Unlike liberal democracies, Beijing has more room to act in crisis. China has extractive institutions that will ultimately be a growth limiting factor, but I don't see it limiting their crisis responses.
* There will be no political gridlock between left and right that can be solved only with half measures. Decisions are done in small groups of 30 people at most, with several hundred people having some influence.
* They don't have ideological fear of meddling with the markets or private property. It's all about being practical.
Beijing can make mistakes when handling the crisis. After they realize their error, they can take as big hammer as needed to fix it.
Everything you said might be right, I don't know. I think though that your facts are just as political as the facts the western countries use to justify market-based deregulation.
I've spent some time near Washington politics. It gave me the opionion that our system is purposefully designed to create gridlock in order to tie up political energies. Political energies that would have otherwise been used to create rapid change. I think the entire point is to create a relatively stable climate for business investment.
So that's the exact opposite philosophy as how you described the Chinese system. Central planning and proactive decisions made by a few vs. market driven and reactive desisions made by many.
I'm not even sure if it's possible to determine which system is better or what the exact best middle ground would be. It may have complexity beyond our scientific tools' ability to study.
I partially agree with your analysis, though I think our system is definitely better, just by reasoning about human nature.
An oligarchy is efficient but can be oppressive. Also, the ancient Greeks figured that an oligarchy naturally evolved into an even more efficient government, a dictatorship (see Xi's purges of rivals, and preparing the stage to retain power indefinitely). And a dictatorship eventually always ends up in the hands of an incapable, uncaring, or downright cruel person, leading to misery for everyone.
My understanding is that was why we put so many checks and balances in the US government, we'd rather do things our own complicated way than submit to a tyrant.
The only problem would be if the US system becomes so weak that it was vulnerable to being conquered by a tyrannical system that was at the height of its power.
> Political energies that would have otherwise been used to create rapid change. I think the entire point is to create a relatively stable climate for business investment.
The flip side of this is, once a few bad decisions seep into the legal system, its incredibly hard to take them out. Which sets the country many years back while others develop rapidly.
I think there is a natural system of balance found in a true free market. When thinking about longer term ideas such as climate change it is ultimately up to the average desire of the population of comsumers as a whole. Even though this has shortcomings I think it is a more "fair" system because it is just a reflection of the psyche and desire of the people and not a controlling party or politburo.
When thinking about things like unsustainable growth rate and ghost cities in China I think that is the negative side of the top down model of central control. The ability to change policy quickly might be a benefit but I don't think we will know the true result in terms of benefit to civilization or country until we can look back and compare systems in the future.
> I think there is a natural system of balance found in a true free market. When thinking about longer term ideas such as climate change it is ultimately up to the average desire of the population of comsumers as a whole. Even though this has shortcomings I think it is a more "fair" system because it is just a reflection of the psyche and desire of the people and not a controlling party or politburo.
Not when capital is not spread out evenly enough. And even then, larger capital will eventually eat smaller ones and then influence gov't and risk invoking a demagog like Trump (oh we already did huh). These mega corp that are controlled by groups of people called executives will do everything to influence the opinion and desire of the people into their favor. The people barely able to feed themselves will have no time to think about climate change. This is _practically_ the same as a controlling party.
The idea of owning a piece of the earth to yourself (and inherited by your descendant) is ridiculous anyway. Resources of our planet is limited. Usable land is limited. Our population grow by the day exponentially. What happens to those who don't have access to these resources and barely have a livable life? Do you expect them to care about climate change? Now you might call me some labels since this idea is not compatible with capitalism and free market, but I would appreciate a thoughtful reply to my questions in this paragraph.
>I think there is a natural system of balance found in a true free market.
This is not borne out by the examples we've seen thus far of deregulated markets. It's important to distinguish between a free market and a deregulated market, as pundits often conflate the two so regularly.
The benefits you state, a system aligned with "the psyche and desire of the people" does not, in fact, naturally emerge from deregulated markets. Every entity participating in a market would benefit by being the only participant in that market, so they do things like externalize costs, acquire competitors and leverage network effects to grow their share of that market.
Once that state is achieved, the people hoping to have their various desires met by various participants in the market will have but a single option.
A deregulated market devolves into central control.
There's a lot of truth in this. However, there is also the fact that their ability to keep the lid on things means they may also suppress feedback mechanisms which in a democracy may prevent wrong things from going on too long.
Something like this has been seen in the one child policy which went too far and the government is now scrambling. Also, the clumsy attempts to prop up the stock exchanges a couple of years ago have ultimately come undone. So we will see whether we have true resilience in the system, or is it actually brittle.
