Archive for the Category China

 
 

Life expectancy in Shanghai

Here’s Paul Krugman:

I’m being flip, but the AQI in Delhi was 263, which is serious don’t-breathe-too-hard territory; actually, on day one I blithely tried my usual morning routine, and really felt the difference. Hong Kong was better but having an unusually bad stretch, and Shanghai was back to the air apparent. No big deal for me, of course, but the health costs to those who live there must be immense.

The pollution is quite bad in Shanghai, but I wonder about those health costs.  Are they truly “immense?”  Here’s a list of life expectancy of some countries.  Japan leads the world, and Iceland leads Europe.  Of course Iceland has virtually no air pollution.  I also included some other East Asian countries:

Japan   84.6

Singapore  84.0

Hong Kong  83.8

Iceland   83.3

Shanghai  82.3

Beijing  81.3

Korea   81.0

Taiwan  80.6

US  79.8

Denmark   79.5

If the health cost of air pollution is immense, why is Singapore’s life expectancy only 0.2 years above highly polluted Hong Kong?  Also keep in mind that the Chinese smoke at a very high rate, which could easily take a year off their life expectancy, even with no air pollution.  And if the cost is truly “immense,” what adjective would describe the health cost of all that cheese, butter and bacon consumed by the Danes?

Every few years I spend a month in Beijing, which is much more polluted than Shanghai.  After the first day you never pay any attention to the pollution, except that it makes the city look uglier. The severe pollution in Beijing probably does slightly reduce their life expectancy, although the fact that Shanghai is richer and has a milder climate may also explain part of the difference.  But I get really annoyed when I read press reports like this one:

They’ve learned too that in the two decades from 1981-2001 the life expectancy of the 500 million Chinese living in the north was a full 5.5 years shorter than that of their fellow citizens in the south. The reason? Heavier coal use for heating during the north’s frigid winters.

That’s not at all what the study they refer to (by Chen et al) claims.  Andrew Gelman and Adam Zelizer have an excellent paper that uses the Chen et al study to look at the broader issues of statistical significance.  Here’s a graph from the study they criticize.  I don’t see any difference in life expectancy between the north and south of China.  The finding is based on the assumption that the data should be fit with a cubic model rather than a linear model.  Here’s the graph showing where the 5.5 years comes from:

Screen Shot 2015-02-12 at 9.05.56 PM

How much confidence can we have that the cubic model is correct?

And this is even more dubious:

Now that we know China’s air pollution problem is impacting the air here in the United States, it’s important to understand what that pollution is doing to public health in China.

According to a new study, it could be taking up to 16 years off people’s lives.

I’ll end with some sensible suggestions from the Gelman/Zelizer paper:

4.3. Skepticism without nihilism

The current rules of publication seem to us to be simultaneously too loose (in the sense of accepting the highly questionable analysis indicated in Figure 1) and too restrictive (in essentially demanding statistical significance, obtained some way or another, as a condition for acceptance).

.   .  .

We have the impression that research journals have an implicit rule that under normal circumstances they will publish this sort of quantitative empirical paper only if it has statistically significant results. That’s a discontinuity right there, and researchers in various fields (for example, Button et al., 2013) have found evidence that it introduces endogeneity in the forcing variable.

PS.  I do wish the Chinese government would institute changes in local governance and/or property rights that would reduce pollution.  It’s not as bad as is claimed, but it is still a problem.  Gelman and Zelizer also emphasize that the are not questioning the claim that China has a severe air quality problem, merely the reliability of the 5.5 year estimate widely cited in the media.

 

Yield curve bleg (plus LA real estate)

Back from a long vacation—it will take me a while to catch up on what I missed.

I notice that 5-year Treasuries are currently yielding 1.56% and 10-year yields are 2.04%.  I was taught two theories of the yield curve:

1.  Expectations hypothesis—>  Long term yields are an average of expected future short term yields.

2.  Term premium hypothesis—> Long term yields are an average of expected future S-T yields, plus a term premium.

The first hypothesis implies the 5-year, 5-year forward yield is expected to be 2.52%.  The second predicts a somewhat lower expected yield.  Are these two theories still the state of the art, or is it possible that investors expect higher than 2.52% yields in 2020?

