Maybe next year

Each year I do a post about the Chinese crash that did not occur.  Early 2012:

Apocalypse later?

Each year there is a loud chorus of pundits predicting that China’s boom will turn to bust.  And each year they are wrong.  .  .  .

And then early this year:

Apocalypse delayed, once again.

Time for my annual post pointing out that the China bears were wrong once again.

And here’s Matt Yglesias this morning:

The Chinapocalypse Keeps Not Happening

By 

I’ve lost track of how many years we’re into the story of “debt-burdened China and its unsustainable investment-fueled growth are about to crash and burn” but this morning came the news of a rebound in economic growth despite a fall in exports after a couple of down quarters. Naturally the news article is nonetheless filled with gloom and doom about bad debts and overinvestment and blah blah blah.

And to be clear, I think that two things are true. One is that as China gets richer and richer its growth rate is going to be on a downward trajectory. The other is that if you predict a Chinese financial crisis every month for enough straight months, eventually the Chinese financial crisis will occur.

But it’s very hard for me to think of another story where the ratio of pessimistic commentary to actual bad news has been so high. You particularly see this in the odd obsession with overinvestment.  .  .  . But the question must be asked: Compared to what? A dollar invested in a very bad project is still going to have more long-term wealth-building impact than a dollar spent on Chicken McNuggets. And by the same token, resources employed in a white elephant infrastructure project are generating drastically more social value than resources employed in Southern Europe’s booming unemployment sector.

PS.  I see that Tyler Cowen has a Time magazine article on a topic of interest to both Matt and me, Texas.


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19 Responses to “Maybe next year”

  1. Gravatar of John Hall John Hall
    18. October 2013 at 05:52

    In USD, the MSCI US total return index is up nearly 25% YTD compared to closer to 2% for the MSCI China index. Maybe not a crash, but the equities have hardly kept up with U.S. performance.

  2. Gravatar of John John
    18. October 2013 at 06:22

    Scott,

    Good point by John Hall. However, I was thinking that I would point out how wasteful Chinese government spending is and how their investment is really just value destroying waste. Then I realized that most of what the U.S. government invests in and spends is value destroying waste and the U.S. government spends a whole lot more (absolutely and in terms of GDP).

    That said, I don’t see such a government directed economy reaching levels of wealth comparable to the U.S. By the same token, if today’s regulatory and tax mechanisms were in place 50 years ago in the U.S., the U.S. would not have become wealthy.

  3. Gravatar of TW Andrews TW Andrews
    18. October 2013 at 06:51

    “booming unemployment sector” is the best turn of phrase I’ve seen in quite some time.

  4. Gravatar of RyGuy Sanchez RyGuy Sanchez
    18. October 2013 at 09:15

    http://research.stlouisfed.org/publications/es/article/9942/

    Is Nominal GDP Targeting a Rule Policymakers Could Accept?

    “In addition, nominal GDP targeting suffers from the other considerations that prevent policymakers from adopting policy rules. For example, policymakers’ response to the alternative situations would depend on current labor and financial market conditions and activity; the composition of GDP, especially between consumption and investment; global economic conditions; and so on. In short, adopting a nominal GDP target is unlikely for many of the same reasons policymakers are unlikely to adopt a traditional Taylor rule””or indeed, any specific policy rule. The economy is too complex to be summarized by a single rule. Economies are constantly changing in ways difficult to explain after the fact and nearly impossible to predict. Consequently, policymakers seem destined to rely on discretion rather than rules.”

  5. Gravatar of rbl rbl
    18. October 2013 at 09:35

    But if China collapses, neo-imperialists won’t have to worry that maybe in decade or so China will be powerful enough to exert a meaningful check on US global hegemony. Impoverishing a billion people is a totally fair trade-off to make sure Niall Ferguson doesn’t have to worry about the scary red menace achieving a per capita gdp at half the US level.

  6. Gravatar of Matthew C Matthew C
    18. October 2013 at 09:50

    I don’t think China will collapse, but I think we will see way slower growth in the near future. Michael Pettis has a really interesting blog (China Financial Markets) which I believe Prof. Sumner has linked on the bottom right hand side of this site. He basically says China’s excessive savings caused by currency devaluation (which they don’t do as much any more), financial repression, low interest rates, and slower wage growth relative to productivity have caused a great deal of debt fueled investment as China “imports demand” from other countries. During every global crises countries in China’s position eventually get hit hard.

    Mr. Pettis predicts that if China readjusts its economy, by increasing domestic consumption rates, Chinese GDP growth will be relatively small (perhaps 3%-4% a year, but consumption will improve and the state will hopefully privatize many state-owned assets leading to a relatively stable China.