>However, there is also the fact that their ability to keep the lid on things means they may also suppress feedback mechanisms which in a democracy may prevent wrong things from going on too long
That is where surveillance and big data comes in.
And I am not too sure if they are scrambling at their one child policy, there are simply far too many people in china.
In 2016, they put an end to the one child policy. In 2017, they are offering women free removal of IUDs. Under the one child policy, women were forcibly fitted with IUDs after the first child, and were forced to undergo sterilization after two.
This has led to a ridiculous situation highlighted in the New York Times, where a woman forcibly fitted with IUDs in 2012, is now being offered free removal of the same IUD.
This is what happens when policy is made centrally, detached from ground realities. I don't know whether there are enough people or not in China - the point was more about the issues with central planning.
Similar U-turns can be seen in the stock market. The government was exhorting people to invest in the stock market as a patriotic duty, creating a huge bubble. When it burst, they tried to manage the stock market by punishing investors who were selling shares! No wonder the stock market has tanked - would you put your money in a stock market where you could be punished for selling?
I agree the Chinese government with its Orwellian-like control of the population can get away with a lot. But they get a lot wrong as well.
Sure, but the point is that while totalitarianism provides enormous scope for rapid action, those actions are not informed by a full and frank public debate and there’s no mechanism for society as a whole to force a change of direction via an election. That means the ruling power, which has huge political capital tied up in their policies cannot be removed, and so tend to cling in to those policies until long, long after it’s become blatantly obvious they are doing serious harm.
Democracies do have less scope for action due to checks and balances, but on the other hand if they pursue a mistaken policy, every 5 years the voters get the chance to force a change. The fact this is so means the current rulers have a strong incentive to course correct themselves as well either executively, or through an internal coup in the party in the case of parliamentary democracies. They are enormously more flexible.
The Chinese governments back handed handling of their stock market is a good example. They exercised powers far beyond those available to democratic leaders, but they were wrong headed and they persisted with them long after it was obvious they were harmful. And the same people that made these grave errors are still in charge and faced no consequences. This is a better system?
I don’t disagree with your conclusion, I just think population control is a bad example as that was more of a regional trend and not a symptom of totalitarianism. Also, after Mao’s excesses (also a regional thing) in the opposite direction, the one child policy was probably necessary, the only problem being that they let it continue too long.
Not sure how your stock market example reflects what you are saying. Stock market actions are merely the aggregate of its individual participants and all participants are "voting". This is particularly true in China where small investors actually make up a larger share of stock market activities.
The Chinese periodically pumps money into the market to prop it up (then they try to drain it, mostly unsuccessfully). They also encourage patriotic investing by locking up stock sales at tech companies, for example. Finally, the small investors are mostly trying to catch waves from a few whales who have lots of inside information, where many of the whales are actually princelings who are our to make money on fooling the very numerous small investors. Not a healthy market at all.
That may be true but most of the price actions are merely noises. The cataclysmic ones show how mass hysteria can easily form and that is rather independent of the existence of manipulations. The problem is really that too much of capital allocation in China is still done through bank loans. And banks are not particularly good at spotting and adapting to new trends.
The Chinese government aggressively intervene in the stock market. It’s a long way from a free market, such as by providing incentives and promoting investing leading to bubbles, punishing release of accurate information about stocks and market activity that they don’t want people to know, even information that in western markets would be required to be published as an investors right, and preventing or punishing people selling during down swings.
As another poster pointed out, how comfortable would you be investing if the government might decide to threaten to punish you if you try to sell?
I don't think that is how bubble or market in general works. Last year prior to Chinese government's ban of bitcoin exchanges supposedly 90% of bitcoin trades were in China. Yet after the ban and a brief dive in price, bitcoin price continued to soar until early this year.
Anyhow large Chinese techs are all listed in New York or Hongkong. Most other large Chinese companies are dual listed on the mainland and Hongkong.
You are quite right, the Chinese stock market is relatively small compared to the size of the economy, which is why it’s wild swings and their cack handed managment of it has done limited damage. The point is that just having enormous powers of executive action is no guarantee that action is going to be effective or even competently executed. Their mismanagement of the markets was just a case in point.
Eventually the Chinese government is going to face a real, full bore economic crisis. Hopefully that’s a long way off and they will learn many lessons before then.
Yes and there are nothing wrong with that distribution. Death rate are lowered life expectancy are higher. Their working population, even though a decrease of 20% is still huge.
If WWII policies seem to be evidence that "tight control of the economy worked just fine to stabilize the system," consider that centralized economic decisions (German war finance, treaty of Versailles, war reparations, Weimar Republic hyperinflation) paved the way for WWII. Early 20th century Europe is an odd example to choose to demonstrate a stable, well-controlled system.
