Spending 60 Minutes in China
[I wrote this a few days ago, but figure I better post it now, as Michael Darda just sent me a similar story.]
I don’t watch much TV, but ran across a couple episodes of “60 Minutes” on the internet. The interview of Zhang Xin by Leslie Stahl was quite interesting. She and her husband have developed some architecturally interesting projects in Beijing. (I recently visited a couple of them.)
I was less impressed by their story on the Chinese ghost towns. The Binhai financial district (Yujiagu) was described as “all but abandoned.” Does that mean not abandoned? Waiting for all the infrastructure scheduled to link it to downtown Tianjin in mid-2014? China has more than four times the US population, and Tianjin is expected to be the financial center of the north (just as Shanghai is the financial center of the east, Shenzhen in the south, and perhaps eventually Chongqing in the west.) Why shouldn’t China have 4 Wall Streets?
Shanghai’s Pudong district was viewed as a bubble in the early 2000s; now those predictions look laughable. Shanghai has built far more office space since then and still has a low vacancy rate. How about an apology from those predicting a Shanghai bubble back in 2001, or at least a little more humility in future predictions. Instead all we got was smug “analysis” about how naive the Chinese home-buyers are.
Their China “expert” (a westerner) said the average Chinese person makes $2/day–which is wildly out of date. He said the housing being built was much too fancy for the average person to afford. OK, but then what happens if prices crash to the point where the housing is affordable? Chinese incomes are doubling every 7 years, and hundreds of millions of people will eventually move from the countryside to the cities. Given that housing is quite durable and China will be much richer in the future, should China be building lots of housing suitable for poor people making $2/day, or housing suitable for the China of 2035? And don’t the Chinese make large down-payments? What is the risk to the Chinese banking system? My hunch is that banks face bigger losses from SOEs than home buyers.
They pointed to a “ghost town” development in Zhengzhou, which is capital of a province of 90 million people. I’d expect its current population (4 million in the urban area) to grow to 10 to 20 million in a few decades. How much longer will that development seem unneeded?
How about fully developed and non-communist (ethnically) Chinese cities like Hong Kong, Taipei, Singapore, sections of Vancouver. What do house prices look like in those locations?
I don’t have all the answers, and even I wonder why they are building the Binhai development so far from downtown Tianjin. But I also wonder how much of this analysis is filtered through our own experience with our own real estate “bubble.” But then we didn’t have 500 million people ready to move from the countryside to our cities; indeed we only have 3 million farmers left. Nor do we have NGDP growing at double-digit rates.
(Actually we might have 500 million peasants wanting to move here–but they are not allowed into the country.)
PS. I should probably say something on Cyprus, but am not well-informed. Tyler Cowen has several good pieces. I will say it seems odd to suddenly stiff small depositors who thought they were covered by deposit insurance. I favor reforming deposit insurance in a way that limits its coverage, but not retrospectively. Are there risks of contagion? I don’t know. It’s weird suddenly being on the “left” on an issue for which I’ve spent my whole life being an outlier on the “right.”
PPS. The comments don’t seem to work for this post—so you can leave any comments at the end of the previous post, or then next one once it’s put up.
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17. March 2013 at 08:16
What’s the difference between predicting a future crash, over and over, while saying “just wait a little more!”, and predicting a future population and commercial influx, over and over, while saying “just wait a little more!”?
I see this post as saying this:
“Just you wait and see all you population and commercial influx deniers! A lot of this infrastructure expansion is going to be seen as genius….eventually….at some point in the future…and there will be people to live in those homes, and people to operate businesses out of those offices….eventually…just you wait!”
Why the love note to centrally planned China?
EMH doesn’t even apply in China, and probably nowhere else either. China’s economy is largely centrally planned. EMH is a theory of markets. You can’t use a theory that presupposes free markets, in an economy where there is no free market. If China goes bust, and people predicted it, it doesn’t mean EMH has been empirically confirmed nor falsified.
