I didn’t get to this yesterday, but The New York Times reminded us why, for all the justified scorn that can be heaped upon much of its Op-Ed team and the occasions when the Village consumes its straight journalism, it remains essential.
You just don’t get this kind of article without a large, well-resourced commitment to sustained coverage. It tells us something we simply wouldn’t know — in any kind of broad public way — without such effort.
And the piece offers a model that the Village itself would do well to study: it provides a strong basis of fact with which to think about broader problems, and it suggests without dictating where that focus of interest might reside.
The piece, you see, is about something that sounds kind of mundane: an inventory overhang in China’s domestic market. A huge one:
The glut of everything from steel and household appliances to cars and apartments is hampering China’s efforts to emerge from a sharp economic slowdown. It has also produced a series of price wars and has led manufacturers to redouble efforts to export what they cannot sell at home.
The severity of China’s inventory overhang has been carefully masked by the blocking or adjusting of economic data by the Chinese government — all part of an effort to prop up confidence in the economy among business managers and investors.
But the main nongovernment survey of manufacturers in China showed on Thursday that inventories of finished goods rose much faster in August than in any month since the survey began in April 2004. The previous record for rising inventories, according to the HSBC/Markit survey, had been set in June. May and July also showed increases.
Now, China hands — some of them, at least, including folks I talk to — have been arguing for some time that China’s economy and society are much more vulnerable than some popular accounts have suggested. The social/political sensitivity of exactly this problem — the need to keep growth roaring to prevent the uneven distribution of the new China’s rewards from inciting real anti-government action — is likely as much why the central leadership has been hiding the numbers as any attempt to boost business confidence.*
There are lots of implications one may draw from the underlying circumstances reported here. China, as the article’s author, Keith Bradsher, notes, has been one of the few functioning economic engines pumping during the Great Recession. Significant problems there, Bradsher writes,
…give some economists nightmares in which, in the worst case, the United States and much of the world slip back into recession as the Chinese economy sputters, the European currency zone collapses and political gridlock paralyzes the United States.
China is the world’s second-largest economy and has been the largest engine of economic growth since the global financial crisis began in 2008. Economic weakness means that China is likely to buy fewer goods and services from abroad when the sovereign debt crisis in Europe is already hurting demand, raising the prospect of a global glut of goods and falling prices and weak production around the world.
There is, as suggested above, another reason to pay close attention to this story. For example, if you credit the argument/research [pdf] advanced by my MIT colleague Yasheng Huang, China after Deng Xiaping has seen a growing gap in rural vs. urban wages, and a shift away from the incredible burst of local and rural entrepeneurship that Deng’s government engendered in the ’80s. Huang’s work suggests that the long-running theme in Chinese history, center-periphery tension, is experiencing increased strain right now.
While I haven’t heard anyone predicting significant political/social disruption in China is imminent, the risk of destabilization in China is something to be watched. It’s a country trying to do something very tricky indeed — maintain political structures within a context of enormously rapid economic change and social re-stratification. It’s a country with which we very heavily engage on a lot of axes, not just economic. Bradsher and the Times here help their public grasp some of what that readership — us — ought to be paying attention to.
So props to the Times, and do go read this story; as the processes it describes play out, this may have as much impact on our material well being as anything Congress may do for quite a while.
And now to my headline: why does this story reinforce my view that Mitt Romney represents a serious danger to America and the world?
Simple: he’s a blustering foreign policy ignoramus completely unprepared to deal with the kind of complexities stories like this describe. Ryan’s as bad, possibly worse. Seriously. This is the weakest foreign policy ticket of my lifetime. Neither man has any serious time abroad, except for Romney’s mission years in France, which do not in my view count for much.** Neither man has done anything in his life that requires navigating complicated intersections of interests across language and history barriers. Both have led sheltered and shielded lives. Neither have made a study of any significant international or foreign policy tangle. They don’t know sh*t. So they rely on advisors — the same crew, for the most part, who performed with such notable skill during the Bush-lite years.
Which is why you get easy braggadocio like this:
If I am fortunate enough to be elected president, I will work to fundamentally alter our economic relationship with China. As I describe in my economic plan, I will begin on Day One by designating China as the currency manipulator it is.