Unless I'm mistaken, I think the point of contention here is whether centralized economic decisions can work sometimes (his point?) versus can never ever work (your point?). And by "work", I do not mean "work absolutely perfectly".
You can see that blind spot in the piece where the author states there are only four ways out. There is actually a fifth, which is currently the one being used.
At the moment Bejing discounts 'foreign currency' into Yuan and distributes it to factories that export. If foreign entities fail to buy that output Bejing can simply discount 'other assets' instead at the central bank, distribute it to the same firms and stick the output in a shed somewhere. The result is the same monetary circulation within China in Yuan.
The problem for China won't be dealing with private property, it will be dealing with government owned property. Just because the average Joe doesn't get to vote doesn't mean the system isn't geared to preserve the status quo. I think you are quite naive if you think vested interests and political corruption is a smaller problem than having to respect private property.
Decision-making processes, especially in times of crises are rarely presenting themselves so supra-rationally.
Meaning, that usually internal struggles will prevent the participants to be so generous, cool headed and foreward thinking.
Sure, the Politburo / Central Committee is small, but they still represent hundreds of millions of people, many different regions, cities, to a degree even many ethnic groups.
Usually shielding the elites does not show up as a goal, and differing circumstances of those can easily lead to serious opposition against the generally useful solutions.
We shall see how the current regime handles whatever history throws at them.
That’s naive and uninformed. Many Chinese political elites not on the side of Xin jing ping have been jailed and killed in recent years under the guise of corruption. Many corporate elites have been quarantined, jailed or killed, such as head of HNA and Wanda.
The only elite safe is xinjingping. Because he is the dictator
This is also naive and uniformed. Xi Jinping hardly has absolute power, there are a few very powerful red families pulling strings in the background, a lot of power brokers that are way in the background. Xi has power, is probably the most powerful man in China, but even he isn’t safe.
This is wrong. China can’t defy gravity and the laws of economics especially in a global economy. It boils down to the fact that Chinese govt continues to abuse the labor without meaningfully increasing their standard of living. This can’t continue. What they’re doing is akin to engineering growth for the sake of showing growth.
That's true at the micro scale, not the macro. Tienanmen may be fading from memory, but it happened before and it'll happen again. Those 30-person decisions have winners and losers, and the losers not being in the room doesn't mean they'll just shut up and go quietly. Nor does it mean that those 30 people are going to be insensitive to or unwilling to accommodate their needs in all cases. They know what the stakes are if they mess up, and it goes farther than poverty.
Basically: "political gridlock" looks bad, but it's a safety valve that democracies use to avoid unrest, which is a far worse problem in the long run than a debt crisis.
That all depends on how powerful the leader is. If you look into the quite recent past this comment would be absolutely untrue. There was massive gridlock between factions it was just so opaque that we could only guess what was going on.
Also, How do you get the bureaucracy to actually do what you want?(A major recurring problem in Chinese History).
Unlike liberal democracies, Beijing has also mostly absolved its people of moral hazard, creating a situation where they have to act and fix things up because they have basically taken complete responsibility for the health of the economy. In a liberal democracy, one can just vote the turkeys out when something economically bad happens (whether or not it’s their fault), but that is obviously not an option in China.
The second point about dismissing markets was actually the downfall of many authoritarian governments. You can't defy the law of economics with executive orders.
At the moment, China is only strengthening private property rights, looks like they learned that lesson.
I wonder if part of the problem is that democracies don't really work well when for example Americans care about only themselves. One classic example is NIMBYs in cities. Of course, the debt-based economy only compounds the problem.
The soviets and Mao's regimes had ample powers to do what they wanted, yet it resulted in mass murder and complete catastrophe at unprecedented scale because they made very, very poor decisions. Having leverage does not mean it fits prosperity nor crisis. Look at how soviets encouraged the killing of Kulaks which led to the great starvation (dozens of millions of deaths) in Ukraine in the following years.
Please do not take HN threads on generic ideological tangents. They lead to boring ideological flamewars, which say less and less the larger and angrier they grow.
The examples you give are not examples of mistakes or unexpected outcomes. Regarding killing of kulaks, it's not like they wanted to achieve prosperity and the chosen measure failed; they intended to eliminate kulaks as a social class with loss of prosperity as an acceptable price to pay to get that outcome, and mostly succeeded in their goal. Regarding Holodomor, again, there's no mistake, the starvation was intentionally caused, having these millions of deaths was part of the goal ("the Sovietization of Ukraine, the destruction of the Ukrainian national idea, and the neutering of any Ukrainian challenge to Soviet Unity."), not an accidental side effect of agricultural policy choice. These are prime examples of harsh large scale practical actions that were reasonably effective in achieving political goals through mass murder among other means.
