Archives: Michael Pettis

Excellent economic analysis of China by Yiping Huang, a professor of Economics at Peking University and at the China Economy Program at the Australian National University and Barclay Bank Hong Kong’s Chief Economist for Asia.  His analysis can be found in an EastAsiaForum article, entitled, “China’s New Growth,” in which Huang talks of how the Chinese government is fine with China’s GDP growth slowing to between 6 to 8 percent per year and of how that is what we should expect going forward.  According to Professor Huang, the days of China needing GDP growth of eight percent and above merely to avoid increased unemployment are over.  Super high growth was needed in the late 1990s when China’s labor force was increasing by more than ten million people per year, but not now when its labor force is actually declining.

Huang goes on to talk of how China’s external account is balancing out, its currency is probably close to equilibrium and its gini coefficient is improving.  Perhaps most importantly, he talks of how the percentage of China’s growth from consumption has risen and is likely to continue to do so, much of it brought about by rising wages, which will soon be followed by rising capital and energy costs:

I have long argued that China’s reform approach can be characterized as asymmetric liberalization, that is, complete freeing of the product markets while heavy distortions are maintained in factor markets. The generally depressed costs of production have the effect of subsidies for the corporate sector but taxes on households. This was the key mechanism contributing to both strong economic growth and growing structural imbalances during China’s reform period.

This pattern has begun to change over the past several years, starting in the labour market. Rapid wage increases squeeze profit margins, slow economic growth and escalate inflationary pressure. They improve income distribution, since low-income households rely more on labour income, while high-income households depend more on corporate profits and investment returns. Rising wages also redistribute income from the corporate sector to households and, therefore, boost consumption as the share of household income in GDP increases.

China’s new growth model is still in its early stages. So far, we have only seen the first wave of cost shocks — changes in the labour market — which have a significant impact on labour-intensive manufacturing industries. The second wave of cost shocks — a rise in the costs of capital and energy — has just started. This could affect state-owned, highly leveraged and heavy industries more dramatically because they were previously built on a distorted cost structure. Consolidation of heavy industries could lead to the first recession of the Chinese economy since the beginning of its economic reforms.

This will not necessarily lead to a period of stagnant growth, as analysts such as Michael Pettis suggest. While cost normalization would shrink economic activity in the state sector, it should benefit the non-state sector, which accounts for 80 per cent of total industrial output.

I think Huang is right and I think what this means for foreign companies is what we have been saying on this blog for years:

  1. Yes, China is still the factory to the world.  But it is also a great and ever-improving market for goods.  And I don’t want to act like a TV ad pitchman, but for most products (both consumer and b2b), the longer you wait to get into China, the greater the odds that someone else will have established what should have been your market share.  For what it takes to sell into China, check out the following:

2.  China wages and other manufacturing costs are going to continue rising. This means that if you are making a product that can easily be made somewhere less expensive than China, you need to consider China alternatives.  For more on your options, check out the following:

3.  If Huang is right (and again, I think he is), we should expect the economic power of China’s State Owned Entities (SOEs) to decline and the economic power of  China’s privately held companies to increase.  Though I think Huang is right on the economics of this, I am not sure if politics will allow this to happen. But if Professor Huang is right, the value of doing business with China’s private companies has just gone up as compared to doing business with China’s SOEs.

What do you think?  Do you agree that China’s economy is changing?  What ramification do you see China’s Changing Economy having for you or for foreign businesses in general?

I did a post yesterday touting a podcast by Jing Ulrich on China’s economy.  In that post, I referred to Ms. Ulrich as belonging “on the very short list of those discussing China’s economy who actually know whereof they speak.”  In response to that, I received the following comment from “Michael RightSite”:

Hi Dan,

Since the list is short, can you name some others who are worth listening to? (Granted that we all have our biases).

Thanks,

Michael

To which, I responded as followings:

I know I will be leaving people off this list, but generally, it is those who actually have advanced degrees in economics and/or those who actually study/report on China’s economy who know the most.  That should not be a surprise.  And I want to stress that I do not necessarily agree with any of these people, but I do respect their analysis.  Having said all this, here goes:  Michael Pettis, Patrick Chovanac, Tom Orlick (who writes for the WSJ), Elias C. Grivoyannis.  I am sure there are a lot more out there working at universities or investment banks, but these are the ones who write a fair amount and with whom I am familiar.  Would love to hear about more though.

I really would, as I know that I am leaving out a number of very good economists who often write about China (in fact, there is one who I frequently read, but whose name escapes me right now).  So it would be great if you, loyal readers, would in the comments list out the economists that frequently write about China’s economy, in English, and do so from a position of knowledge, not mere uninformed speculation.  Thanks.

UPDATE:  The person I read, but whose name escaped me — but has since returned, thanks to a comment below — is Andy Xie.  I definitely also should have mentioned Nicholas Lardy, especially since my daughter is reading his excellent book, Sustaining China’s Economic Growth after the Global Financial Crisis for her emerging economies course and I read large swaths of it when she left it at my house for a few days.