17. March 2013 at 08:22
If the development is only affordable after a price collapse that leaves the sales le price below the costs of production, that doesn’t strike me as a sign of success but rather a sign of failure. Losses signal value destruction, especially relative to opportunity costs. The same sorts of “someday this will be useful” valuation is what underpins the drive to subsidize various energy technologies whose time has not yet come. Building right stuff too early and at too high a cost is not much different (if at all) from building the wrong stuff all together. Actually, it really isn’t different at all. It’s just a subset of building the wrong stuff.
17. March 2013 at 08:56
Geoff, China isn’t really centrally planned. That’s a myth. But you are right that the government policies toward real estate are highly flawed. Even worse than in America (which is hard to believe, but true.)
Where was the love note?
John, I agree. But if Chinese people freely buy properties at market prices, and the properties soar in value, and then later fall in value, is that a failure of communism, or the market?
17. March 2013 at 09:45
Dr. Sumner:
“Geoff, China isn’t really centrally planned. That’s a myth.”
Not really centrally planned. Does that mean centrally planned?
http://www.heritage.org/index/ranking
Heritage puts China as ranked 136 out of 177 countries, for economic freedom.
Has the Heritage Foundation fallen for a “myth”?
While they have made “reforms” in the direction of economic freedom, and as a result the average standard of living is rising, nevertheless, I think it is the case that the Chinese government still maintains a large degree of control over the economy, such that if we were to separate all countries into either “largely centrally planned” and “largely market oriented”, China should be identified in the former category, not the latter.
I got the love note impression from your defense of China’s infrastructure expansions which are almost entirely under the control of the Chinese government. Defending those expansions from criticism is tantamount to defending China’s central planning of those infrastructure expansions.
I remember a similar thing happening during the 1970s and 1980s when otherwise market oriented economists praised the USSR’s centrally planned infrastructure projects and defended them from criticism.
17. March 2013 at 18:11
“But if Chinese people freely buy properties at market prices, and the properties soar in value, and then later fall in value, is that a failure of communism, or the market?”
But what if the Chinese people have to hold their savings in something other than currency since inflation will eat that away and aren’t permitted from engaging in productive investment by government regulations? Residential housing is unproductive consumption. It is not capital. It doesn’t increase productive capacity or generate real income (aka additional real output). So an artificial bias into housing isn’t “market prices” any more than the current price of solar panels in the USA (or China) or the current price of corn-based ethanol are “market prices”. It’s a ponzi scheme. That’s not to say that it’s not needed. I don’t know. I don’t know if there problems really are what some say they are. But it fishy to say the least.
18. March 2013 at 06:10
Geoff, It’s not a free market economy, but it’s locally planned, not centrally planned.
Regarding infrastructure, you are confusing two issues. As in the US much of the infrastructure is government built, and some is privately built. I’d prefer much more of it be privately built (in both countries). That’s a completely separate issue from the quantity and quality of what is actually built.
I never once praised the Soviet economy.
John, Residential housing most certainly is “capital.” Indeed in many ways it’s more “capital-like” that a commerical or industrial building. It’s often more durable. Where I live there are houses from the 1700s, but every single factory from the 1700s is gone.
The flow of housing services from a house is consumption, just as the flow of movie services from a movie theatre is consumption.
I don’t agree with the overall thrust of your answer. Just because there are distortions in one sector doesn’t mean the other sectors are not market-oriented. By your logic there would be no markets in the entire world. Hong Kong is often rated the most market-oriented economy, but their economy is hugely distorted by government intervention into housing, which causes resources to be diverted into other non-housing sectors.
Every market needs to take the background conditions as a given. If there are distortions to manufacturing it may well be optimal for the Chinese to put more money into housing. Of course they are also free to start manufacturing businesses, commerical enterprises, or to buy stocks rather than invest in housing. It’s far from perfect, but it’s still a market and I presume housing investors are acting “rationally” unless proven otherwise.
18. March 2013 at 09:19
I think we can all agree that there are distortions in EVERY economy. I could rant for days on land-use restrictions in the US. The problem with China is determining the extent of the distortions. I know next to nothing about their housing market. But I do know that interest rates in China specifically and their banking sector in general is not subject to typical market forces. So, I agree with Scott in that I think housing investors are acting perfectly “rationally”. I just think it’s due to the fact the pricing mechanism for credit in China is suboptimal. All that being said, the biggest problem I see in China (due to my brain’s biases of course) is the environment and I have yet to see a single economic data point that really brings that into sharp relief.