Effectiveness is about achieving goals, it's quite possible to be very effective while working towards evil goals.
>These are prime examples of harsh large scale practical actions that were reasonably effective in achieving political goals through mass murder among other means.
Yes, but it was effectively half measure anyway - they bought some time at expense of poverty and got nothing in the long run - the union is gone, poverty killed what nationalism was not able to and with fall of the union nationalism came back with 6 more millions of reasons to prove it.
Chinese have not been strongly ideological after Deng Xiaoping.
Communist party is more like ruling aristocracy with privileges. Communist party is using communism the same way as aristocracy used religion to justify their divine mandate.
It has worked that way for several decades, but as you say, an authoritarian state can change direction quickly. There are some indications that Xi's ideology is very similar to Mao's: total domination of everything by the guy at the top. Will it be a surprise when everyone starts carrying around a little red smartphone?
The interesting thing is that Xi seems smarter and wiser than Mao ever was. Well, in matters of war, Mao was really smart, and hopefully, we'll never have to see Xi tested that way because if we do, it'll probably be during a world war. But in terms of economic decisions, I'd say he absolutely tops Mao. The question is whether there's any situation where he wins in the long run because the responsibility of running China is basically being dealt a really bad hand; the issues are perhaps more complex and risky than corresponding issues when running the US.
I highly doubt Xi is smart in economics or whatever else, even compared to Mao, and he seems partly sincere in his belief in his methods, which raises some worries. One can argue whether Mao was really ideological or just supremely egotistical and corrupted by power. After all he was rather pragmatic in the beginning.
What is true though is that institutionally China is much smarter about economics and less ideological than in Mao's era, but that is predicated on retaining institutional norms and memory past Xi and his ostensibly tactical rollback. It could totally work out in a worse way.
Central decision makers generally cannot predict the outcomes of the decisions they make because the system is so complex. It's been proven time and time again that the distributed decisions of millions of individual actors ala a non-centralized economy results in a more efficient and non-catastrophic outcome.
Wherever recent history has gone awry is when a few powerful people think they know what's best for everyone else.
You have completely wrong image in your mind. We are not talking about fully centralized command economy.
Just like I said in other comment, Look at the post war economies in Europe, Japan, Korea etc. Wage controls, price controls, rationing etc. still a market economy and not a command economy.
An interesting line of thought. Some writers have suggested that the failure of centralization in prior eras was due to a poor state of information availability. If you consider why things like the Great Leap Forward continued till it became a catastrophe, one big reason was because politicians in locales made up good numbers for political reasons. As long as humans have been involved, this and other more technological barriers (as in the case of the USSR) have presented insurmountable challenge, but things are certainly moving in a direction that makes centralized decision making less impractical.
Note, this is still not a suggestion to do it, for humanist reasons, which I think is mostly what the Western (cultural) objection has always been. But from a practical perspective, centralization (even totalitarianism) has been accepted as the norm in various smaller and non-governmental contexts that have also involved highly complex decision-making, e.g. the corporate employer. People seem to accept this level of de-individualization, and a strong evidentiary case has yet to be put forth that full decentralization of that relationship works out better over all.
You are seriously arguing that consuming sugar is equivalent to mass murder ordered by the government, and that a totalitarian regime might be better than democracy? I think you have some errors in your logic.
If a totalitarian regime is not better than a democracy, then why is China outpacing the western world by every meaningful metric? Why are more and more governments increasingly shifting to the totalitarian side of the spectrum?
I think it's pretty obvious by now that individuals' feelings of being 'free' are not relevant to the big picture of what nation states seek to achieve. If you tasked an AI with controlling a country to achieve arbitrary goals, you can be damn sure it would be totalitarian for maximum efficiency.
I don't support or condone totalitarian governments and I value my freedoms, however illusionary they may be. But I have no delusions about what the optimal governance structure is.
One bomb dropped every twenty minutes for the last 30 years, mostly on innocent people.
Hell yeah, America has a mass-murder problem. Its just ignorant of the fact because .. you know .. nobody likes to know how their powerful military is really being used.
>The soviets and Mao's regimes had ample powers to do what they wanted, yet it resulted in mass murder and complete catastrophe at unprecedented scale because they made very, very poor decisions.
Yeah, but a planned economy wasn't the reason. The reasons were:
(a) they wanted to establish their elite rule (and that required a big show of force and getting rid of potential enemies)
(b) ideology was at play (ethnic tensions, coming up with a BS "elite class" to get rid of in the form of kulacs, etc)
(c) they started from very poor rural economies very fragile to weather, famines, and such
(d) they improvised their decisions with much incomplete data from ad-hoc established regional bureaucracies.