More important, I will take a holistic approach to addressing all of China’s abuses. That includes unilateral actions such as increased enforcement of U.S. trade laws, punitive measures targeting products and industries that rely on misappropriations of our intellectual property, reciprocity in government procurement, and countervailing duties against currency manipulation. It also includes multilateral actions to block technology transfers into China and to create a trading bloc open only for nations genuinely committed to free trade.
Why does Romney think that the last several presidents of both parties have not done this sort of thing?
Lots of reasons. The multilateral actions proposed are fantasies, for one. The unilateral ones assume that we face no consequences for such actions. Not exactly a safe thought. Not to mention that moves that at this moment pushed a struggling Chinese economy into worse shape, as Bradsher’s article helps one to grasp, have plenty of unintended consequences that would make most leaders think hard. The list goes on, and there are folks in this commentariat who can discuss them more knowledgeably than I can.
But W. Mitt Romney is not most leaders. He is through both life and professional experience astonishingly unprepared for the job he seeks. When you actually stop and think about what it would mean to sit him opposite the Chinese leadership, your first reaction should be terror.
Of course he does look the part.***
So that’s OK then.
*For one thing, business folks can generally look out over their own car lot/warehouse and kind of see the excess supply themselves. They talk to each other too…which all reminds me of this true classic of a Doonesbury strip.¹
**Why not? Because of what he was trying to do in France: evangelize. The conventional purpose of a Grand Tour or junior year abroad or some such is to expose yourself to the way a culture not your own does things. Mission activity attempts to express the desirability of your own culture as a replacement for that in which you travel. Very different mental/emotional circumstances.
***Read: white, older, tallish, male, good hair. He is, to reuse a tired by still marvelous on point phrase, someone to be taken as potential leader only through the subtle bigotry of exceptionally low expectations.
1: Yes, I am old enough to have read on its first release a comic from Nov. 10, 1973. What pleases me, lo these many years on, is that I am not so old as to be unable to remember doing so. ;)
Images: Evert Collier, Newspapers, Letters and Writing Implements on a Wooden Board, c. 1699
Ma Yuan, Dancing and Singing (Peasants Returning from Work), before 1225.
Roger Moore
One of the great ironies of Chinese growth is that it’s recreated exactly the kind of rich/poor and rural/urban divide that provoked the Communist revolution in the first place. The Chinese nouveau riche are very rich indeed, and they’re setting themselves up for an even bloodier civil war than the one that put Mao in power.
CarolDuhart2
Frightening, indeed. Our economy has outsourced so much of our needs that a disruption would leave shelves empty and our own mostly service sector employees unemployed (sales clerks, et al.) And not just our economy either-Europe has its own hooks in China as well.
while it looks like disruption in China is coming-I don’t think the center can hold-at least a culturally sensitive President like Obama can slow things down enough for us to make needed adjustments.
I’ve always wondered about people like Bush and Romney-people with the resources and certainly the time to go overseas who don’t bother. It would seem that just out of curiosity alone that they would have looked around a bit. And for a businessman like Romney and an aspiring politician like Bush, it would seem to be a necessity to understand different cultures even if only to sell better to them.
So why not even make the effort?
Anoniminous
The Chinese economy is roughly 100,000,000 people on the Pacific coast living a developed or developing world lifestyle and 900,000,000 million in the interior living a 1750 lifestyle.
This is known to anyone who has bothered to pay attention.
It is obscured by the habit of corporations to keep three sets of economic and financial records and statistics:
a.) One set to fool the public
b.) One set to fool the government
c.) One set to fool themselves
c u n d gulag
Why is it that I’d feel more comfortable with Ward Cleaver, Mitt’s look-alike, as President?
And don’t even mention Mitt’s VP sidekick, who reminds me of Eddie Haskell.
Ok – he looks like Eddie Munster, but think about how he acts.
Ryan’s as smarmy and evil as Eddie Haskell – only with dark Munster-like hair.