If I am correct, then investors are predicting stunningly low 5-year yields in 2020. Why do I say 2.52% is stunningly low?  Very young readers that are used to low rates might find that claim to be odd. But recall that the market cannot predict business cycles 5 years out in the future.  Thus investor forecasts for yields at that date essentially represent estimates of what rates will look like once they have been “normalized.”  (And by the way, I hate it when central bankers use that term; it does more harm than good.  There is no such thing as “normal” in an ever-changing world.)

Theories:

1.  Slightly lower expected inflation.  Although the Fed’s been targeting inflation at about 2% since 1990; during 1990-2008 the market probably thought they’d err a bit on the high side, now they’re expected to err a bit on the low side.

2.  Low real interest rates.  The 5-year TIPS yield is 0.29% and the 10-year is 0.38%, implying a 5-year, 5-year forward real rate of 0.47%.  That seems low to me—the Great Stagnation?

I’m looking for feedback from people who know more finance than I do (like David Beckworth.)

PS.  Speaking of blegs, our family will probably end up in Southern California when we retire (although the way things are going I’ll never really “retire.”)  We explored the entire area and sort of liked North Tustin in Orange County.  But our favorite was Glendale in LA County.  Anyone have any opinions on either place?  Also Woodland Hills/Sherman Oaks.  I’d like a house high enough up to have a view, but can’t afford west LA.  I like LA itself, but am too old for the gritty urban lifestyle of more central locations.  But I want to be close.

And I’ve always wanted a single family home.

PPS.  Did you know that Arcadia is considered the Chinese Beverly Hills?  This suburb is far from the coast, in the hot, flat, smoggy San Gabriel valley.  We ate lunch there.  This ad shows a 2100 sq. foot ranch for $1,680,000.  That’s the power of Chinese money.  In 2005 and 2006 Bush was expected to enact immigration reform that would have led to many more Asian and Hispanic immigrants to southern California.  You all know what happened when that reform failed.  But the Chinese immigrants will come, it’s just a matter of time.  In Arcadia house prices have already soared far above the 2006 “bubble” peaks:

Screen Shot 2015-01-05 at 3.08.06 PMLow rates as far as the eye can see and 1.4 billion Chinese who covet the SoCal lifestyle. Bubbles?  You ain’t seen nuthin yet.

America as #3

Ever since I started blogging in 2009, I’ve been predicting that China would become the world’s largest economy, and much faster than most people expected.  If you’ve been reading the news, you know that it has already happened.  But I also made a more outlandish claim, that India’s economy would soon be as large as Japan’s (a country with exactly 1/10th India’s population), and that in 100 years India would have the world’s largest economy.  Later I moved that auspicious date up to 2081.

Unfortunately India hit a wall right after I made those predictions, and its growth rate slowed.  The reform process stalled.  The Sumner jinx.  So am I scaling back my forecasts?  Not at all.  The Economist has come out with its GDP forecasts for 2o15, and it says India’s economy will be almost 60% larger than Japan’s economy, at nearly $8 trillion (PPP).  My new forecast is that India will surpass the US by the early 2030s, and become #2.  To give you a sense of just how outrageous that forecast is, consider that a few years ago Lester Thurow was forecasting that the US economy would remain larger than China’s for the next 100 years!  Many other forecasters expected China to surpass us eventually, but almost none as soon as I did.  India?  No one even talks about it.

Here are the Economist (PPP) forecasts for 2015:

China $19,584.0 billion (over $20 trillion if you include HK and Macao, and why the hell shouldn’t you?)

USA  $18,365.5 b.

India  $7,899.4 b.

Japan  $4,952.8 b.

Germany $3,844.7 b.

India is forecast to grow at 6.5% next year.  It seems reasonable that India will grow about 4% to 5% faster than the US for the next few decades.  By the early to mid-2030s America will be number three. And that’s something to give thanks for, as it is the only way that billions of Asians can move out of poverty.

BTW, I participated in a recent Cato symposium of economic growth.  And later this afternoon I’ll do a post on growth over at Econlog.