18. March 2013 at 10:18
Besides immigration laws that barely work anyways, the only thing preventing tens of millions from flooding into the US is lack of jobs. It’s never been lack of infrastructure or housing, immigrants make due without just as migrants make due in China. The reason China’s urbanization policy is so flawed is for the same reason a migrant janitor at JPMorgan is never going to buy an apartment in Manhattan: low wages and no legal status or social benefits in the city in which he works.
I don’t understand why the urbanization of hundreds of millions of rural Chinese is taken for granted. Is it because “similar” nations of fewer than 100 million have done it before by creating a global monopoly in 1 or 2 niche industries? Maybe because China “has been so successful” at doing it in the past, even though half of the population is “urbanized” by fiat (rural communities are redesignated as urban) and 250 million “urban” Chinese do not even have legal status (hukou) to live where they work?
18. March 2013 at 12:24
Scott,
As to the overall thrust of the question, I am making a stronger point to push back against your claim of the “market” here because, from the story, I got the impression that the Chinese government has explicitly forbidden investment in other sectors of the economy. Is that not true? Can Chinese citizens by corporate stocks and bonds? Why is it inappropriate to condemn distortions in the Chinese economy as being the result of excessive government intervention? Are you honestly saying that China has a high degree of Laissez Faire, comparable to that of Hong Kong? But more generally, why is this “general thrust” any less valid than a criticism of US housing policy being the result of excessive intervention? I do vociferously push back against those who claim that our housing boom and bust was a “market failure” and it would seem as if claims that the Chinese housing boom may be “market failure” would be even less reasonable. Do you really disagree with that?
John, Residential housing most certainly is “capital.” Indeed in many ways it’s more “capital-like” that a commerical or industrial building.”
No. It’s not. Certainly not compared with buildings which contribute to productive capacity. Allow me to liberally quote Mr. Smith:
“The general stock of any country or society is the same with that of all its inhabitants or members, and therefore naturally divides itself into the same three portions, each of which has a distinct function or office.
The First, is that portion which is reserved for immediate consumption, and of which the characteristic is, that it affords no revenue or profit. It consists in the stock of food, clothes, household furniture, &c., which have been purchased by their proper consumers, but which are not yet entirely consumed.
The whole stock of mere dwelling-houses too, subsisting at any one time in the country, make a part of this first portion. The stock that is laid out in a house, if it is to be the dwelling-house of the proprietor, ceases from that moment to serve in the function of a capital, or to afford any revenue to its owner.
A dwelling-house, as such, contributes nothing to the revenue of its inhabitant; and though it is, no doubt, extremely useful to him, it is as his clothes and household furniture are useful to him, which, however, makes a part of his expence, and not of his revenue.
If it is to be let to a tenant for rent, as the house itself can produce nothing, the tenant must always pay the rent out of some other revenue which he derives either from labour, or stock, or land. Though a house, therefore, may yield a revenue to its proprietor, and thereby serve in the function of a capital to him, it cannot yield any to the public, nor serve in the function of a capital to it, and the revenue of the whole body of the people can never be in the smallest degree increased by it.”
Residential housing is a durable consumption good, just like a car, only more durable and more expensive to buy and maintain. But it does not expand the productive capacity of the nation. Now, if you can invent a way to build more housing cheaper using robots instead of construction workers, those robots would be productive capacity. But the houses they build are a consumer good. Smith was right. You and GDP classification are wrong.
18. March 2013 at 13:36
To put Shanghai in perspective. I have a friend who moved there in the late 70’s (first American to get a visa to live in Shanghai after the revolution). 3 western ex-pats in the whole city. Tallest building was 16 stories (built pre-war). 6 taxis in all of Shanghai.
If GDP per capita goes up another 5x, maybe there will be a slowdown, but for now talk of “bubbles” or “collapses” are just noise on the long term trend line.
19. March 2013 at 16:25
DF, Don’t look at China as a static society, but rather as a rapidly evolving society. The urbanization is inevitable (and is happening very fast.) Incomes are rising very fast.