CarolDuhart2
@Roger Moore: And a worse one. Back then, the Chinese were battered by war, a bad experience with colonialism. Communism at least promised education and some self-sufficiency and solidarity. The pseudo-Communism doesn’t have any safety net or promises of better times to hold deep allegiance. No doubt millions are already cynical. It would take relatively little to start a fire that they can’t control anymore.
ed_finnerty
Michael Pettis’s blog (China Financial Markets) has been on this for a while. It makes for very somber reading.
CarolDuhart2
China Financial Markets
MattF
If you want more to worry about, there’s capital flight (via boing-boing):
http://www.ft.com/intl/cms/s/0/de41c970-dd44-11e1-aa7b-00144feab49a.html#axzz24UOFRWWL
And, by the way, the notion that China’s purchase US Treasury debt gives it some sort of leverage over US policy is, um, poppycock, to be uncharacteristically polite.
Chris
@Roger Moore:
IANAChina-expert, but I remember reading somewhere that the corruption and excesses of the nouveau riche peaked under Jiang Zemin in the 1990s, and that the CCP since then had worked to keep a somewhat tighter lid on things. I mean, some of them must be aware that what brought them to power could conceivably see them tossed out some day.
@CarolDuhart2:
Wait, the Chinese don’t have a safety net? Holy dogshit! I knew they’d come over to capitalism since the eighties, but I’d have thought they’d at least have enough sense to leave some kind of social welfare net in place!
MattF
Oh, durn, used a euphemism for a bad word that contained another bad word (poppyc**k). This is just too complicated.
Seebach
I don’t know why people think China’s market is invincible. It’s all being done at great cost to freedom, the poor, and the environment.
The chickens will come home to roost in a nasty, nasty way. It’s predictable, but easily ignored by market fundamentalists.
beltane
@Roger Moore: Peasant uprisings/rebellions have always been a feature of Chinese history. The leadership is certainly very aware of this and have so-far managed to prevent the powder keg from exploding but it is really only a matter of time.
gene108
The Chinese economy is nowhere near as strong as people in the USA are lead to believe.
The government props up so much of it and dictates what different sectors need to contribute and at what price (i.e. selling at a loss) that if China ever ran into a real recession, the whole house of cards would come tumbling down.
Ash Can
If Romney were to win in November, war with Iran would come first. After that got started, Romney would then start threatening China. This of course would make the Chinese forget their own problems for a while and work together to kick the US to the curb. And that would essentially be the sum total of Romney’s foreign policy.
Culture of Truth
Mitt Romney can relate to these struggling economies better than Obama. Nobody’s buying what he’s selling either.
mattH
There’s more to it than that. The peculiar nature of Mormon missions requires that the pairs are as removed from the local culture as possible. In some ways it’s the antithesis of any other kind of travel, be it business, tourist or even other mission work.
? Martin
I’m sure the failure of supply side economics in China will be taken as some sort of genetic deficiency on the part of the Chinese, or an inadequate embrace of the Gospels by their leaders. St. Ronnies legacy surely won’t be tarnished by such a failure.
Dennis SGMM
@Ash Can:
Chickenshits like Romney and G.W. Bush are dangerous because they feel the need for compensatory bellicosity.
gene108
@? Martin:
I’m not sure I’d call what China’s been doing the past 20 years supply side economics.
I’d call it crony capitalism.
Keith
@CarolDuhart2: Interesting link, I’ll have to forward that to a family member. (Though he may already know of it)
He works in a well known accounting firm, specializing in BRIC countries.
He has a pithy assessment of how well each might do in coming years – which he told me of about a year or so ago. It goes something like this: Russia, criminal conspiracy to destroy itself from within; India, great minds, lousy infrastructure (boy, was he right on that score!); China – an irreplaceable recipe for disaster, too many old folk, too few young, too few rich folk, too many poor. Oh yes, and Brazil – well, he thinks they have the best shot of the bunch of them to make the grade – if they don’t lose the Amazon forest first.
CarolDuhart2
@mattH: Not just a trait of Mormon missions. A lot of American cults like the Jehovah’s WItnesses, et al demand rejection of the local culture and separation from it.