Those are not problems with a "planned economy", but more of those particular historical circumstances.
Neither (a), (b), or (c), or (d) are the case anymore (I mean, they still need to enforce their party rule, but not establish it from nothing).
In fact China's growth in GDP the last 50+ years has been phenomenal, so it's not like "they made very, very poor decisions" for their economy over this span.
Besides, today China's economy is not at all planned the same hard way Stalin's Russia or Mao's economy was.
> Unlike liberal democracies, Beijing has more room to act in crisis.
I strongly disagree; the above is an old shibboleth of dictators and other anti-democrats. Mussolini promised to make the train runs on time.
Authoritarian governments are actually starkly limited by the individuals with power - by their ability, their vision, their own greed and interests, and their political limitations (authoritarian power structures are not democracies; the limits are not voters and law but other power bases). When those leaders are incapable, the country fails - rule of man, not rule of law and by the people. In a democracy, the pluralism in people and inputs creates great flexibility: This especially applies to vision, a reason market economies, which factor in the vision of all, work so much better than command economies, limited to the cognitive processing of a few; it's the reason why micromanaging CEOs fail while delegating and empowering ones are so much more successful. Democracies are much more innovative politically and economically.
More generally, when one person can't do it, in a democracy others can; either others in the broad power structure do it, or the people in power are replaced. IMHO, that exact problem explains the lack of dynamism in authoritarian government, and the reason by imperial China fell so far behind the 'West' - when the emperor failed to adapt, the country was stuck with him (and his progeny) for another century. In a democracy, he'd be gone within months or at worst a few years.
Finally, corruption is an enormous problem and impediment in non-democracies, a fact long-established in Chinese histories. (IIRC, in Chinese histories the standard model of the long-term political cycle is the ascendancy of a new power, then its decline due to corruption, then chaos, then it repeats.) Policy is not driven by serving the voters, a necessity in democracies, but by those in power serving themselves.
Finally, reality does not bear out the strong-man theory: Without question the best performing economies historically are liberal democracies. China remains - and many believe will remain without liberal democracy - a poor country compared with the liberal democracies. Everything the Chinese dictatorship does well economically, from monetary policy to market capitalism to universal education, are innovations of liberal democracies. The most economically successful parts of China, Taiwan and Hong Kong, are liberal democracies (speaking very broadly about Hong Kong - the complexities there are out of scope in this comment).
(This is not a knock on the people of China. I dream of the day they will be set free to run their own lives - it's hard to imagine the innovation of a billion people set free with those incredible cultural resources at their disposal.)
I don’t get this article. China exceeded their economic growth target for 2018 in April when their economy hit 6.8% growth. Their wages are steadily increasing. Their internal market is the healthiest of any g20 economy. Investments both internally and internationally are up and their population has little dept.
On top of that they haven’t touched retirement age, so they have a lot of leverage there.
I think Michael Pettis is probably worth quoting here :
"In most economies, GDP growth is a measure of economic output generated by the performance of the underlying economy. In China, however, Beijing sets annual GDP growth targets it expects to meet. Turning GDP growth into an economic input, rather than an output, radically changes its meaning and interpretation."
I’m no economist, but I think the point is that they’re collecting debt at a high rate too. If they continue to grow faster than that debt, all is well. Once their growth starts to revert to the G20 mean, they’ll need to change their strategies dramatically.
I don't know what their "real" gdp growth was, but the larger point is that GDP growth occurred because of an even larger increase in debt. That debt likely went to wasteful/non-productive projects. That isn't healthy or sustainable.
And did you forget China is about to be hit with tariffs from US on 200B worth, soon to be 500B? when their economy is export oriented?
> Investments both internally and internationally are up
Wrong. Yuan has lost 12% this year. Chinese stock market has crashed 30% this year. That's not a sign of increasing FDI. that's FDI leaving and screaming
> On top of that they haven’t touched retirement age
Wrong. Chinese demographics looks horrible, and will reach peak in 2025. Their population will shrink 1/3 in the next 60 years.
I'm usually 100% in agreement when you chastise inappropriate behavior on HN, but this parent comment, with links to supporting evidence, was extremely informative to me -- even moreso than GP. How is such a reply nationalistic? Ideological?
(Though I acknowledge that it's a newish account... So I put much more credibility on the linked content. Anyway, you deal with this BS way more than anyone else, so major hat tip to you regardless - keep up the good work!)
It's been a while since I posted a longer explanation of what we're doing when we do this, so maybe one would be helpful.