PS.  If any commenter wishes to complain that it’s per capita GDP that matters, then please move to Liechtenstein or Qatar and leave the rest of us alone.  If the US and India both spend 2% of GDP on the military in 2034, we’ll have roughly equal defense budgets.

PPS.  Some of this is due to the IMF and World Bank dramatically redoing their PPP adjustments. Back in 2009 I complained that the PPP adjustments for China were far to small, but there was no objective “truth” of the matter.  On the other hand, Rorty once claimed that when people say something like; “Although my peers believe X is true, I think Y is actually true” it’s an implied prediction that eventually people will come to believe that Y is true.  As far as PPP adjustments for China (and many other Asian nations), that day has arrived.

PPPS.  Unfortunately there still is no objective truth to the question of whether the US or China is the world’s 3rd largest country, geographically speaking.  That question remains shrouded in the Rortian mists of disputed borders.

PPPPS.  The Economist contains other interesting tidbits—next year Indonesia surpasses France and Great Britain in total GDP (PPP).  The distinction between middle and high income continues to blur—where do you put countries like Malaysia ($26,320 per capita) or Chile ($24,310 per capita?) Portugal and Greece are only around $27,000.

PPPPPS  Singapore at $83,340/person?  Even I don’t believe that.  What happened to common sense?  Who makes these estimates?

Abenomics is doing better than I expected (shades of grey)

Here’s commenter dtoh:

I think you’re disheartened a little bit by the results of monetary policy which has been less effective in Japan than you had hoped and therefore you are trying to blame it on socio-economic and supply side factors. Yes…. these are problems, but the primary reason monetary policy has not been effective is the hike in the consumption (and other) tax rates.

Stop worrying, it will take a little longer, but Japan will prove you are a clairvoyant genius.

This is half wrong.  Certainly less effective than I had hoped, but more effective than I expected. In my early posts on Abenomics I suggested that it was likely to have a positive effect, but that Japan would fall short of the 2% inflation goal.  I expected about 1% inflation, still a significant improvement.  Japan has exceeded 1% inflation, even if you discount the effects of the sales tax. The yen has also depreciated much more than I (and the markets) expected.  Japanese stocks have risen much more than I (and the markets) expected.  Indeed by almost every metric they’ve done better than I expected.

So why does dtoh (a careful reader) have the opposite impression?  Because I am also very pessimistic about Japan, due to its big public debt and rapidly falling working age population.  I supported the sales tax increase, but even as I did so I predicted it would hurt the economy, and it has.  And regarding monetary stimulus, it’s technically possible for a policy to improve an economy that is doing very poorly, while still leaving it doing fairly poorly.  That’s Japan.

Read this and this for my earlier pessimism about Japan.

For the same reason, people often wrongly believe I’m a fan of the Chinese government, or its economic policy.  It’s a bad policy–perhaps as bad as Greece. But if China ever became as rich as Greece it would be the single most successful economic policy in all of world history.  And China probably will become as rich as Greece, as moving from a nightmarish policy under Mao to a merely bad policy under Deng and Xi has released the entrepreneurial energies of the Chinese population.

Real world economics is never black and white; it’s always about shades of grey. I’ve frequently pointed out that Abenomics was doing all sorts of things that the liquidity trap Keynesians said was impossible.  It boosted stock prices, it depreciated the yen, and it boosted nominal and real GDP.  That made me seem like an optimist. But I also said it would fall short of the announced goals, and I now feel that more strongly than ever.  Contrary to dtoh, if Japan does well I will be forced to admit I was wrong, as I did not expect Japan to do well.

I’ve also been saying that while QE and forward guidance helped, the Fed has consistently been too optimistic about US growth.  We are in a Great Stagnation. Just yesterday I noticed that Fed officials are hard at work explaining why their latest 3% growth forecast will fail to materialize, just like the previous 5 years.

A sharply stronger dollar could hamper Federal Reserve efforts to spur growth and lift inflation, a senior Fed official said today, in unusually direct remarks about the U.S. currency from the central bank.

By the way, Nick Rowe recently had this to say about central bankers:

But I do have a lot more confidence in the BoC than in the BoJ, ECB, or the Fed. Yes. The people who run the BoC are better macroeconomists, they speak with one voice, and they have the support of the government in doing what they are doing. You do not hear them say totally stupid things, like you do with people making decisions at other central banks.