And think of the Mormon theology and it’s habits of no liquor or coffee. How many French people were going to go for that, especially the strongly secular French? Golden plates from the Angel Moroni and giving up wine? No way. I bet Romney hates the French for all those slammed doors.
gene108
@CarolDuhart2:
After coming back from Budapest and Vienna, I have to wonder what’s the point of going to a place in Europe, such as France, if not for the coffee, wine and in some cases beer?
I bet if you told a European a Christian denomination started in the U.S. and its adherents make up most of the population of a state and among its core tenets is no alcohol or caffeine, they’d think you are lying to them.
ThatLeftTurnInABQ
__
This fits the reading I’ve done re: Chinese history, except that it isn’t so much center vs. periphery as it is the interior vs. the coastal areas and lower Yangtze river delta region, i.e. those which benefited the most from increased trade along the major waterways and/or maritime trade with other nations. Almost all of the traditional dynasties saw a shift in their economic center of gravity from the interior southward and eastward over time as their mercantile economy grew, accompanied by both rising wealth inequality and increasingly successful tax avoidance on the part of socio-political elites. In the past this story has always ended badly for the ruling dynasty.
CarolDuhart2
@Chris: http://www.whydev.org/chinas-moth-eaten-social-safety-net-who-will-catch-the-poorest-of-the-poor-not-corporations-2/
One of the things not discussed very often is that both Russia and the emerging countries out of Communism were infected by the neo-liberal ideology that demanded that they gut the previous social safety net so that they could grow. It is the same ideology that is so hostile to people like Chavez because Chavez insists on distributing things to the poor that they never had before, like free food and education. The result isn’t growth: it’s stagnation and social instability.
Yutsano
@CarolDuhart2: One of the rationales for loosening the mao restrictions was that capitalism had not matured enough in China to allow a true Communist revolution. Now they have capiytalism in spades and decide they like it too much.
dmbeaster
Nice to see an article pointing out that China, for all its strength, has huge problems that are deferred for now. Its economic engine still has a huge problem with corruption in that the CCP basically skims off a huge portion of the GNP. What has held it together for now has been tremendous growth. A rising tide raises all boats after all, and makes everyone look like a genius even if crippling problems lay at the foundation of the economy. Its when the correction hits that we find out how much strength is actually there.
Roger Moore
@Chris:
The government is facing a very difficult balancing act. On the one hand, it wants to prevent socially disruptive corruption and inequality. On the other hand, it wants to continue explosive economic growth that’s built around cheap wages and cheap currency. My impression is that their solution to the inherent contradiction in that policy has been to allow some modest wage growth in the industrial cities while keeping the peasants poor to provide a massive source of cheap labor. That has wound up reducing local disparities in wealth a little bit, but the global disparities have continued to grow. Meanwhile, the pot of money out there is much bigger than it was 10 or 20 years ago, which still leaves a huge scope for corruption.
@gene108:
You say tomayto, I say tomahto…
Ben Lehman
Yasheng Huang! I saw him speak at University of Washington. I love his book. On of my favorite books about economic growth.
Mike G
A bellicose ignoramus who can’t handle complexity — that pretty much sums up the entire Repuke party.
wenchacha
As much as we 99%ers loathe the New Gilded Age here in the US, the truly wealthy have mostly kept it out of the public eye. Sure, we know the names of Buffett and Bloomberg and the like, but they market their names. In the US, we also still have dreams that the Lotto could rocket us into the ranks of the wealthies.
I am curious how much flaunting of new riches goes on in China. If the rich don’t attribute their personal wealth to godliness, is there a socially palatable reason for them to be so much better off than their countrymen? One that doesn’t fuel envy and resentment?
Yutsano
PS I love Chinese art.
Chris
@CarolDuhart2:
True, and it’s not even the “cults” like Mormons or JWs – mainstream fundiegelical missionaries do it too. They might not be as hardass about it, but it’s made very clear that you’re not there to learn about, much less learn from the local culture (overexposure could contaminate your own faith, after all). THEY’re there to learn from YOU, not the other way around.
I would say that more or less sums up the entire conservative mindset vis-a-vis the rest of the world, actually.