The core issue is the word primarily. It's one thing to occasionally comment on the politicized topics that naturally come up on HN. That's what most users do and it's fine. But there's a different class of account that exists primarily to do this, pushing a political or ideological or national agenda. That is what we don't allow, as the site guidelines are careful to say. We have to draw a line somewhere, in order to prevent flamewars from taking over HN entirely, and experience has shown this 'primarily' test to be the best place to draw it.
The reason we draw the line this way is that there is a bimodal distribution of accounts and the two categories behave differently. People in the first group are motivated by intellectual curiosity, so post on a wide range of things and tend to post curious, factual, open-minded comments. People in the second group are fighting a war. That destroys the curiosity HN exists for. Indeed, that's the first thing it destroys, because the point of political battle is not to curiously meander, but to blast enemies. This site is for curious meandering.
This second type of account often comes armed with pre-existing talking points and links, which can look like contributing to good conversation, and sometimes add good information. But their fixation on an agenda and the intensity with which they seek to destroy other views instead of—let's say—dance with them, make their cumulative effect on HN not just negative but toxic.
Figuring out how to moderate this kind of thing without excluding politics altogether (which is undesirable and impossible anyway) is a challenge, and the observable difference between these two kinds of account turns out to be a useful heuristic. So when we notice an account that shows the telltale signs of being agenda-driven and guideline-breaking, we ask them not to do it. We try to explain why, and we ban them if they don't change.
There's an aspect of this that isn't publicly visible. It's not uncommon for people we've banned for abusing HN in this manner to create new accounts to continue doing it. So sometimes, when we bring this issue up with a new user, we're looking at more of a track record than might appear.
None of the above implies that an account is wrong in its views or that the topic at issue is unimportant. On the contrary, it's almost always very important and legitimately intense. That's actually why we have to moderate these forces on the site-in the literal sense of 'moderate'. Otherwise they would dominate everything, which would turn HN into a very different kind of forum. It would also quickly kill it as a place for thoughtful conversation.
Not all, but a good chunk. Definitely less than half. Somewhere around 18% of current US GDP is healthcare spending [1], growing at around 5% year over year. Education spending is somewhere around 5% of GDP [2]. It's hard to figure out how much actual growth is occurring there since most of the ridiculous increases have been specifically in college, not in K-12 which is the bigger share. Total increase seems to be somewhere below 3% year over year growth. We can even add in military spending and not get to half. Thanks to this year's absurd 9% budget increase [3], military spending is now above 4% of GDP again.
So, healthcare + education + military accounts for around 27% of GDP and about 5.2% weighted average growth for that 27%. US GDP is up 4.2% annualized for Q2 this year, so that growth in our 3 categories is only accounting for maybe a third of total GDP growth.
Why government spending is neccesarily wasteful? I would say consumption of financial services part of GDP which is massive in us is less relevant to layman that vital services government provides
Ever heard of Chinese ghost cities? Completely designed and built cities that could home millions but only hold a thousand or so? That's wasteful government spending.
some of the spending just saw on my trip was mind blowing. Acres of granite pavers and timber decking in new parks. Huge new city walls in place of ancient ones. (protecting them they call it)
Studying economics for some time, I think economists often ask wrong questions. So let's say trade war occurs, and china will lose some of its exports. The main question is not whether savings would decrease or investment rise, the main question is how all the spare capacity left will be utilised. Yeah, if it won't be utilised then there will be unemployment, well pointed by the author. If domestic consumer will consume what was produced for exports, then consumption would increase and savings would fall. If Chinese will find a way to use spare capacity to produce something else what is in higher demand (high tech let's say) then investment would rise. And let me assure you that strong Chinese government will find a way to use all the freed up labour/capital resources, so any downfalls would be temporary. On the other side are democracies like US which don't have that much control over production side and whose economies are not that robust to shocks that China may face now.
How can you be so naive as to state that a dictatorship is a "strong" government?
Having one man and his clique at the helm is extreme weakness. Any strength the government may have at any time is wholly incidental, not structural or systemic like what a well-functioning democracy of the people for the people produces.
In many way the current state of governance in China is worse than what an established hereditary monarchy would provide.
Any way this all will be tested soon enough.
You can go through a simple two-stage exercise. But it comes down to how China can churn out tech and this is exactly why they are not allowing the Big Silicon Valley to do business there (and understandably so). To be honest, the tech baton will stay in the US until someone can put up a comparable education and research ecosystem. I don’t see that happening for at least another 50 years. China is at a crucial point in their economy and my bet is they will do whatever they can to generate growth in the WRONG (and easy) areas.
I mean that Chinese manufactures have an option just to do a slight downgrade of their undifferentiated mass consumption goods that were previously sold to America, and sell them to poorer countries, as well as domestic consumer.