John You said;
“I got the impression that the Chinese government has explicitly forbidden investment in other sectors of the economy. Is that not true? Can Chinese citizens by corporate stocks and bonds?”
Yes, that is most definitely “not true.” They can buy stocks, they can start their own business. In China there are numerous billionaires who a few decades ago were so poor they went to bed hungry at night.
You said;
Are you honestly saying that China has a high degree of Laissez Faire, comparable to that of Hong Kong?”
Do I look like a complete idiot? Of course not. Hong Kong is considered the freest market in the world, and China’s not even in the top 100.
Regarding “market failure, I believe that it was Tyler Cowen who said that if the US government subsidized the production of bananas, and if Americans built millions of houses with roofs made out of bananas, and the roofs collapsed, it would be partly the fault of the free market—and I agree.
Yes, the US government improperly subsidized housing, but it’s still true that banks and millions of individuals made really stupid decisions, and hurt themselves. No one put a gun to their heads. So I think it’s fair to blame both the market and the government in America. If and when the Chinese housing market crashes, I’d blame both in China.
As far as the definiion of capital, I’m using the definition of the 20th and 21st century, found in any textbook, not the 18th century. When you call someone “gay,” do you mean happy, or the modern definition? It gets really confusing if people use 300 year old definitions, which are now completely obsolete.
dtoh, I agree.
19. March 2013 at 17:40
Dr. Sumner:
“Geoff, It’s not a free market economy, but it’s locally planned, not centrally planned.”
Local, province-wide central planning = central planning.
Also, the provinces have to answer to the State Council and SASAC which reports to Beijing through the State Council. Major management appointments are made by the COD. The provinces obey the 5 year plans.
The provinces are not independent economic authorities. They have some leeway of course, as a lot of power was ceded to the local authorities during the 1970s and 1980s, but it’s not like China is without significant country-wide central planning. Imagine Europe being composed of a dozen or so independent communist nations. That’s pretty much China.
“Regarding infrastructure, you are confusing two issues. As in the US much of the infrastructure is government built, and some is privately built. I’d prefer much more of it be privately built (in both countries). That’s a completely separate issue from the quantity and quality of what is actually built.”
I disagree. There is a strong, well understood, and even visible relationship between quality and quantity of infrastructure on the one hand, and whether or not production is centrally planned or privately planned on the other.
Governments are not subject to market forces of profit and loss. It isn’t their money they’re spending, and the revenues they collect are mandatory regardless of quality. They can build bridges to nowhere, and not a single politician pays for it out of their own pockets, and those who do pay for it, have to pay for it or else they will find themselves living in a cage.
I don’t think it makes any sense to believe that quality and quantity are “completely separate” from whether or not there is central planning or private planning. The foundation of either central or private planning is perhaps the most significant cause for quality and quantity of production.
“I never once praised the Soviet economy.”
That means you’re in the minority.
But still, you’re doing what economists in the 1970s and 1980s did. Praise the infrastructure of a largely centrally planned economy. Not sure how else to take the defense of the Chinese ghost cities.
19. March 2013 at 17:52
Sorry, I meant “Imagine Europe being composed of a dozen or so interdependent communist nations. That’s pretty much China.
20. March 2013 at 07:51
ssumner,
Every year, China “urbanizes” 20 million people like clockwork. They do so to raise productivity, but also to make up shortfalls in the rest of the economy. If you break down the numbers, roughly 9 million of those new urban residents are newly reclassified rural folk. The local government seized their land, cut them a check, sold their land to developers, and redesignated the city from “rural” to “urban”. No volition from the new urban residents required, but they are free to buy a new apartment in their old city if they want. Another 2 million of those 20 million are children born to urban parents. The remaining 9 million are the migrants that actually decided to move to a city. Depending on the year, half or less will be given hukou status. The rest are “illegal immigrants” in their own country, hardly in the market for a new apartment.
My point is, even though China has been “urbanizing very fast”, the reality is less sanguine than the numbers suggest. Nominally, China is something like 55% urbanized. In real terms, maybe 35% actually have urban hukou. This suggests that beyond simply building the prerequisite infrastructure, urbanization has not been particularly successful.
