More evidence of creative destruction in China

Brent Buckner sent me the following story from Business Insider:

Some commodities, like iron ore or cement, are necessary for massive industrialisation, and Chinese demand for them exploded during the boom years. Goldman [Sachs]’s note refers to them as capex (capital expenditure) commodities.

Growth in others, like gasoline and coffee (opex or operational expenditure commodities) indicate that something else is going on “” that a population is getting richer, and spending more on things like food and personal travel.

In China, consumption of capex commodities is slumping, against rapid growth in opex commodity consumption.

The more capex-intensive the commodity, the weaker the demand growth, while the more opex-intensive the commodity, the stronger the demand growth. Demand has declined by 5.0% for cement, yet demand for gasoline is up 19.1%. This pattern suggests that policymakers are, at least to a degree, successfully creating the conditions for the much-anticipated rotation in economic growth away from investment and towards consumption.

And that’s pretty important. Beijing is currently trying to rotate away from being the world’s investment-heavy, export-driven industrial powerhouse and towards an economy more driven by domestic consumption and services.

When investment declines in a well functioning economy, you should see a move along the PPF toward more consumption.  When both C and I decline at the same time, and you move inside the PPF, then you have major problems.  Think about the US in 1929-33 or 2008-09.

When falling investment is offset by rising consumption, however, employment tends to be stable.  Think about how the US created jobs in the January 2006 to April 2008 period, despite residential construction falling in half.  So far China seems to be doing it the right way.

As an aside, you might wonder why I am a bit skeptical of the claims that China has overinvested in housing and infrastructure.  Read this tragic story about the 70 million children left behind in China’s industrialization drive, as their parents went off to work in the cities.  There is no greater priority in China than building an urban capital stock capable of supporting 1.2 billion people, so that these families can be reunited.  (Of course it would also help to abolish the hukou system.)

PS.  I was asked about the new Chinese GDP figures.  They have switched from a bizarre year to date cumulative system to a year-over-year reporting system. Thus RDP is 6.9% higher than the 3rd quarter of last year.  The quarter-over-quarter growth was 1.8%, or an annualized 7.2%.  (HT:  Ben J)

PPS.  Lars Christensen reports that NGDP growth in China continues to slow.  This suggests that China needs more monetary stimulus (perhaps a weaker yuan.)  Marcus Nunes suggests that it also points to a need for easier Fed policy.  Some believe that the actual inflation rate is higher than the reported rate, and hence RGDP growth is slower that reported.

James Alexander notes that the new Labour leadership is looking at NGDP targeting.  However they have virtually no chance of taking power, so I’m not sure it matters.



13 Responses to “More evidence of creative destruction in China”

  1. Gravatar of Chuck Chuck
    20. October 2015 at 10:46

    China needs to continue its shift to a private sector driven economy. If private preferences are towards investment over consumption, then investment it should be.

  2. Gravatar of Luis Pedro Coelho Luis Pedro Coelho
    20. October 2015 at 11:32

    “James Alexander notes that the new Labour leadership is looking at NGDP targeting.”

    Hopefully they don’t discredit it by association!

  3. Gravatar of Luis Pedro Coelho Luis Pedro Coelho
    20. October 2015 at 11:32

    “James Alexander notes that the new Labour leadership is looking at NGDP targeting. However they have virtually no chance of taking power, so I’m not sure it matters.”

    Hopefully they don’t discredit it by association!

  4. Gravatar of TallDave TallDave
    20. October 2015 at 12:34

    That deflator is perplexing.

    If they abandon the peg their prospects certainly improve in the long term. Should China fear the free flow of capital and the free exchange of currency?

    At the very least, let’s hope their forex burn rate continues to fall.

  5. Gravatar of ssumner ssumner
    20. October 2015 at 12:40

    Chuck, That’s right.

    Talldave, Agree about the deflator. And I think they should not fear open capital markets.

  6. Gravatar of TravisV TravisV
    20. October 2015 at 15:32

    Dear Commenters,

    Which individuals do you think have made the strongest arguments questioning the Market Monetarist model of reality?

    For me, I think the answer is Arnold Kling and Bob Murphy.

    Someone like David Glasner doesn’t count, because his disagreements are small quibbles relative to Kling’s and Murphy’s.

  7. Gravatar of benjamin cole benjamin cole
    20. October 2015 at 16:08

    Egads, the People’s Bank of China needs to loosen up, as does the US Federal Reserve Board, as does the ECB, as does the Bank of Japan as does the Monetary Authority of Singapore and I guess I could go on.

    But when they hold central bank confabs, the only topic is inflation. There were six presentations at the Jackson Hole Pow Wow, and all six were on inflation and not one was on growth or demand.

    It is seven years since the 2008 Fed meetings of which we have transcripts, and which show hundreds and even thousands of mentions of the word “inflation” and scant of “demand” or “unemployment.” Have central bankers changed? Or proudly unrepentent?

    Yes, Market Monetarism has made some advances in media. But is anyone confident that central bankers are listening?

  8. Gravatar of LC LC
    20. October 2015 at 18:07


    The tragic story you linked to shows the incompetence of Chinese government. In many rural areas, government and NGO support for migrant families are non-existent. Unfortunately one hears too many stories about children missing for many years after being kidnapped and sold and reuniting decades later with their birth families, women running away from abusive homes and leaving children behind. In cities, day care hours are extremely short, normally closing by 4pm due to government regulations and restrictions, placing undue burden on families at an enormous economic cost. Hopefully the transition to service oriented economy also means better efficiency and service from the government sector.

    Off topic, have you talked to anyone in PBoC regarding market monetarism? It would open their minds and start the process to de-link to the Fed.

  9. Gravatar of Qwert Qwert
    21. October 2015 at 09:18

    Sumner, What you think about that

  10. Gravatar of Ray Lopez Ray Lopez
    21. October 2015 at 10:34

    Cut and paste this post here:

    Brian McCarthy
    20. October 2015 at 13:01

    Why did Sumner not reply better to McCarthy’s brilliant expose of Sumner’s argument except to say “I don’t understand your post” and then nitpick over some small semantics in McCarthy’s post? Why did Sumner run away from that post and start a new one here? Because Sumner, when beaten to a pulp, slithers away and rearranges the goal posts. Cut and run. Cut and Paste is what is the cure to cut and run, but I don’t want to be banned so I’ll not do that.

    Amazing how dishonest Sumner is. He’d make a good politician.

  11. Gravatar of ssumner ssumner
    21. October 2015 at 12:08

    LC, No, I haven’t really talked to people at any central bank, at least to any significant extent.

    Qwert, Good post, but I don’t really agree that Free Banking would lead to NGDP targeting.

    Ray, Don’t worry, you are the last person I’d ever ban–I have too much fun with you.

    Yes, I’m quivering in fear over whatever Brian said. And it was brilliant, at least the parts he stole from my earlier blog posts on China.

  12. Gravatar of James Alexander James Alexander
    21. October 2015 at 14:14

    The Conservatives often steal the best ideas of the opposition. If Labour endorse NGDP Targeting it makes it easier for Osborne to bring it in. After all, NGDPLT isn’t a left/right thing.

  13. Gravatar of Ray Lopez Ray Lopez
    21. October 2015 at 20:14

    Sumner is so full of himself, he thinks a person who is criticizing his bogus “China is not slowing down much” thesis is stealing from Sumner’s own work?! So Sumner is arguing with himself, like a crazy man? Makes sense.

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