This is what happened in 2008. To Chinese electronics industry the crisis was a blessing in disguise. It saw an unprecedented expansion after it reoriented from OEM for "rich American co." to selling own products to places like South Asia, CIS, and African nations.
A bit of explanation:
Pre-2008 industry was very oriented on developed countries with contract manufacturing of high premium goods secured by branding, marketing, IP lockdown and such - in other word, niches with very inefficient market and companies hellbent on profit maximisation. Thus, they had a huuge leeway for trading unit value for volume which they used to devastating effect.
That was right the time when people in places like Africa realised that $20 Nokla is no worse than low end $100 Nokia, the rest is history.
Fair as long as demand is as elastic as it used to be. Like if everyone has a phone now it will be harder to sell new phones. And good for pointing out a critical assumption behind the article - that CA surplus will actually fall as a result of tariffs, as you showed there is a fifth solution - sell to other countries, EU for example, US is not the whole world
They can try that, but I don't think they'll have much success this time around. At least In Indonesia, the government here just hiked rates on imports, as well as implementing a whole bunch of other policies in order to defend the IDR. I can only assume this is going on as well in other non developed markets.
As a non-expert, it seems likely that of the 3 options, wealth transfer will be the main solution to China's debt problems. (It's worth noting, China's high corporate debt levels are, like Japan's, owed to mainly to domestic creditors, and I believe also denominated in the local currency.)
In a totalitarian dictatorship, "political opposition from so-called vested interests" is not that strong a barrier when political and economic stability is at stake.
I think while some unsustainable debt will continue to be allowed to default, a lot of debt will eventually be painfully bailed out by taxpayers (both households and corporations) over time.
This mean lower health, education, and social welfare spending affecting people who didn't cause the debt problem in the first place. That's just the unfortunate price of accumulating large amounts of non-productive debt.
There is no Zhu Rongji in current generation of party leaders.
From my personal observations, the leeching of public debt through borderline fraudulent projects barely ceased under Xi. This is an elephant in the room. Only the moment they will lift a knife on it, will we be assured that they began an actual move on that front.
Do you know why Xi raised his hand on his closest supporters in the reactionary camp he leads - Bo and Co?
He did so because he was too afraid that Bo as a much more charismatic person will take over the lead of reactionaries from him.
Now, he needs to pay his supporters in the party lavishly in form of state sanctioned corruption - all kinds of unsupervised small local projects where money vanish using long lending chains, or simply stratospheric remunerations for offsprings of party officials employed somewhere in the chain.
Thanks for your analysis. Just to clarify some of your points to readers who may not be that familiar with Chinese politics.
* Zhu Rongji is the more reformist leader in the late 1990s, and seen as one of the few leaders (maybe along with Zhao Ziyang in the 80s and Wen Jiabao in the 2000s) who may have been favorable for a move towards democracy in China.
* Bo and Co = Bo Xilai and ... Zhou Yongkang? They were arrested in 2012-2013 for plotting a coup against Xi and human rights abuses such as organ harvesting of prisoners of conscience, after a high-ranking security official (Wang Lijun) defected and sought refuge in the US consulate, providing inside dirt on these two party chiefs.
Not sure how zhu was viewed as more possible for democracy.
Note that what he did was the most brutal form of autocratic policy making, by forcing unemployment of millions of workers who are not trained to live in a different system; was possible because of autocratic government; and his policy pretty much made the rich out of the ranks of former government officials just like what happened to the Russian oligarchs.
I am guessing the rich do know how to court the expectations from inside and outside. And I often hear praises from Chinese people to zhu, while at the same time none of them suffer during zhu's policies...
I've tried reading this piece a couple times, but despite the bullet points and numbered lists, I can't make any sense out of it. I presume this is because I lack essential background knowledge. Can someone please help explain the context?
When he says "China's debt problems", what exactly is he referring to?
When he says "there are also only four ways that Beijing can respond", what are they responding to and what is the goal of their response?
Pettis writes extensively about China and its internal debt problem. The best primer, though lengthy, is to slog through his posts dating back to the mid-2000s.
Briefly, though: China has had artificially cheap credit in its corporate sector due to explicit government policies restricting the growth of household spending. This cheap credit caused a lot of malinvestment ("bridges to nowhere"), and there hasn't been an accounting reckoning yet.
To continue to grow, China needs its household sector to grow, both in consumption and share of the economy. This is a classic shift from middle-income to developed economy. Because right now continued growth from the corporate (generally export-driven) sector has topped out, and getting more growth out of it is costly in terms of debt.
I think those are the broad strokes. To summarize: the Beijing is responding to the explosive growth of internal debt in the economy, and the goal is to continue growing. That growth must come from the household sector, but must also include dealing with the massive debt overhang. (I suppose you could also say that Beijing's goal is to stay in power, which requires economic growth to keep the populace happy.)
