventory for nearly two years in the not-unreasonable belief they could call the government’s bluff. (I said as much at the time, on Chinese TV — see interview on May 18, 2010, beginning at point 23:50). Even when rapid credit expansion caused inflation to balloon, forcing the central bank not exactly to tighten, but at least rein in the pace of that expansion, authorities turned a blind eye to an explosion in off-the-books shadow credit that kept funding land purchases and construction, and applauded when statistics showed real estate investment continuing to grow at 25-30% year-on-year – until this Fall, when the growing need to roll over bad debt while keeping inflation in check made it well-nigh impossible to keep throwing money at this boom.

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