CarolDuhart2
@Yutsano: But the capitalism that was introduced into China was the Republican version that had a strong hostility towards the social safety net. American Kenysians would have told them to invest in their population and infrastructure and progressive taxation. So there would have been millions in the countryside who at least had something to live on while changes were made, allowing social stability.
There is a demographic problem coming for China that will increase its woes. The one-child family policy has over 50 million more men than women, and a rapidly aging population. I read somewhere that China would have more than 30 percent of its population over 65 by 2030. Right now 18 percent of its population is over 35 and half will be over 65 in 2050.
A greater formula for restlessness can’t be devised. The aging population won’t want change, while younger men feel there’s no real hope for a real life in China without it.
Chris
@CarolDuhart2:
True. I mean, all you have to do is compare Germany post World War Two with Russia post Cold War. Both of them adopted the ruling economic gospel of the United States at that time. Germany rocketed back to becoming one of the world’s greatest economies: Russia is still the same barren wasteland we’ve come to know and love.
I just didn’t know China had drunk the kool aid that deeply too. I thought they’d been smarter at managing their transition to capitalism, and assumed they knew better than to take everything Reagan and his high priests said at face value.
Chris
@Roger Moore:
By the sound of it, the next revolution’s still going to come from the countryside, not the city. A happy thought. Wonder what ideological banner the next order will be flying after the CCP falls or gets seriously reformed. Might it actually be another communist revolution? You know, “we hadn’t gone through the capitalist stage yet in the seventies, but now we have, and it’s time for it to go!”
Chris
@CarolDuhart2:
I’m not an expert on these countries either, but – isn’t this exactly what happened with the Asian Tigers (South Korea, Taiwan and the like)? They offered a cheap workforce to attract foreign capital, but then used the new tax revenue to finance things like good schools and eventually a safety net? And subsidized the shit out of areas that needed to be developed but that market forces weren’t touching fast enough?
If I’ve got that right, seems to me that comparing China and Taiwan isn’t comparing the communist and capitalist models so much as the Republican and Democratic ones…
Schlemizel
@Roger Moore: So, just like the Koch Bros?
Chris
@Chris:
By seventies I meant forties, when Mao threw his revolution. No idea what part of my brain made me miscalculate that by three decades…
Enhanced Voting Techniques
Even with GW Bush something like this would be that worrisome, but gods’ Romney couldn’t even stay a day in England without creating an international incident.
Schlemizel
@CarolDuhart2: You are assuming he actually ever knocked on a door – there is no evidence & he has never claimed he went door-to-door. Yet another inconvenience Willard was allowed to skip/
Schlemizel
I think the need for foreign policy experience is vastly over rated. Nobody could know enough about all the places & people necessary to be flawless. What they need are a sense of respect and of their own fallibility as well as good advisers. The first two rule out both Willard and Ryan and the thought of the wingnut bozos that would be back in charge as advisers scares the spit right out of me
Mino
Oh dear, multinationals won’t be able to live off exports after all. Maybe they ought to think about broadly
increasing wages so folks can actually buy something?
CarolDuhart2
@Schlemizel: Sure, nobody could know everything. But it helps to actually have gone somewhere and exposure to different people. For most of America’s history that might have meant going on a Grand Tour or immersing themselves into the Classics or learning a foreign language. Other times in meant going into the military and serving overseas for a while as a private or commissioned officer. Truman read the classics and went overseas as a minor officer in World War I. Eisenhower was a well-traveled officer in the military. Kennedy went on overseas trips and served in World War II. A whole generation of American Presidents served in World War II and gained an appreciation no matter how imperfect of foreign relations. Clinton was a Rhodes Scholar and Governor who went on overseas trips. Obama’s well-traveled due to life.
In an increasingly interconnected world, where what happens elsewhere can have immediate impact on things at home, a President who has no foreign policy interest is like a bull in a China shop, or a three-legged ballet dancer.
JoyfulA
And Sheldon Adelson’s billions depend on his access to Macao.
Enhanced Voting Techniques
Ah but read deeper and we find as always SOCIULZIM! is the core problem;
Oh noze, wild eyed liberals!