Yesterday I noticed a perfect example of what Nick was thinking about:

Japan is in danger of falling into a recession as the yen’s decline reduces the purchasing power of households and squeezes corporate profits, said a former deputy governor of the Bank of Japan.

“The current yen weakness is slightly excessive,” Kazumasa Iwata, the deputy from 2003-2008, said in an interview on Sept. 19 in Tokyo. “Abenomics entails the risk of ‘beggar thyself’ consequences and signs are already emerging.”

Hmmm . . . .

Totally off topic, fans of drug legalization will love this youtube.

China is still reforming

Every once and a while you read articles suggesting that the reform process in China has stopped. Tyler Cowen discussed a book on China by Joe Zhang that makes 5 very dubious claims about reform. This one seems more than “dubious”:

In the past decade, China has erased most (if not all) of the liberalization of the previous two decades.

Thirty years ago China wasn’t much more advanced than North Korea.  The SOE share of the Chinese economy fell from 80% in 1978 to 18% today.  Here’s a graph showing the first decade of the 21st century:

Screen Shot 2014-09-14 at 1.01.45 PM

That graph is from a 2011 article in The Economist. But how about more recently? Has the reform process stopped?

Last year the FT reported that Xi Jinping was initially focusing on making the SOEs more efficient:

Reforms in train in China amount to a significant, albeit indirect, challenge to state companies across a range of industries, chipping away at their privileges. The government does not want to eliminate them. Instead, it wants to make them more efficient and more profit-focused – in short, more like private companies.

.  .  .

Private companies complain that they are struggling to compete against state companies and cannot access the same investment or funding opportunities as them. Moreover, the productivity gains at state companies have stalled, with their equity returns lagging behind private rivals by about 10 percentage points.

These problems form the basis of Mr Xi’s new round of SOE reforms. First, the government has promised to open up protected industries, including finance and energy, to more private capital – giving entrepreneurs capital opportunities that they lacked before. These openings, though, are expected to be modest.

The second and crucial part of Mr Xi’s push is to make existing SOEs more like private companies in their operations, if not their ultimate ownership. The reforms “will mainly focus on improving the operational efficiency of the SOE sector”, said Zhu Haibin, an economist with JPMorgan.

The government will allow state companies to introduce employee stock ownership plans, a way of encouraging managers to target profits. Bringing more private investors on board will also increase the portion of state companies in the hands of performance-minded shareholders, a disciplining force.

Even more important are the reforms that will change their operating environment. Shifts to market-based pricing for energy inputs and interest rates are, over time, undermining the advantages that state companies have over their private rivals.

An example of that was seen last week when China Development Bank, a state-owned lender that is one of the biggest creditors to local governments, had to scale back a planned bond issue because of tight monetary conditions. It was a case of an increasingly liberalised interest rate market forcing a state-owned company to weigh its investment plans more carefully.

“They know that if they issued the bond, the yield will be pretty high, probably higher than their returns,” said a credit trader with a European bank in Shanghai.

The industrials sector has also thrown up multiple examples this year of how market forces are impinging on state companies. The listed arms of Cosco, a shipbuilder, and Yunwei, a chemicals company, are among those that have announced assets sales in recent months to repair their balance sheets after big losses.

In 2014 things are moving even faster.  The Economist recently reported that privatization is back on the table:

The temptations to branch out have been too great: relative to their private-sector peers, they have benefited from cheaper financing from state-owned banks, favouritism from local governments in land sales and a lighter touch from regulators.

Second, despite these advantages, SOEs have given progressively less bang for their buck. Faced with mounting losses in the 1990s, China undertook a first round of drastic reforms of its state-owned companies. There were mass closures of the weakest firms, tens of millions of lay-offs and stockmarket listings for many of the biggest which made them run a little more like private companies. That initially paid dividends. SOEs’ return on assets, a gauge of their productivity, rose from barely higher than zero in 1998 to nearly 7% a decade later, just shy of the private-sector average. But over the past five years, their fortunes have ebbed. Profitability of state companies has fallen, even as private firms have grown in strength. SOE returns are now about half those of their non-state peers. For an economy that, inevitably, is slowing as it matures, inefficient state companies are a dangerous extra drag. Jian Chang of Barclays says that putting SOEs right is “the most critical reform area for China in the coming decade”.