    On the other hand, Mr. Pettis believes if they continue with excessive investment it could be very damaging to the country and one could see more stability.

    I would definitely like to hear Prof. Sumner’s views on this analysis

  7. Gravatar of benjamin cole benjamin cole
    18. October 2013 at 09:52

    People forget—the People’s Bank of China prints money. They have a 3.5 percent inflation target and they can also repair bank balance sheets by buying bad loans.
    The West has gotten a little ill—rising asset prices, once seen as a sign of strength, are now seen as bubbles.
    In some regards China is an example of what a growth-oriented central bank can accomplish, like the USA in the 1960s.
    BTW, it is tough to have real estate collapses and moderate inflation at the same time…rising price levels tend to “bail out” iffy loans…
    The Big Lesson: Tight Money does not work. See Japan.

  8. Gravatar of ssumner ssumner
    18. October 2013 at 12:08

    John Hall, You said;

    “Maybe not a crash”

    That’s an understatement!

    John, You said;

    I was thinking that I would point out how wasteful Chinese government spending is and how their investment is really just value destroying waste.”

    So all those glizty new subways, airports, superhighways and high speed rail lines are pure waste? What do you call government spending in Nigeria or Brazil?

    I’ve been visiting China since 1994, when it was very poor. “Waste” is not the first term that comes to mind, although certainly there is plenty of waste, as you’d expect in a statist economy.

    You said:

    “That said, I don’t see such a government directed economy reaching levels of wealth comparable to the U.S.”

    Of course they won’t. But that’s because nobody does. Even Switzerland is poorer than the US. But they also won’t get stuck in a middle income trap. They will become a developed country—sooner than many people realize.

    RyGuy, That quote is pretty silly, I hope the rest of the article is more thoughtful.

    Matthew, I tend to agree with Pettis on micro issues, but I’m afraid he’s wrong on the macro issues. Growth will be much higher than he forecasts. A year or two back he bet The Economist magazine that China would grow at 3% for the rest of the decade. He’ll almost certainly lose that bet.

    Last time China devalued was 1994. They’ve sharply revalued in recent years, particularly in real terms.

    BTW, I’ve met Michael Pettis, he’s a great guy.

  9. Gravatar of RyGuy Sanchez RyGuy Sanchez
    18. October 2013 at 12:26

    ssumner,

    It is not.

    “However, despite the support among economists for policy rules, transcripts of the Federal Open Market Committee (FOMC) meetings suggest that the Federal Reserve has never used a policy rule, and there is no evidence that any other central bank has either.”

    That is true only if we accept that a 2% inflation target, like canada or nz, is not a rule. And it gets worse:

    “So what prevents the Fed and other central banks from adopting nominal GDP targeting? Again, there are a number of reasons, but an important and sufficient reason is that nominal GDP targeting requires policymakers to be indifferent about the composition of nominal GDP growth between inflation and the growth of real output, and, in general, they are not. For example, let’s assume the target is 5 percent and nominal GDP is growing at 6 percent. Would policymakers react the same if the composition was 1 percent inflation and 5 percent real growth, or 5 percent inflation and 1 percent real growth? It seems unlikely.”

  10. Gravatar of Lorenzo from Oz Lorenzo from Oz
    18. October 2013 at 15:06

    RyGuy Sanchez: My translation of your first quote “That’s why you need terribly, terribly clever central bankers to manage the mysteries”.

  11. Gravatar of Lorenzo from Oz Lorenzo from Oz
    18. October 2013 at 15:39

    Buried in this piece on Australians being the wealthiest people in the world:
    http://www.theguardian.com/business/grogonomics/2013/oct/14/australia-wealth-top-world?CMP=dis_829
    There is a chart that notes Hong Kong’s RGDP per capita has grown 11.7% since 2007. If one is a China doomsayer, what is the permanent blockage that stops the rest of China reaching Hong Kong levels? Given the amazing level of policy flexibility that the Beijing regime has displayed since 1978. Especially as Taiwan is an example of how to get rich under a one-Party state while being Chinese. (The joke being that the CPoC wants to become the KMT while the KMT wants to become the DPP.)

    Japan modernised successfully in the late C19th because, in 1855, it was institutionally already like Atlantic littoral Europe c1455. So, it simply had to fast forward what Europe did in 400 years in 50 years. Which it did so successfully, by 1905 Japan was more industrialised than Iberia.

    C19th China failed because it was under non-Han rule and the institutional structure was strikingly different. Those blockages no longer apply–no foreign rule and it can just fast forward (or simply broadly repeat) what Taiwan did.

