Back to the countryside, once again

Tyler Cowen recently linked to this story in The Guardian, and wondered whether it was an indication of a Chinese recession:

China’s Workers Abandon the City as Beijing Faces an Economic Storm 

Labour disputes are rising and some workers are leaving for the country amid fears a crashing economy could cause political and social unrest

Liu Weiqin swapped rural poverty for life on the dusty fringes of China’s capital eight years ago hoping – like millions of other migrants – for a better future.

On Thursday she will board a bus with her two young children and abandon her adopted home.

“There’s no business,” complained the 36-year-old, who built a thriving junkyard in this dilapidated recycling village only to watch it crumble this year as plummeting scrap prices bankrupted her family.

And here’s The Guardian in May 2009, a year when China experienced 9.2% real GDP growth:

Unemployment forces Chinese migrants back to the countryside

Factory to farm: millions who had enjoyed a taste of city freedom are returning to their villages

Until a week ago, Liu Xiao was part of the Pearl river delta’s army: one of the thousands of workers streaming along a Shenzhen road, gulping down breakfast, texting, lighting a final cigarette, teasing friends and swapping gossip – rushing rushing rushing to the factory for another shift making bras, computers and plastic toys for the world.

Today she waits patiently at the railway station across town. This region was the motor of China’s economic boom, but plummeting exports have forced it to slow and millions of those who kept it running have given up and gone home. Liu Xiao is one of the latest to return to the countryside: in her case to a village of just 200 people a 10-hour ride – and a world away – from Shenzhen.

So will 2015 be a repeat of 2009?  Not entirely, the trend rate of growth in China is now lower, and the risks of recession really are higher than in 2009.  But the similarity of these two articles should provide a cautionary note.  Adam Smith said, “there is a great deal of ruin in a nation”, and there are very few countries where that aphorism is more apt than China.

PS.  Here is an excellent article on the situation in China.  It points out that the Chinese government is tightening monetary policy to stabilize the yuan.  That’s not the right move at a time like this.

PPS.  This is a really good article on why Chinese stock market regulation is so inept.

PPPS.  This article suggests that as of August 25, 2015, the consensus forecast of economists is that China will have 6.9% growth this year and 6.7% next year.  That makes Tyler and I China bears, as we both expect less growth than the consensus. For some reason it makes me feel better to be on the same side as Tyler.  (I forecast about 6% going forward, and Tyler expects a very bad recession.)  Willem Buiter forecasts, 4% on official figures, in reality even less.  He says it will drag the world into a mild recession.

August 25, 2015

The main downside risk to the economy in the short term is that high volatility in the stock markets could translate into turmoil in the financial sector. On the other hand, a sooner-than-anticipated recovery in real estate and further action from authorities could spur growth in the next months. Panelists maintained their GDP projections for 2015 at the previous month’s 6.9%. Next year, the panel foresees growth at 6.7%.

But if China’s growth goes negative, I don’t think Tyler will let me get away with “I predicted less growth than the consensus, and I was right!!”

HT:  Marcus Nunes



10 Responses to “Back to the countryside, once again”

  1. Gravatar of Larry Larry
    28. August 2015 at 17:51

    I’ve thought that China could put a (low) floor under its stock markets if it chose to. The floor could e.g., use PE ratios rather than prices and make 10x the floor. Make a broad index of stocks and buy and sell the index accordingly.

  2. Gravatar of Ray Lopez Ray Lopez
    28. August 2015 at 17:58

    Sumner: “But if China’s growth goes negative, I don’t think Tyler will let me get away with “I predicted less growth than the consensus, and I was right!!” ” – interesting and shows your character that you would even try to pull a stunt like that. I know, I know, ‘you were just joking’ (except when you’re not).

  3. Gravatar of ssumner ssumner
    28. August 2015 at 18:35

    Larry, Yes, but why would they want to?

    Ray, You recognized a joke?!?! Maybe there is hope for you.

  4. Gravatar of Frances Coppola Frances Coppola
    28. August 2015 at 20:13

    Scott, for once I agree with you. China has painted itself into a corner. It will eventually have to float the yuan (or at least devalue considerably, though floating would be better) and loosen domestic monetary conditions substantially. It will also I think have to write off much sub-sovereign and corporate debt. The longer it continues trying to force the pace of growth by propping everything up the worse the inevitable downturn will be.

  5. Gravatar of benjamin cole benjamin cole
    29. August 2015 at 03:18

    Depends on the CCP and the PBoC. My guess is slowly the PBoC will finance ouput and pay off bad loans. When a central bank can print money and buy bad loans, and a nation is below inflation targets anyway…

  6. Gravatar of ssumner ssumner
    29. August 2015 at 04:50

    Frances, I agree, and would add that in my view floating the yen would actually boost growth–although it might affect the debt problem. But even there, growth helps debtors.

    Ben, I’ve heard the PBoC is net very independent (as you’d expect.)

  7. Gravatar of Tom Brown Tom Brown
    29. August 2015 at 06:03

    O/T: If I’m not mistaken Scott it looks like Krugman and you agree on something else (bubble popping):

    “OK, there are arguments that the Fed should be willing to abandon its inflation target so as to discourage bubbles. I think those arguments are wrong”

    In his latest “Artificial Unintelligence” post. He also skewers William Cohan for his call for the Fed to raise rates because, Cohan argues “interest rates should be determined by supply and demand” (?!?!?) Lol! Krugman of course points out the obvious there. He also had a favorable impression of David’s Beckworth’s latest (a few posts prior). You guys are practically twins these days.

  8. Gravatar of Paul Paul
    29. August 2015 at 07:53

    Scott, hypothetically, if the yuan were to float and the PBoC were given true independence to conduct monetary policy, would you recommend an NGDP targeting regime immediately? (Would data quality limit effectiveness? Would a sub-optimally fed (in terms of data) non-discretionary policy be better than well conducted discretionary policy?)

    If not, what would you recommend? I assume a nominal wage targeting regime wouldn’t be feasible if NGDP targeting weren’t feasible.

    If so, how would you approach selecting a growth level target in a big developing country like China with all of the reforms/structural re-balances/historically high growth rates to choose from?

  9. Gravatar of Brian Donohue Brian Donohue
    29. August 2015 at 10:57

    Excellent cautionary tale!

    The ‘hell in a hand basket’ mentality, from both left and right, is tiring.

    I’d say Tyler’s prediction is pretty bold. He’ll prolly be wrong, and he knows it, but if he’s right, he gets a bunch of guru points.

  10. Gravatar of ssumner ssumner
    30. August 2015 at 04:45

    Tom, Thanks, I’ll do a post.

    Paul, The data is far from perfect, but yes, it’s good enough for an NGDP targeting regime, which is what I’d recommend.

    I would start with the growth rate of the recent past, and then very gradually scale it down to about 3% or 4% in terms of per capita NGDP, over a couple decades.

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