By: Steve Dickinson

On Monday, March 14, The PRC National People’s Congress approved China’s 12th Five Year Plan and the outline of the plan was released to the public yesterday. The full 105-page document can be found (in Chinese) here. I am now reviewing the plan and over the next several weeks I will provide a series of reports on its contents.

I can make some preliminary remarks at this time.

The striking thing about the plan is its lack of originality. In the policy documents that have been promulgated over the past year, the party and the National People’s Congress (NPC) concluded that China must boldly reform its entire economic structure. The idea was to have China move away from a export and infrastructure driven economy to a balanced, consumer demand driven economy. The Communist Party of China (CPC) issued an outline of a bold plan that would bring about this transformation. The conclusion of many Western economists was that 1) the transformation would be essential for the long-term health of the Chinese economy but that 2) the transformation would be extraordinarily difficult. See the recent writings of Michael Pettis on this issue.

Apparently, the NPC also concluded that the consumer driven economy simply would be too difficult to achieve. As a result, the 12th Five Year Plan basically abandons the concept of creating a consumer driven economy and falls back to the standard Chinese economic model of depending on massive infrastructure projects and export driven growth as the primary models. Though some lip service is paid to increasing household consumption, that concept is basically brushed aside in favor of domestic infrastructure spending.

The list of projects is breathtaking. In just a preliminary review, I noted the following:

  • Highways, conventional rail and high speed rail
  • New airports
  • New ports and port upgrades.
  • Oil and gas pipelines
  • Electric transmission lines, especially high voltage lines
  • Coal transport and storage
  • Environmental upgrades of virtually the entire system of coal fired power plants, together with constructing substantial new coal fired power plant capacity
  • Modernizing the entire heavy industry sector: steel, cement and aluminum, in particular
  • Expanding mineral mining, particularly coal
  • Oil and gas field development in Inner Mongolia and Xinjiang
  • Creating an entirely new industrial base, focused on seven strategic industries
  • Urbanizing rural China to allow at least 10,000,000 rural residents per year to move to the cities
  • Investing in massive amounts of new nuclear power and hydropower facilities
  • Major expansion of domestic oil refining capacity and LNG storage and transmission
  • Sewage and waste treatment facilities throughout the entire country
  • New hospitals throughout the country
  • Waterworks focusing on irrigation and water transport from the South to the North
  • Developing coastal marine resources, primarily focusing on maritime infrastructure
  • Developing the Central and Western regions
  • Redeveloping China’s Northeast industrial base
  • New jobs for 45,000,000 workers

Note that this set of projects is not designed to encourage the domestic household economy; all of it is designed to maintain China’s position as an export-oriented manufacturing powerhouse. It seems that the NPC has rejected the idealistic notion of reforming China’s economic structure and instead has adopted the easier plan of simply improving what China has been doing for the past ten years. No major changes here: just upgrades and refinements.

Of course, as is typical, there is no mention of how much this huge list of projects will cost and no mention either of from where the money will come to pay for all of this. If the past is any indication, the projects will feature a mix of direct central government expenditures and bank loans to local governments. The recent huge jump in bank lending supports the notion that the banks will be instrumental in funding this truly massive set of infrastructure projects. There is also no discussion of how this massive spending program will mesh with the China’s current concern with controlling inflation. Nonetheless, the basic plan is clear. Spend, spend, spend on creating manufacturing capacity and then export the surplus in order to pay for it all. 

In other words, we should be expecting more of the same.

What do you think?

 

 

I often write how irritated I get when I see pseudo-economists write on China’s economy. Whenever I do that, I get comments and or emails asking me what constitues a real economist and who I consider to be a real China economist. A real economist is someone trained as an economist who works as an economist. Though many seem to think they qualify, there are damn few who meet these two rather basic criteria and study China’s economy and write about it in English. Michael Pettis is one of the few.

What also greatly irritates me is how some people act as though an economist is an idiot simply because some prediction or another he or she has made did not prove to be. That is one way to judge an economist, but just one way. The best way is to look at their analysis and judge them on that, rather than their conclusion/prediction. The prediction matters, but so often the analysis can be right on, but some totally unforeseen event can intrude and change the outcome. Was the analysis wrong? No. Was the prediction wrong? Sort of, but really what happened was that something nobody could have predicted came along and changed the result.

I mention all this because I just read a great analysis by Michael Pettis, in his post, “The dollar, the RMB and the euro?” [link no longer exists] on why China’s currency will not be the reserve currency for a very very long time, if ever. I totally buy it. He also makes the very valid point that being the world’s reserve currency is not necessarily all good. For the rare piece on China’s economy by someone who actually knows whereof he speaks, I urge you to read Pettis’s most recent piece.

What do you think?