    While I believe there is a recurring tendency to discount India, that does not mean that China will not continue to grow. The period 1830-1980 was completely weird in global economic history because the Industrial Revolution meant that China could stop being the dominant factor in Eurasian trade, as it had been since at least 220BC, and the global economy not notice. The growth of China is, in a sense, the return to normality.

  12. Gravatar of Benny Lava Benny Lava
    18. October 2013 at 15:50

    The China crash watch is great. I wish I had the time to google all those articles and blog posts about China’s crash back from 2009. Remember how their stimulus was huge and reinflating a bubble, setting them up for an even bigger crash?

  13. Gravatar of ssumner ssumner
    18. October 2013 at 16:38

    RyGuy, It sounds like criticizing it would be fun. I like this quote:

    “For example, let’s assume the target is 5 percent and nominal GDP is growing at 6 percent. Would policymakers react the same if the composition was 1 percent inflation and 5 percent real growth, or 5 percent inflation and 1 percent real growth? It seems unlikely.”

    I’ve heard this many times, and what I find really funny is that half the people who agree with them say “Obviously the Fed would tighten more with the high inflation case” and the other half say “obviously they would ease more with the low RGDP growth case.” So they can’t even agree on which way the Fed would deviate from NGDP targeting! And yet they think it obvious the Fed would do so.

    Lorenzo, Excellent comment.

  14. Gravatar of Geoff Geoff
    18. October 2013 at 17:34

    With enough predictions of no collapse, eventually you’ll be “proven” right.

    Predicting no collapse before a collapse is not a signal of either valid economic theory or other scientific prognostication ability.

  15. Gravatar of John John
    18. October 2013 at 18:19

    Scott,

    No private company would have built the kind of infrastructure the Chinese government has. There are lots of stories about how empty their glitzy bullet trains and new airports are. Based on how much money governments typically lose running public transit, we can deduce that Chinese spending on transportation is very unprofitable and therefore destroying a great deal of value. Ditto for many of the SOEs in China. However, most governments in the world do the same thing to a similar extent.

    The biggest thing about the China debate is that we have to use very bad numbers. I really think that China’s can manipulate the statistics they put out within a fairly wide range. I really don’t know whether China’s GDP grew 9% or 6% last year and I don’t think anyone else does outside of their statistical office.

  16. Gravatar of rob rob
    18. October 2013 at 22:56

    I think people’s confusion about China not crashing mostly has to do with the fact the image they have of China is not a very accurate picture of actual China.

  17. Gravatar of ssumner ssumner
    19. October 2013 at 06:52

    John, You said;

    “No private company would have built the kind of infrastructure the Chinese government has. There are lots of stories about how empty their glitzy bullet trains and new airports are. Based on how much money governments typically lose running public transit, we can deduce that Chinese spending on transportation is very unprofitable and therefore destroying a great deal of value.”

    1. Private companies certainly can and should build high speed rail lines, what they cannot do is decide the lines should be built.

    2. The stories about empty high speed trains are lies, the lines are quite busy. I’ve ridden them, and by 2014 they will be carrying more passengers than the entire US airline industry. On some lines there is so much traffic that the trains run every few minutes. Many of the airports are crowded, although there are white elephants in the smaller cities.

    3. Just because subways lose money doesn’t mean they destroy value. The London and Paris subways lose money, imagine those cities if the subways shutdown! There are huge externalities in urban transport.

    The official numbers are certainly in the ballpark, in any case the China bears have been predicting a sharp slowdown in the official numbers, so they can’t use that as an excuse.

    rob, That’s an understatement.

  18. Gravatar of Ari Tai Ari Tai
    19. October 2013 at 12:53

    And for those that think the 1-child policy limits their horizons (even though it’s now only seriously applied in the rural areas – where the government knows they need to get those people off the land in into the cities to complete their entry into the first world) – check out the dependency ratios for China, the U.S., and say Germany.

    http://esa.un.org/unpd/wpp/unpp/panel_indicators.htm

    China’s going to be fine. They (still) have a long term and pragmatic view. It’s the first world I worry about. Where we are determined to sacrifice our future for the present.

  19. Gravatar of Lorenzo from Oz Lorenzo from Oz
    19. October 2013 at 14:14

    Ari Tai: Also, the Chinese state has no general pension liabilities. As Niall Ferguson points out, why does the Beijing regime care if there are a lot of poor old people?

    Of course, no general pension liabilities also mean a tendency to frantic saving., which rising incomes make easier to do.

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