For the record, I do believe urbanization is inevitable in China and every developing country. However, it won’t be nearly at the rate of China’s “clockwork urbanization.” Pronouncements like “China will urbanize more than 300 million people by 2030.”
20. March 2013 at 07:58
ssumner,
Every year, China “urbanizes” 20 million people like clockwork. They do so to raise productivity, but also to make up shortfalls in the rest of the economy. If you break down the numbers, roughly 9 million of those new urban residents are newly reclassified rural folk. The local government seized their land, cut them a check, sold their land to developers, and redesignated the city from “rural” to “urban”. No volition from the new urban residents required, but they are free to buy a new apartment in their old city if they want. Another 2 million of those 20 million are children born to urban parents. The remaining 9 million are the migrants that actually decided to move to a city. Depending on the year, half or less will be given hukou status. The rest are “illegal immigrants” in their own country, hardly in the market for a new apartment.
My point is, even though China has been “urbanizing very fast”, the reality is less sanguine than the numbers suggest. Nominally, China is something like 55% urbanized. In real terms, maybe 35% actually have urban hukou. This suggests that beyond simply building the prerequisite infrastructure, urbanization has not been particularly successful.
For the record, I do believe urbanization is inevitable in China and every developing country. However, it won’t be nearly at the rate of China’s “clockwork urbanization.” Pronouncements like “China will urbanize more than 300 million people by 2030” seem like truisms to some China watchers. But why? Especially because so much of the Chinese economy is driven by the rate of urbanization, and there are real costs in building infrastructure too early. The US is something like 80% urban, why isn’t it inevitable that it will be 90%? Why isn’t it inevitable that it will be 90% be the end of the decade? These are the questions I’d like answered. Truisms like “China will urbanize X million people by time T” are just cliches like “No President gets reelected with unemployment over Y%.”
20. March 2013 at 08:23
Hopefully it’s clear that I don’t think you’re an idiot, Scott. I learn tremendously from your work here. Asking pointed questions shouldn’t be taken as an insult. I’m mostly with you. Don’t be grumpy.
“Yes, the US government improperly subsidized housing, but it’s still true that banks and millions of individuals made really stupid decisions, and hurt themselves.”
I’m not denying that private decision making matters nor that people should be held responsible for decisions they freely make. If you bought a house you clearly could not afford or loaded up your bank with bad bets, it’s in large measure your fault even if government policy made those decisions seem wiser than they would be. I’m not saying that people (aka “the market”) aren’t partly to blame. But, Tyler’s reducto ad absurdum point is too strong. It’s a bit akin (if in the inverse) to the strongest flavor of EMH where nobody should pick up a dollar from the ground because clearly it shouldn’t be there.
A concerted, large-scale set of policy distortions can (and did) give rise to miscalculation which seems clearly stupid in macro retrospect but was individually reasonable at the time. This didn’t have to happen in the US as it did. It wasn’t a natural, emergent phenomenon. Isn’t economics partly about trying to understand systematic responses to relative costs and benefits at the margin? If policy makes something look better at the margin, and it’s not clear to people that it’s “unsustainable” or even “unnatural”, is it really their fault if they are moved to act? Don’t we believe that prices are an important if imperfect information system which stands in for impossible-to-collect systematic causal knowledge. We can’t know why prices are what they are, so we do our best. Hell, look at the level of profession disagreement among economists about whether Fed policy was even excessively loose in 2002-2005!
My point is simple. A systematic distortion of this sort is primarily (though not solely) government failure, not market failure. I doubt we even disagree on this.
21. March 2013 at 08:59
It hits me at some point all this building of infrastructure is going to leave an empty ghost town at some time eventually. Maybe not today, maybe not tomorrow, but it will happen. There is one lesson of bubbles, when in a bubble is the hardest to seeing explode. The slowdown in infrastructure building will slow down growth. My guess China is entering their roaring 20s and in 7 – 10 years it will be huge.
25. March 2013 at 04:53
I agree I think a lot of the talk of Chinese construction foolishness is really just a lack of ability to comprehend the effects of compound growth rates. (that said there are some government projects that I think ware largely giant wastes, like the empty city they built in Inner Mongolia)