Monster, stopping housing speculation!
HIPPIES!!!!!
Roger Moore
@Chris:
I wonder if some of the difference isn’t one of scale. Japan and Korea were exporting into markets that were much bigger than they were, not just in terms of wealth but in population, so there was a reasonable prospect of becoming prosperous that way. OTOH, China’s is bigger than the EU and USA combined, so there’s no reasonable hope that they can become remotely close to as prosperous as we are by selling to us. Maybe they just gave up on pulling up the whole country that way, wrote off the hinterlands as too huge to think about, and decided to concentrate on improving things in the coastal cities where the elite party leaders lived anyway.
sherparick
Romney and Bain were among the leaders in starting the proces of outsourcing jobs and industries to China. On this issue I don’t think Romney is an ignoramus. He is blustery liar and this is one of them. He will not do anything like naming China a “currency manipuluator” which would get immediate calls from the Walton family and half the CEOs on the Fortune 500. Who are his true constiuency after all.
Herbal Infusion Bagger
Why the capital of China is way up in Beijing never made much sense to me. The pre-Mongolian dynasty capital, Nanjing, seems much closer to the natural center of power in the country.
Uncle Cosmo
IANAEconomist, but innit something of a truism that the great crashes start, not in the dominant economy but in the primary rising economic power?
Imagine a China shattered into dozens of satrapies–some with more than a couple nukes. Yeesh.
ETA: Re the demographics, there is a time-tested default method for rectifying an excess of young males in the population. It’s called war, & it ain’t pretty.
Herbal Infusion Bagger
Actually, state pensions were recently introduced into China:
http://www.economist.com/node/21560259
Chris
@Roger Moore:
True. I guess the only thing left is for them to sell to themselves… which would require following Henry Ford’s belief that his workers had to be able to afford his products. The GOP’s been too dumb to remember that for too long. Hopefully the CCP has a few more brains.
@Uncle Cosmo:
That seems to be the usual state of being for China – if there isn’t a strong central authority forcing things to stay together, it fragments into warlord-run mini-states. Not unlike Afghanistan. But, as you say, with nukes…
We’ve still barely scratched the surface in terms of what nuclear weapons can do. What happens when a nuclear power collapses? Closest we’ve had so far is the Soviet Union, where, thank God, the state seems to have at least managed to maintain its control of the nuclear arsenal even if everything else flew to pieces. Next time that happens (Pakistan? China? America?) we might not be so lucky.
Roger Moore
@Chris:
They certainly need to focus more on domestic consumption than they have been, but converting from a low wage, export based economy to a decent wage, consumption based economy isn’t something that happens overnight. Meanwhile, they have an economic problem that could blow up in the very near term, and a social system that will have a terrible time dealing with the strain of the economy tanking.
drylake
Couple of responses vis a vis China:
1. For all the wretched conditions of the migrant labor in the cities, the wage rates have doubled over the last few years. Low to begin with, to be sure, but the net result is that China is no longer the low-wage paradise it was only a few years ago.
2. These migran workers should not ever be referred to as “slaves,” if only because they can and do leave often their city jobs for better ones or simply to return home. I know of one factory owner originally from Taiwan who expects half of his workers never to return from the winter Chinese new year holiday.
3. Many of these workers have families ensconced in their rural homes, and the money they bring back is invested in building large and relatively luxurious houses. Even my reflexively anti-communist friends admit it’s going to be hard to start a revolution among so many house-holders, since the proletariat now has something that at least seems like property.
Finally, a question from ignorance: has anyone ever tried to gauge the economic effect of the gigantic profits pulled by economic innovators in the US (i.e., Gates, Jobs) vs that of the gigantic cut taken by economic innovators (i.e., high speed rail)in China? The latter is universally seen as corruption, a conclusion impossible to argue with, but in actual economic terms is it a significant damper on the economy?
uptown
As The Big Picture pointed out on Tuesday…
Herbal Infusion Bagger
I think that commenters above are making comments that might have been valid 7-10 years ago but aren’t now. There’s been immmense upheaval in China, but 7-10% GDP growth p.a. buys you a lot of acceptance, and that level of growth also means people (and their children) are moving to better opportunities all the time, and the Japanese can reliably be expected to Do Something Stupid to fan the flames of Chinese nationalism ever 4-6 months.
