Archive for the Category China

 
 

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.

Either Lars or I am really, really wrong

I’ve argued that China is currently overtaking the US in the race to have the world’s largest economy, and will have an economy twice the size of the US within a few decades.  I’ve picked on Lester Thurow for claiming it wouldn’t happen until the 22nd century.  And now Lars Christensen has suggested it might never happen.  Those are fighting words to a Sinophile like me.  Here’s Lars:

However, the [World Bank] argument was completely bogus as it was based on Purchasing Power Parity (PPP) rather than on actual exchange rates (To be fair we should blame the media rather than the World Bank for this interpretation of the data).

PPP based measures of GDP (per capita) might make sense if we want to measure how much an average citizen can buy for given an average income, however, it does not make sense when we want to measure the size of the economy. There we have to use measures based on actual exchange rates and if we do that then it turns out that the Chinese economy is still significantly smaller than the US economy. Hence, total Chinese GDP today is around 10 trillion USD, while US GDP is around bn 17-18 trillion USD. Said in another way the US economy is still nearly double the size of the Chinese economy.

And what I will argue in this post is that China might never overtake the US as the biggest economy in the world.

I have several problems with this argument.  First, if Lars really feels PPP is wrong, and that we should use nominal figures, then he should not be talking about China having recently grown at 7 to 7.5% per year.  In PPP terms China may have been growing at 7.5% vs. 2% in the US, but in nominal terms the gap is far wider, due to the Balassa-Samuelson effect.  China’s real exchange rate has appreciated strongly over the past decade.  So if Lars is right that nominal exchange rates are the right test, then China’s been catching up to the US at a rate far faster than either Lars or I assume. And in that case China’s nominal growth could slow dramatically and yet still be growing far faster than the US (where trend NGDP growth is now about 3%, in my view.)  Lars avoids this problem by assuming the Balassa-Samuelson effect will suddenly come to a screeching halt, whereas I think the yuan is headed to 4 to the dollar.  He also assumes a 3% RGDP growth rate for the US, whereas I believe it will be closer to 1.2%, growing over time to perhaps 2% in a few decades.

My second argument is that it makes no sense to use nominal exchange rates to compare the size of economies.  Perhaps it makes sense if you want to look at the impact on global trade (China exports far more than the US, BTW), but surely not if comparing domestic production.  I recall the euro being about 85 cents around 2002, then by 2008 it peaked around $1.60.  And yet the US and eurozone had roughly similar NGDP growth rates over this 6 year period.  Does anyone believe that comparing non-PPP adjusted GDPs would have given a meaningful comparison of the relative size of these two economies?  Did the eurozone suddenly go from having an economy much smaller than the US to one far larger, in six years?

And consider the effect of tax regimes.  Suppose you adopt a VAT that provides revenue equal to 20% of GDP.  Your nominal GDP at market exchange rates will suddenly jump by 20%, even though nothing has happened to the real size of your economy.  Indeed the European VATs are one factor that explains why Europe often looks better against the US if you don’t adjust for PPP.

Switzerland’s nominal GDP per capita is $81,323, and Germany is $44,999. Here are three more:

Greece   $21,857

Taiwan, $20,930

Portugal,  $20,727

Now let’s go to PPP.  We find Switzerland at $46,430, and Germany at $40,007. Doesn’t that gap seem more plausible?  In PPP terms Taiwan has a bit under $40,000, whereas Greece is just over $24,000 and Portugal a bit over $23,000. Again, far more plausible.

Still not convinced?  China produced more cement in 2011-12 than the US did in the entire 20th century.

Still not convinced?  Think about the fact that China has 1.36 billion people while you read this:

CHINA Northern Locomotive and Rolling Stock Corporation (CNR) has been awarded a contract to supply a fleet of 60 driverless trains for the first metro line in Beijing to be equipped for Unattended Train Operation (UTO).

I’m telling you, this country isn’t messing around.

For Lars to be right, China’s nominal GDP per person would have to get stuck at Brazilian levels.

Ladies and gentlemen of the jury, I rest my case.

PS.  Under PPP Denmark drops from over $59,000 to under $38,000.  Maybe that’s why Lars likes the unadjusted figures.  :)

About those struggling middle class Americans

I’m a bit of an extremist on saving.  That partly reflects my supply side views—government policy discourages savings in 100s of ways.  It partly reflects the fact that successful economies like Singapore and Switzerland tend to save a lot.  And it partly reflects my (patient) personality.  I’ve been in all 5 quintiles at various stages of my life, and can always save money at any income.

I often get into debates with commenters, and eventually it reaches the point where I’m told Americans are too poor to save.  I don’t get it. Isn’t America the richest country in all of world history? How can we not afford to save?  It also makes me think of my frequent trips to China, where people earning about $10,000 on average are able to save 50% of their incomes.

Lots of our economic problems, from excessive health care costs to excessive student loan debt to the housing crisis, are partly caused by insufficient saving.

Now Businessweek reports that even most “upper-middle-class Americans” don’t save anything:

Just 45 percent of upper-middle-class households (income from $75,000 to $99,999) saved anything in 2012, according to the Fed study. That means the other 55 percent didn’t save for a house, retirement, or education. About 16 percent spent more than they earned and went further into debt.

Now you might object that a family making $80,000 or $90,000 a year isn’t really “upper-middle-class.”  It’s middle class.  And I’d agree with you.  But I’ll only agree with you if you agree that this shows the income distribution data doesn’t show what most people assume it shows.

To be fair, the income distribution data used by the right is often just as meaningless.  Remember hearing about all those people who “escape poverty?”  Lots of them are like me—struggling grad students moving up to fat and happy professional careers. The NYT reported that 73% of Americans spend part of their life in the top 20%.  What’s the matter with Kansas?  No, what’s the matter with intellectuals who don’t understand why average Americans don’t favor higher taxes on the top 20%.