Until recently, however, few analysts thought that China had the desire or the ability to get back into the muck of SOE reform.  Companies under the central government, such as PetroChina, the country’s biggest oil producer, were believed to be strong enough to resist the changes that would erode their privileges. At the provincial and municipal levels, local officials were thought bound to government-owned companies by ties of power, patronage and money. China was not expected to sit entirely still: gradual deregulation of interest rates and energy pricing was placing indirect pressure on state companies to operate more efficiently. But a direct, frontal assault on them of the kind waged by Zhu Rongji, then prime minister, in the 1990s seemed out of the question. Even when the party unveiled a much-ballyhooed reform plan last November and vowed to target SOEs, there were doubts about how far Xi Jinping, China’s president, could go. People close to the State-owned Assets Supervision and Administration Commission (SASAC), the agency that oversees China’s biggest SOEs, say that it was still dragging its feet at the start of this year.

But a flurry of announcements in the past few months shows that reforms are getting on track. There is no one-size-fits-all approach. Sinopec, Asia’s biggest refiner, is close to selling a $16 billion stake in its retail unit, a potentially lucrative opening for private investors. CITIC Group, China’s biggest conglomerate, is poised to become a publicly traded company by injecting its assets into a subsidiary on the Hong Kong stock exchange, for $37 billion. After its initial reluctance, SASAC announced reforms at six companies. They are to experiment with larger private stakes and greater independence for directors.

Although generating fewer headlines, moves by local governments to sell their companies could be even more significant for the Chinese economy. Local SOEs have performed worse than their central counterparts, meaning there is plenty of scope for improvement. They are more accessible to private investors since they are concentrated in non-strategic sectors. “It’s opening wide up. There is a ridiculous amount of deal flow coming our way,” says a manager with an international private-equity firm. The southern province of Guangdong recently held a meeting at which it offered stakes in 50 different SOEs, according to people present. Shanghai has also been at the forefront. In June it sold a 12% stake in a subsidiary of the Jin Jiang hotel group to Hony Capital, a local private-equity firm. Analysts say that this will encourage better management practices at Jin Jiang, including stock-option incentives for executives, and that it could serve as a template for future such deals.

The received wisdom in China used to be that “vested interests”, namely SOEs themselves, would thwart reform. Few believe that any more. With more than 100 officials from PetroChina, the biggest SOE of all, now under investigation for corruption, Mr Xi has flexed his muscles.

I often get commenters making very strange claims.  They’ll assert that the success of the 4 East Asian “tigers” was due to mercantilist policies and the failures of Latin America were due to free market neoliberal policies.  That’s of course the exact opposite of the conventional wisdom. They always cite a couple economists whose names I forget (one American and one South Korean.) While I haven’t read the original papers, my guess is they make the common mistake of forgetting that all economies are very complex.  You can find market reforms everywhere, even in North Korea.  You can find lots of government intervention everywhere, even in Hong Kong much of the real estate is owned by the state.  The trick is to get an overall view of the situation.  Was East Asia or South America more open to trade?  (The two most successful tigers were completely open, the other two fairly open.) Which South American economies did the least bad?  (The neoliberal ones like Chile did best, the highly statist ones did the worst.)  Perhaps some people believe intervention is good, and then look for examples of intervention in a successful economy.  You can always find some, but were they the decisive factor in the success?  Almost never.

I haven’t read the book Tyler discusses, so I can’t comment on the specifics.  But I’d love to see someone provide a short summary of how someone could claim China today is roughly as illiberal as 30 years ago.  That seems preposterous at first glance.  Is it possible the author made the same mistake as those who claim Latin America is a test of free markets, and East Asia a test of statist policies?

On the other hand my claim that tight money by the Fed caused the Great Recession also seems “preposterous at first glance.”  :)

PS.  I’d recommend Coase’s book on China (written with Ning Wang) for those who are interested in how they reformed their economy.