>When he says "China's debt problems", what exactly is he referring to?
China’s response to the financial crisis was to loosen credit and “encourage” banks to lend. The result was that debt started rising faster than GPD and total debt now stands at 300% of GDP.
Since GDP is the income needed to pay off debt there is a point where it is no longer sustainable. If there were no limit it would be possible to eliminate poverty by simply giving poor people loans.
> When he says "there are also only four ways that Beijing can respond", what are they responding to and what is the goal of their response?
With a looming trade war it is unlikely that China will be able to sustain the trade deficits with the US like it has in the past. It is also unlikely that China can find any other viable markets that could absorb exports that are currently destined for the US. China will want to mitigate the domestic impact of the outcome in a way that preserves domestic stability.
I'm assuming the debt problems are the corporate defaults on bond payments [0] for 2018 until July, were close to equal to the entire year of 2016. There's also consumer debt stuff that's blowing up as well (the whole p2p loan companies going bankrupt was linked on HN recently).
As for the what are they responding to is the engine for economic growth is stalling out from knock on effects behind whats going on above, and I can only speculate that the "goal" of any kind of response will be to maintain some kind of economic "stability".
I appreciate the answer. But I still don't see the connection between the proposed responses (the first four bullet points) and the stalling of economic growth. For example, how is "Reduce savings by letting unemployment rise" a response to slower economic growth, and how does this maintain economic stability?
Letting unemployment rise is the least desired outcome but is what will happen by default in response to a declining trade surplus. Wide spread unemployment doesn’t contribute to economic or societal stability and so China will attempt to avoid that.
The second option is wealth transfer through debt default; or government forced wealth transfer (taxes or inflation). China’s debt could be brought down from 300% of GDP to 100% of GDP overnight if creditors simply forgave 2/3rds of debt. That could happen though debt default (debtor bankruptcy) or taxing creditors and giving it to debtors. Having the bulk of your life savings disappear tends to make people angry and so China will attempt to avoid that.
The last option is to kick the can down the road and increase domestic debt which is what they have been doing for the last 10 years.
For that particular example I think economists usually see savings as bad because it means that there is unproductive capital (and eventually leads to deflation?) and therefore reduced savings means that capital that would typically be in savings would now be productive (an asset on someones balance sheet that can now be tallied for GDP instead of liability on a banks).
Well I put "stability" in quotes because in reality, every economic actor will have their own perspective of what the goal is and how effective any solution will be in achieving such goal. Some people thought zero lower bound and real negative interest rates solved things, and others thought it was just kicking the can down the road…
My issue with the first four bullet points is that the government now can point to instances where they say that they have been doing all of those things (because all these bullet points address things at such a high level), and all this is telling them to do is just do more of the same and expect different results.
It's not you, it's just that he's answering the question by using a macro framework. I don't necessarily agree with his approach because China has unprecedented scale in modern economics.
I have been reading his blog for years (ever since Calculated Risk, another great economics blog, pointed to him). He has been beating the same drum the entire time. His point is that the mechanics of how an economy work at the macro level reduce to a simple set of equations between investment, savings and consumption. And that those equations force hard choices that have political implications.
I have passed some articles to economics professors I know, but haven't heard whether Pettis' ideas make sense from a theoretical perspective. I know they make sense to me, a layman.
> And that those equations force hard choices that have political implications.
All economic decisions have political implications because all economic decisions are inherently political. Recall that until recently, we called it political economy until the Neoclassical school decided they wanted to pretend to be—and be viewed as—a science.
> Notice that all four paths either raise investment or reduce savings, thereby reducing the country’s excess of savings over investment.
Or...a fifth path would be to entice people to convert "unproductive" savings into investment. If only there were some mechanism where people could tell if this was a viable route like, say, a market based interest rate.
Quite surprisingly, it turns out that "saving" and "investing" are nearly synonymous.
Put differently, over the longer run, Beijing can only avoid a sharp rise in unemployment or stagnant wage growth to the extent that it has managed to achieve significant wealth transfers.
Isn't this exactly what the Communist Party or socialism (fake capitalism) with Chinese characteristics is supposed to have retained the option to do?
To be more specific, a charitable interpretation of affairs is that Xi or whoever is engineering Xi's policies has made sharp left turn, and is taking authoritarian measures to carry out exactly this.
* There will be no political gridlock between left and right that can be solved only with half measures. Decisions are done in small groups of 30 people at most, with several hundred people having some influence.
* They don't have ideological fear of meddling with the markets or private property. It's all about being practical.
Beijing can make mistakes when handling the crisis. After they realize their error, they can take as big hammer as needed to fix it.