PS.  I recently did a post comparing Brazil and China.  If you wonder where all that Chinese saving goes, check out this map provided by Matt Yglesias, which compares growth in the Rio and Shanghai subway systems since 1993.  By 2025 Shanghai’s will probably double again.

Screen Shot 2014-08-26 at 7.05.33 PM

Of course not all the Chinese saving is invested wisely.

PS.  The Yglesias post has some other interesting graphs.

Brazil on the short end of a 7-1 score

In economic growth and development there are mysteries that get a lot of attention.  And then then are deeper mysteries, the puzzling lack of puzzlement over certain facts.  Brazil is a country that has always puzzled me a bit.  Here’s a recent article from the Economist:

The unemployment rate is low. But with job prospects dimming, consumers, who have pulled the economy along in the past few years, are growing more downbeat. Last month 11.4% were more than 30 days behind on their debt payments, up from 9% a year earlier. Retail sales have flagged.

Sagging confidence poses the biggest threat to President Dilma Rousseff’s chances of a second term in an election this October. In an effort to prevent voters from feeling the pinch, Ms Rousseff has loosened the fiscal reins. In May public spending was 16% higher than a year earlier and revenues 8% lower. As a result Brazil posted its second-worst monthly primary budget deficit (ie, before interest payments) ever. “They are trying to mask the problem until after the election,” says Ms Maurício.

I checked online and it looks like Brazil has averaged 1.5% RGDP growth over the past 3 years.  In contrast, RGDP in China has been rising at about 7.5% per year. In per capita terms that’s a roughly 7-1 advantage to China.  Ouch.  (Sorry to my Brazilian readers for mentioning 7-1, but I just couldn’t resist.)  What could explain such a vast difference?

1.  Perhaps it’s because Brazil is about 20% to 25% richer, and richer countries tend to grow more slowly.  But that would explain only a slight difference.  Both are solidly middle income countries, thus the two growth rates should not differ that much.

2.  It sure doesn’t seem like “austerity” can explain the slow Brazilian growth.  Indeed the article suggests that fiscal policy has been expansionary.

3.  The business cycle?  Perhaps, but the unemployment rate is described as “low.”

4.  Ethnic differences?  Possibly, I’ve argued that for cultural reasons North Korea would have a much easier time growing 10% a year for 30 years in a row than Afghanistan or the Congo.  (Assuming North Korea adopted capitalism.)  But even so, I still have doubts about the ethnic argument.  Here’s a comparison of the US and Brazil:

Brazil:  48% white, 43% “pardo”, 7.5% black, 1% Asian, 0.5% Amerindian.

USA:  62% white, 17% hispanic, 13% black, 6% Asian, 2% mixed, 1% Native American

The US has fairly wealthy states like California and Texas where the white population is less than 50%.  I’m certainly not saying ethnicity has no role in the wealth differences, but the IMF estimates Brazilian per capita GDP (PPP) at $12,200, compared to $53,100 in the US.  That gap seems way too wide to be explained by the ethnic/cultural differences between the US and Brazil.  Even black and hispanic Americans have average incomes at least double the level of Brazil.

5.  Government policies?  Brazil does have a big government, at least for a developing country.  Government spending is 39% of GDP, which is considerably higher than other Latin American countries.  As a libertarian I’d like to pin all the blame on that data point, but of course many of those other Latin American countries with “small government” are also quite poor.

6.  If not size, then perhaps quality of government?  The Heritage ranking of economic freedom puts Brazil only 114th in the world, which is below average.  But China is #137, which is even further below average.

7.  The one thing that really stands out with government is that Brazil spends lots of money on pensions and not much on infrastructure.  And China spends LOTS of money on infrastructure, and spends it reasonably efficiently.  (China does build some unneeded infrastructure, but they also build a lot of needed infrastructure, very quickly and at low cost.)

The last item is the one I find most plausible, but even I don’t think it can come close to explaining the 7-1 growth gap between Brazil and China.

And to return to the opening—there’s the deeper mystery of why more people don’t talk about Brazil as a failed state.  Why this continual hyping of Brazil as the country of the future?  Recall it’s one of the original BRICS.  Here’s Bill Clinton in 2012:

Clinton, speaking at a forum of bankers in Sao Paulo, acknowledged some problems but said Brazil still “looks really good” compared to crisis-ridden economies in Europe and the United States.

He said Brazil also compared favourably to India, which is struggling with a stagnant economic reform agenda, and China, which has tensions with some of its neighbours and is at risk of suffering from water scarcity and other depletion of natural resources, he said.

Remember that Brazil is a sophisticated country that has been exporting products like commuter airliners to the US for many years.  They have a huge internal market and a fabulous agricultural sector. Waterpower and lots of resources.  Modern big cities.  We aren’t talking about Lesotho or Laos.

And their per capita income is $12,200 and going nowhere.  It’s a mystery to me. And it’s also a mystery as to why they get such a good press.  Why aren’t they expected to grow like China?  The soft bigotry of low expectations?  Is the mental image of Brazil the beach life in Rio, whereas the mental image of China is hard-charging, sharp-elbowed businessmen in Shanghai and Shenzhen? What do you think?

PS.  Paul Krugman recently had this to say:

You might be tempted to dismiss this notion as wishful thinking, a sort of liberal equivalent of the right-wing fantasy that cutting taxes on the rich actually increases revenue. In fact, however, there is solid evidence, coming from places like the International Monetary Fund, that high inequality is a drag on growth, and that redistribution can be good for the economy.

Brazil has tried that approach under the new government (and the previous center-right government as well), and in fairness inequality has fallen somewhat.  But I just don’t see the growth payoff.