As to predictions of It’s All Going To Fall Apart in China: I’ve been reading those predictions, and making them myself, since 1989. Even K-thug was making comments about China hitting a wall on its development back in the early 2000’s. But they’ve still continued growing, and there isn’t a civil society in China that’s an alternative to the CCP. So as long as the CCP continues delivering a higher standard of living, at least for the next 10 years it’ll stay in power.
Uncle Cosmo
@Chris:
Funny, I was thinking as I posted that earlier comment that you could gin up one HELL of a technothriller based on a sudden collapse of central authority in China touching off a race to secure the loose nukes between terrorist baddies, a vaguely UN-sponsored US-led SEALlike response team, & dogonlynose how many other players…
And it just now struck me that if there is any one scenario that comes anywhere near justifying a Star Wars defensive system, it’s rogue elements taking over a launch facility from a collapsing central government. (Screw the NKoreans, their preferred delivery system is a counterfeit Samsung container shipped in through Baltimore or Jacksonville or Tacoma.)
MikeJake
The above-mentioned Michael Pettis had a great article recently that outlines the financial repression dynamic that fundamentally drives Chinese prosperity. Essentially, Chinese households are constrained in their ability to save. Either they put their savings in China’s national banking system, which pays miniscule to negative interest, or they buy an empty apartment or two and hope that real estate continues to appreciate.
Now if you think for half a second about all the growth and building and investing that’s gone on in China, it would be reasonable to expect to see inflation and higher interest rates. However, if it turns out that savers are not being paid an appropriate level of interest, then it becomes obvious what a massive subsidy that China’s businesses are enjoying thanks to the fact that Chinese households have virtually no competition for their savings. The state banking system lends out the savings at extremely favorable terms to state enterprises, whose primary concern is meeting GDP growth targets so that their functionaries can get promoted up the chain. And all the steel and concrete and coal and everything else is put to work building wasteful infrastructure and ghost cities nobody lives in, simply to maintain the appearance of growth. And even though these enterprises are economic losers, the subsidy they get from financial repression allows them to continue to show profits.
This is the conundrum China faces. They’ve long passed the stage where the whole country is backward, when pretty much any investment will pay off (think Soviet Union of the 1930s-50s). Now they have to start investing in projects that make sense, and they have to tackle inflation. That’s going to be difficult given the current environment and the expectations in their elite that this environment has fostered. It’s the elites that will cause the most trouble, not the peasantry.
ThatLeftTurnInABQ
@Herbal Infusion Bagger:
__
When the Ming dynasty was founded the political capital was Nanjing at first but it was later moved back up to what we now call Beijing because the rulers needed to be closer to the northeastern border to more closely keep an eye on and manage political relations with the semi-nomadic “barbarians” on their northern border. In their prior history significant military threats from outside had traditionally come from the north and/or west. And the Qing had good reason not to move the capital seeing as how they were the descendants of some of those self-same northeastern “barbarians” (“barbarians” in scare quotes because the Qing, like a great many similar groups on the northern Chinese frontier before them, had already become highly sinified long before they invaded China proper).
Chris
@Uncle Cosmo:
I think that last is EVERYONE’S preferred delivery system. I used to be pro SDI, but I’ve come around to the point of view that it’s a waste of billions of dollars when 1) we’ve already got conventional deterrence and 2) even if you can set up a perfect nuclear umbrella, all anyone needs to get through it, if they actually want to, is to smuggle a nuke through customs.
I’d love to read that technothriller, though.
Roger Moore
@Chris:
There’s an old joke about that:
Q: How to you smuggle a nuclear weapon into the USA?
A: Hide it in a bale of pot.
polyorchnid octopunch
@gene108: Isn’t that what supply side economics actually is?
ed_finnerty
late to the game
but
The articles at Bronte Capital about the Chinese Kleptocracy are also very instructive